ISSUE NO. 179 HORIZON RABI AL THANI-JUMAD AL THANI 1432...

GLOBAL PERSPECTIVE ON ISLAMIC BANKING & INSURANCE

ISSUE NO. 179APRIL–JUNE 2011

RABI AL THANI-JUMAD AL THANI 1432

THE SUKUK MARKET:OBSTACLES TO ANEXPONENTIAL INCREASEIN GROWTH

POINT OF VIEW:THE JOURNEY FORISLAMIC FINANCE

ACADEMIC ARTICLE:AN ALTERNATIVE TOCALL AND PUT OPTIONS

COUNTRY FOCUS:ISLAMIC BANKING ININDIA – REALISING THEDREAM

LEGAL MATTERS:SALE CONTRACT IN BAI’ BITHAMIN AJIL

PUBLISHED SINCE 1991NEWHORIZON

NewHorizon_Issue179_NewHorizon 12/04/2011 12:52

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NEWHORIZON Rabi Al Thani-Jumad Al Thani 1432

Features

Regulars

CONTENTS

protection and Shari’ah engineeringin Islamic finance and the February2011 lecture on a practitioner’s viewof takaful.

39 TECHNOLOGY NEWSThis issue contains a preview of theMEFTEC conference and exhibitionwhich will now take place in May inAbu Dhabi.

30 EVENTSRead all about the events coming upduring the spring and summer of 2011.

32 AWARDSListing of IIBI awards of postgraduate diplomas.

33 IIBI LECTURESReports of the December 2010lecture on risk concentration, deposit

05 NEWSA round-up of the important storiesfrom the last quarter around theglobe including the moves by Qatarto close Islamic banking windows,Bloomberg’s announcement of anIslamic finance platform and thelaunch by the CISI and IIBI of aquarterly private interest forum (PIF)to discuss issues affecting theIslamic finance industry.

05 Is the US returning tothe dark days ofMcCarthyism?

This lead article asks what can be done tocounteract the paranoia exhibited in aleaked cable from the US State Department to diplomatic staff in Londonrequesting them to monitor Islamic banking activities in the UK and firmlyrebuts the idea that Islamic banks assistterrorists.

11 The Sukuk Market:Obstacles to an Increasein Exponential Growth

Andrea Wharton and Mohammed Shafiquelook at the factors that may be limiting the growth of the sukuk market. Inparticular they consider issues aroundShari’ah compliance, legal problemsencountered in cases of default andrestructuring and the weakness of thesecondary market.

17 Islamic Banking inIndia – Realising theDream

Fayaz Ahmad Lone, a research scholarfrom the Aligarh Muslim University inIndia examines the status of Islamicbanking in India. With the third largestMuslim population in the world India, tosome extent hampered by its constitution,has no Islamic banks. The article looks atthe constitutional and cultural barriers tothe establishment of Islamic banking, aswell as the embryonic growth of variousinstitutions offering Islamic financialproducts in India.

24 Sale Contract in Bai’Bithamin Ajil

Hakimaah Jacoob ponders a recent rulingfrom the Malaysian Court of Appeal andcalls for a strengthening of the legalframework to avoid derailing the efforts ofthe central bank and the government tomake Malaysia a hub of Islamic finance.

25 An Alternative to Calland Put Options: A Hybridof Bay al-Ikhtiyar and aNormal Sale

Dr. Zaharuddin Abd Rahman argues that acombination of khiyar al-tayin with severalacceptable sales contracts such asmurabahah could offer flexibility to Islamicfinancial institutions in replicating the keyfeatures of call and put options.

27 The Journey forIslamic Finance: Ten milesbehind me and tenthousand more to go

Sudarshan K Madabushi makes a heartfeltplea to the Islamic finance industry to striveharder to translate the principles of fairnessand social justice into the practice of Islamicfinance. He believes that such action wouldmake Islamic finance a powerful andcredible alternative to its conventionalcounterpart.

17


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NEWHORIZON April–June 2011

Executive Editor’s NoteThe focus of Islamic finance is moving East. Our report on thesukuk market shows Malaysia consolidating its dominance of newissues. While the UK treasury seems reluctant to take advantage ofthe manifold benefits of a sovereign sukuk, our article on India,which has the third biggest Muslim population in the world, revealsmoves to create opportunities for Islamic investments there. Evenfurther east in Japan the government is planning to change tax lawsto make Japan a more attractive market for sukuk.

The likelihood of rebalancing the industry in the short term seemsunlikely. Political turmoil in the Middle East and North Africa mustsurely distract attention from the issues of Islamic finance and therehave been claims that the Qatari move to close Islamic windowswill have an adverse effect on the market there. Across the Atlanticthe Wikileaks exposure of the State Department’s investigation intothe baseless accusation that Islamic banks were conduits forterrorist funds gives little hope of regulatory support in NorthAmerica.

Does this matter? As we have said so often, without a truly genuinecommitment by all stakeholders, Islamic finance will never reacheven a fraction of its potential. Indeed, if it is not flourishing even incountries with predominantly Muslim populations, then thereseems little prospect elsewhere.

As is often the case it takes an outsider to tell us a few home truthsabout where we are going wrong and his views on what we need todo to put it right. So please take note of Sudarshan Madabushi’sarticle – The Islamic Finance Journey. As an interested observer hesees how far away we are from the Islamic values of fairness andhuman honesty. He challenges us to take some bold steps, such asfounding a pan-Islamic central bank and an International IslamicMonetary Fund, which might in turn redress the geographicimbalances that are emerging.

Mohammad Ali Qayyum

Director General IIBI

EDITORIAL

This magazine is published to provide information on developments in Islamic finance, and not to provide professional advice. The views

expressed in the articles are those of the authors alone and should not be attributed to the organisations they are associated with or their

management. Any errors and omissions are the sole responsibility of the authors. The Publishers, Editors and Contributors accept no

responsibility to any person who acts, or refrains from acting, based upon any material published in the magazine. The Editorial Advisory Panel

exists to provide general advice to the editors regarding matters that may be of interest to readers. All decisions regarding the published content

of the magazine are the sole responsibility of the Editors, and the Editorial Advisory Panel accepts no responsibility for the content.

4 IIBI

ExECUTIVE EDITOR

Mohammad Ali Qayyum,Director General, IIBI

EDITORS

Andrea WhartonSue Dobson

IIBI EDITOR

Mohammad Shafique

PUBLISHER

Humphrey Tizard

IIBI EDITORIAL ADVISORY PANEL

Mohammed AminRichard T de BelderAjmal BhattyStella CoxDr Humayon Dar Iqbal KhanDr Imran Ashraf Usmani

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Deal not unjustly,and ye shall not be dealt with unjustly.

Surat Al Baqara, Holy Quran



NEWHORIZON Rabi Al Thani-Jumad Al Thani 1432

In the 1950s the US found itselfin the grip of a phenomenoncalled ‘McCarthyism’, whenindividuals could findthemselves hauled before aSenate Committee accused ofun-American activities, even ifthey were merely lobbying forthe reform of labour practices orimprovements in the welfaresystem. Given the recentWikiLeaks disclosure that in2006 US State Departmentordered diplomats to monitorand report on the activities ofShari’ah banks in London, it isperhaps appropriate to recall thewords of former US PresidentHarry Truman in 1953, when hedescribed McCarthyism as‘…the corruption of truth, theabandonment of the due processof law. It is the use of the big lieand the unfounded accusationagainst any citizen in the nameof Americanism or security. It isthe rise to power of thedemagogue who lives onuntruth; it is the spreading offear and the destruction of faithin every level of society.’ Today,the hunt for ‘reds under the bed’has been replaced by a fear ofIslamic terrorism and byextension all things Islamic.

One of the recent WikiLeaksdisclosures indicated that the USState Department sent aninstruction to its London-based

diplomats to monitor Islamicbanking activities in the UK,apparently fearing that Islamicfinancial institutions in the UKcould be exploited for illicit orterrorist purposes. Is this a 21stcentury manifestation of theparanoia that begatMcCarthyism? As far as we areaware there was no substancebehind the US concerns, butthen paranoia is a condition inwhich fear and anxiety lead toirrationality and delusion.Perhaps this also explains whyIslamic banking has failed toflourish in the US.

The only way to deal with suchfear and anxiety is to shed thelight of knowledge andunderstanding into the darkcorners where paranoia canflourish. Islamic banks do nothelp terrorists; they are simplyoffering an alternative, ethicalform of banking. By helping tobring Islamic finance into themainstream, London is doing itsbit to increase that knowledgeand understanding. The US might do well to follow the UK’s example and embraceIslamic banking as an ethical,values-based financial system.

In fairness the US Treasury hasmade some efforts to gain anunderstanding of Islamicfinancial practices and also to

educate government as well asCapitol Hill staffers about thisfast-growing industry. Theseefforts included the creation ofa post called the ‘Scholar-in-Residence on Islamic Finance’to promote broader awarenessof Islamic financial practicesinternationally anddomestically, although thisprogramme was later cancelled.Robert Kimmit, US DeputySecretary of the Treasury, alsostated on a visit to Saudi Arabiathat the American treasurywould study the features ofIslamic banking in depth in anattempt to benefit from it, butthere seems to be littleconsistency in the messagescoming from Washington.

It is only by working togetherthat we can tackle a threatwhich confronts the safety andprosperity of all communitiesaround the world. To this endthe Institute of Islamic Bankingand Insurance has supportedevents such as ‘The FinancialWar on Terrorism: TheContribution of IslamicBanking’ held in 2003 and ‘TheWar on Terrorist Financing:Forging an EffectiveInternational Architecture’ in2007, as well as endorsing anti-money-laundering forums heldin Mumbai in 2006 and Sydneyin 2007.

Is the US returning to the dark days of McCarthyism?

LEAD ARTICLE

The only way to dealwith such fear andanxiety is to shed thelight of knowledge andunderstanding into thedark corners whereparanoia can flourish.Islamic banks do nothelp terrorists; theyare simply offering analternative, ethicalform of banking. Byhelping to bringIslamic finance intothe mainstream,London is doing its bitto increase thatknowledge andunderstanding.


6 IIBI www.newhorizon-islamicbanking.com


CISI Launch Quarterly Islamic Finance Forum

membership of the IFSB hasgrown from nine foundingmembers in 2003 to 195members as at December 2010.The IFSB has also issued 14standards and guiding principlesfor the Islamic financial services

industry, with the last threerecently approved for issuance bythe IFSB Council on 14thDecember 2010, when it was alsoannounced that Professor AbdelKarim will end his term as theSecretary-General of the IFSB.

In late December 2010 ProfessorDatuk Rifaat Ahmed AbdelKarim, Secretary-General of theIslamic Financial Services Board(IFSB) became the latestrecipient of the Islamic Business& Finance Award 2010 for

Outstanding Contribution tothe Industry.

Professor Abdel Karim has beensteering the IFSB from itsinception in 2003. During hiseight years in office, the

NEWS

CISI Crest

debates on the foremost issueson the industry’s agenda.’

Also, the CISI’s Islamic Finance Qualification and itsIFQ workbook Edition 4 are

The CISI (Chartered Institutefor Securities and Investment)has launched a new Islamicfinance professional interestforum (PIF) in conjunction with the Institute of IslamicBanking and Insurance. From2011, members of the Islamicfinance forum will meetquarterly in London to networkover lunch, listen topresentations and discuss issuesaffecting them in a confidentialsetting. Events will be free forall members of the CISI(although students may onlyattend one Islamic financeforum each year) and IIBImembers.

Mohammad Ali Qayyum,Director General of the IIBI,said: ‘We are pleased to be part of this PIF which will offer a unique platform formembers of the CISI and IIBI to exchange views on issuesvital for the continueddevelopment and growth of theIslamic financial servicesindustry.’

Ruth Martin, ManagingDirector of the CISI said: ‘Weare delighted to be launchingour Islamic finance PIF and welook forward to future lively

Recognition for IFSB’s Secretary General

now fully Shari’ah compliant.The IFQ has been developed in conjunction with L’EcoleSuperieure des Affaires in Beirut, one of the leadingbusiness schools in the

Middle East. It is a groundbreaking qualification which covers Islamic finance from both a technical and Shari’ahperspective.



NEWHORIZON Rabi Al Thani-Jumad Al Thani 1432 NEWS

than 10% of their issued capitalto Islamic banking operations.Banks were given until the endof 2011 to comply. This circularwas interpreted as a move by theQCB to encourage the growth ofdedicated Islamic bankinginstitutions, particularly giventhat conventional banks withtheir greater resources have beeninstrumental in driving thegrowth of Islamic banking.Clearly, the restriction willfavour Qatar’s own Islamicbanks and there have even beensuggestions that QIB (QatarIslamic Bank) could acquiresome of the Islamic business ofconventional banks.

The latest February circular goesfurther and requiresconventional banks withimmediate effect not to acceptnew Islamic deposits; toreimburse Islamic termdepositors at their agreedmaturity date and not to enterinto any new Islamic financetransactions during the graceperiod, although they shouldcontinue to collect paymentsfrom their customers inaccordance with their existingarrangements. Following the end of the grace period,conventional banks with Islamicoperations will be required toconsolidate their Islamicportfolios until all payments arecollected in accordance withtheir agreed terms andconditions. In the meantime,conventional banks arepermitted to transfer all or partof their Islamic portfolios to

In early February, Qatar’sCentral Bank (QCB) issuedspecific directives to each ofthe conventional banks thathave Islamic branchesinstructing them to stopopening new Islamic branches,accepting Islamic deposits andinitiating new Islamic financeoperations. These banks havebeen given until the end of2011 to wind down theiroperations. After thisdeadline, the conventionalbanks will be allowed tocontinue to manage theirremaining Islamic assets in aspecial portfolio with thepossibility of transferringsome of these assets to Islamicbanks.

The Central Bank asserts thatthe well-established financialinfrastructure in Qatar is ableto fulfil the bankingrequirements of the localpopulation and the cominglingof conventional and Islamicfinance makes it difficult toregulate the mixed-modebanks. They also suggest thatthe overlapping nature of non-Islamic and Islamic activitiesof conventional banks makesit difficult and complex forthem to prepare consistentfinancial reports governed byunified international standardssince each type has differentinternational standards, thusimpacting negatively on theproper financial analysis ofthese reports within Qatar aswell as at the regional andinternational levels. In

particular the Qatar CentralBank is currently in the processof drafting separate instructionsto be issued to Islamic banks oncapital adequacy, in accordancewith the Islamic FinancialServices Board (IFSB) standardsupon the Board’s finalisation ofthe new amendments. Theseinstructions will apparentlydiffer significantly from theinstructions on capitaladequacy relating toconventional banks, which arebased on Basel II and IIIstandards.

Perhaps critically they see thecombination of non-Islamic andIslamic banking activities asbeing prejudicial to the stabilityand growth of the Islamicbanks and to the effectivenessof Qatari monetary policy. TheCentral Bank believes that bysegregating conventional andIslamic banks they will be ableto create a better framework forliquidity management andimprove the openness of themarket.

Sources in Qatar have describedthe circular as ‘overnight’ and‘ad hoc’, although the QCB’sown statement refers topreliminary meetings andcoordination with the banksconcerned. There was also anearlier circular in August 2010,which amongst other thingsstated that conventional banksoperating in Qatar were notpermitted to open anyadditional branches for Islamicbanking or to allocate more

existing Islamic banks inQatar, which adds weight tothe suspicion that this is aprotectionist policy.

This does seem to besomething of a U turn inpolicy. Following the approvalto set up Islamic bankingwindows granted toconventional banks in 2005,these window operations haveestablished a base of some80,000 customers, privateindividuals and corporatesand as recently as July 2010QCB Governor, E SheikhAbdullah bin Saud Al Thanipresided over the openingceremony of HSBC Amanah’sfirst dedicated Islamic branchin Qatar.

Why then have they taken thisaction, which could harmQatar’s stated commitment toopenness? The country isapparently pursuing aneconomic policy that willmove them away fromdependence on hydrocarbonsand perhaps this Central Bankcircular is an indicator of theirambitions in the financialspace. They trailed Dubai andBahrain in the move towardsbecoming a GCC financialcentre, but this move clearlydifferentiates them from othermarkets in the region inproviding a 100% Islamicbanking environment, butsources in Qatar question theability of the four existingIslamic banks to sustain therecord growth that Islamic

Is Qatar Central Bank Throwing the Baby Out with the Bath Water?



NEWHORIZON April–June 2011NEWS

banking has enjoyed recently.The suggestion is that thecountry needs more ratherthan less competition.

An alternative view about thereasoning behind the decisionis that one or twoconventional banks have failedto maintain the fire wallbetween their conventionaland Islamic operations. Againlocal sources suggest that theQCB’s reaction is excessiveand that they should insteadpunish just the offendingbanks.

As things stand at the momentit seems that conventionalbanks have three possibleoptions. They could throw inthe towel and sell their Islamicoperations to one of theIslamic banks, but such a firesale would be unlikely torealise anything like a fullreturn on the investments theyhave made in the last five

years. A second option wouldbe for the conventional banksto apply for a licence to set up awholly Islamic bank with itsown balance sheet and capital.The third option would to be toacquire an Islamic bank andfold their window operationsinto it. Options two and threeare obviously dependent on justhow far the QCB is prepared toplay ball.

The fallout from this decision isalso likely to be felt beyondQatar’s borders. Internationallaw firm, Simmons andSimmons, commenting on therecent moves said, ‘The decisionby the QCB will certainly beobserved closely by otherregulators in the region to seewhether such a move willenhance transparency andgrowth in the Islamic financeindustry. To the extent that itdoes, and with support fromShari’ah scholars, such a moveis likely to be mirrored

elsewhere. Conventional banksacross the Middle East andbeyond should thereforeprobably start reconsidering themodel by which they conducttheir Islamic financeoperations.’

This story clearly has further torun. At the moment none of theconventional banks affected are

making on-the-recordcomments. Are they just goingto roll over and accept whathas been dished out to them;do they have any alternative?We will be watchingdevelopments with interest,because, as Simmons andSimmons comment, there arepotential knock on effectsacross the region.

Doha Skyline

Frost & Sullivan have recentlypublished a report on theIslamic asset managementindustry in which they claimthat Islamic asset managementis gaining interest amonginvestors as an avenue foralternative investment. They saythat the focus is intensifying onnew categories of Islamicproduct offerings such as hedgefunds, fund of funds, indexfunds and exchange tradedfunds. They believe that

growing awareness amonginvestors about the benefits ofasset diversification and theirwillingness to considerunconventional investmentoptions are factors helping to boost Islamic fund assets.

The report suggests that theIslamic asset managementindustry is, however,challenged by a lack of depthin the GCC capital market,

causing inefficiencies inportfolio management.Operational efficiency needsto be ramped up to attractinstitutional investors. Fundsare also likely to be exposedto regulatory, political, legal,economic, and financial riskin cross-border investments.Efficient management of theserisks is vital for keeping costslow and funds profitable. TheIslamic fund industry is highlyfragmented and high

management fees prevent theachievement of economies ofscale. Proper audit controlsmust be established to ensurethat investments have beendone in line with Islamicprinciples and profits aremade based on Islamicinvesting. Moreover,distribution channels must beexpanded to reach outglobally. The full report isavailable from Frost &Sullivan.

Frost & Sullivan Report on Islamic Asset Management



NEWHORIZON Rabi Al Thani-Jumad Al Thani 1432 NEWS

Euromoney magazine hasnamed HSBC Amanah BestInternational Islamic Bank andBest Sukuk House for 2011. In2010, HSBC Amanah continuedto grow its operations in thecore markets of Saudi Arabia,the United Arab Emirates andMalaysia, while expanding inthe key growth territories ofIndonesia, Bangladesh, Bahrain and the UK. Landmark transactions for2011included:

❑ Largest Sukuk deal of theyear: Saudi Electricity

Company’s SAR 7 billion Sukuk

❑ Largest US dollar sovereignSukuk: US$1.25 billionGovernment of Malaysia Sukuk

❑ World’s largest Shari’ah-compliant REIT and firstShari’ah-compliant listing inSingapore: US$664.4 millionSabana REIT

❑ First project finance Sukukby a foreign borrower in theMalaysian Ringgit capitalmarkets: Trans Thai-Malaysia

HSBC Amanah Named Best International Islamic Bank

Mukhtar Hussain(Thailand) Limited MYR 600million Sukuk

Mukhtar Hussain, Global CEO of HSBC Amanah said,‘HSBC Amanah will continue to invest in our franchises both in the Middle East andAsia. The potential for theindustry remains considerable,but further efforts will need to be made to institutionaliseand operationalise bestpractices. Notwithstanding the challenges, this remains an exciting era ofopportunities.’

The United Arab Emirates AlHilal Bank, 100% owned by thegovernment of Abu Dhabi, haslaunched the Al Hilal GCCEquity Fund, a Shari’ah-compliant investment fund thatwill provide retail investors withaccess to the Gulf’s equitiesmarkets. The open-ended fundwill invest in publicly tradedstocks of companies that meetShari’ah law criteria. Al HilalBank believes that GCC equity

markets offer significantopportunities for investors dueto the long-term economicgrowth potential of the region,coupled with the attractivecurrent valuations of its market. Abu Dhabi-basedinvestment company, Invest AD,has been appointed as theinvestment advisor to the newfund and HSBC will providecustodial and administrativeservices.

UK’s Gatehouse BankStrengthens Ties with

Indonesia

Al Hilal Bank Launches NewGCC Equity Fund

Gatehouse Bank plc, a fullyShari’ah-compliant investmentbank in London has enteredinto a memorandum ofunderstanding (MOU) with PTBank Syariah Mandiri and PTBank Negara Indonesia tostrengthen ties with both partiesand agree upon Islamic bankinginitiatives that will benefit eachother through closer workingcooperation.

Fahed Boodai, Chairman ofGatehouse Bank, said at thesigning in Indonesia, ‘We lookforward to a productive andprosperous working future with these banks and we willstay committed in our efforts to engage and advancetransaction activity that will

deliver real reward to allworking parties.’

PT Bank Syariah Mandiri is one of 7 Islamic banks inIndonesia. It is a wholly ownedsubsidiary of Bank Mandiri,which is the largest commercialbank in Indonesia. PT BankNegara Indonesia is the fourthlargest commercial bank inIndonesia. London-basedGatehouse Bank continues tostrengthen its strategicpartnerships with companies inthe SE Asian region that wantto tap into the services of abank with its depth ofknowledge in internationalfinancial markets combinedwith its understanding ofShari’ah banking.



NEWHORIZON April–June 2011NEWS

Bloomberg Launch Islamic Finance Platform

In late February BloombergProfessional launched theBloomberg Islamic FinancePlatform (ISLM), which isdescribed as a comprehensivesolution designed to increasetransparency, better connect thecommunity and provideanalytical tools to maximiseinvestment performance in therapidly growing market forShari’ah-compliant productsand services.

Bloomberg also announced, incooperation with theAssociation of Islamic BankingInstitutions Malaysia (AIBIM),the launch of a MalaysianRinggit (MYR) sukuk index toprovide a benchmark for MYRsovereign sukuk investments.

The new Bloomberg ISLMplatform has extensive

resources for investing inShari’ah-compliant fixedincome, equities and moneymarkets including:

Sukuk – News coverage,analytics and search tools formore than 1,500 Islamic bondissues globally including fatwa endorsements andstructured diagrams of thefinancial instruments. It alsoincludes credit ratings andsearchable data on Islamic loansglobally.

Equities & Funds – Screening ofmore than 35,000 Shari’ah-compliant stocks by prominentscreening agencies plus adatabase of more than 500Islamic funds with the ability toresearch and monitor debt,commodities, equities andexchange traded funds (ETFs).

Islamic Community Database –Providing a full profile of morethan 250 Shari’ah scholars withdetails on which sukuk theyhave rated, boards theyrepresent and their fatwaendorsements. A listing of morethan 70 Islamic banks andprofiles on all prominentIslamic institutions andregulators is also available.

Region-specific content –Carrying the MalaysiaInternational Islamic FinancialCentre (MIFC) initiative’scontent, developed incollaboration with Bank NegaraMalaysia and other MIFCcommunity members; providinginsights into Shari’ah, MIFCbusiness opportunities and keydevelopments and listing themore than 90 community

members for businessconnections.

Commenting on theannouncement Dato’ MohdRedza Shah Abdul Wahid,President, AIBIM, said ‘TheMYR sukuk index developedwith Bloomberg will becomethe Islamic benchmark of choicefor the Malaysian sukuk marketand help stimulate the growth,competitiveness andsustainability of Islamicfinancial services. With strategic partnerships andcollaborative efforts, we canbuild an extensive andinnovative leading-edge Islamic financial communitythat will succeed globally andenhance the internationalpresence of Islamic productsand services.’

At the beginning of FebruaryGulf Finance House theBahrain-based Islamicinvestment bank announcedthat the Kuwait InvestmentCompany has been appointed

to assist the bank with itsrecapitalisation. By thebeginning of March it waswidely rumoured that CEO TedPretty had left the company.The company denied this

rumour saying that he had takenan extended leave of absence forpersonal reasons.

In mid March QatarInternational Islamic Bank

(QIIB) agreed to acquire fullcontrol of the Islamic Bank ofBritain (IBB). The offer of 1pper share represents a 70%discount on IBB’s closing priceof 3.38p on 15 March 2011.

Updates


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NEWHORIZON April–June 2011ANALYSIS

The Market Background

According to Standard and Poor’s (S&P) thesukuk market grew from a barelyperceptible blip on the chart in 2001 toreach approximately $38 billion in 2007. In2008 the market nose dived and althoughthere was some improvement in 2009, itwas tentative. In 2010, however, the marketbegan to bounce back and early estimatessuggest it has come close to matching the$34 billion record for new issuancesestablished in 2007 Figures for the first fewweeks of 2011 suggest that so far thatgrowth is being sustained with around$16 billion of sukuk issued. If that rate ofgrowth continues, we could be looking at avery substantial increase in the market in2011.

The driver of the sukuk market hasundoubtedly been Malaysia. Indeed the latest figures from S&P indicate that in 2010 Malaysia increased itsdominance accounting for 78% of sukukissuance.

In the medium term S&P expect GCC (GulfCooperation Council) countries to take alarger share of the market as they seek tofund major infrastructure projects in theregion. In the short term, however, webelieve that issues such as the current unrestin some parts of the region, notablyBahrain, are likely to put a temporary brakeon any progress.

Underlying Issues

Aside from current events, however, thereare some underlying issues, which will notstop the sukuk market growing, but theymay well stop the market achieving its fullpotential. At a recent Islamic financeconference in London it seemed that anymention of sukuk was followed shortlyafterwards by the word ‘transparency’. Theproblem is transparency is something of a

catch-all word, which has several differentconnotations – including Shari’ahcompliance, integrity and honesty,disclosure, intelligibility and clarity, so towhich of these possible meanings werespeakers alluding? The answer is probablyall of them.

Shari’ah Compliance and Harmonisation

At the most fundamental level is the issue ofwhether most sukuk are genuinely Shari’ahcompliant, honestly Islamic in nature,emphasising substance over legal form. Dothey genuinely represent sukuk holders’ownership or part ownership of underlyingassets that bring profits or losses or do theymerely represent shares in a company, whereno real ownership of assets is conferred, butsimply a right to a share in the returns ofthat company? Are the returns based on ashare of the profits or a guarantee that thecapital sum will be returned in the sameway as is the case in conventional bondsregardless of the true or market value of theunderlying asset at maturity, plus regulardistribution of a return that is no more thana fixed percentage of the principal. It isargued that this is simply interest by anyother name, where the investor accepts noelement of the risk inherent in theunderlying transaction.

The influential scholar and chairman ofAAOFI’s (Accounting and AuditingOrganisation for Islamic FinancialInstitutions) Shari’ah Board, MuhammadTaqi Usmani, stoked this debate with hispaper, Sukuk and their ContemporaryApplications in late 2007. He argued that,while a blind eye may have been turned tolax practices in the early days of the Islamicfinance industry, it was high time for these‘blemishes’ to be removed. It is generallybelieved that it was this opinion that wasresponsible for a significant slowdown inthe sukuk market, although it is difficult to

The Utopian solution is astandard that is acceptableacross all jurisdictions and toall organisations. The problemis that Utopia implies a perfectworld and regrettably we livein an imperfect world.

The Sukuk Market: Obstacles to an Exponential Increase in Growth



NEWHORIZON Rabi Al Thani-Jumad Al Thani 1432 ANALYSIS

complex and lacking in clarity, would nothave found their way into the market giventhe strong emphasis in Shari’ah ondisclosure and transparency. As was seen, agreat deal of contractual ambiguitysurrounded these instruments that fed theworst of the global financial crisis. It is theprohibition of undue ambiguity in contractsthat excluded these types of instruments inIslamic finance.’

The incentives for standards bodies andcentral banks to reach some sort ofagreement on sukuk structures that hasinternational application are certainly there.The question is whether these organisationscan see beyond the narrower perspectiveand achieve something that will contributeto the significant growth of sukuk andtherefore the Islamic finance industryworldwide. Comments from experts in ourarticle ‘Does Islamic Finance Need to Put itsHouse in Order?’ featured in the January toMarch 2011 issue of NewHorizon suggestthat reaching such agreement will not beeasy or quick, if, indeed, it can be reached atall.

Richard T de Belder, Partner, SNR Dentonexpressed a slightly different view. Hecommented, ‘I believe that the mainproblem affecting the sukuk market atpresent is the continuing fallout from thecredit crisis. Investors are more cautiousabout capital market issues, whether they be conventional or sukuk. The uncertaintyabout the use of musharaka or mudarabastructures is unfortunate and this will needto be resolved sooner rather than later, asthis uncertainty will not help the sukukmarket when confidence levels return, but, at present, the main issue is the general lack of confidence in the marketplace.’

Default and Restructuring

Default and restructuring is another aspectof sukuk that gives investors cause forconcern. For example, many sukukcontracts are governed by English law, butthe assets are likely to be in anotherjurisdiction. If an English court sanctionedthe seizure of assets in a case of default,local jurisdictions could refuse to enforce

be absolutely certain just how much themarket was affected by this announcementand how much by onset of the globalfinancial crisis in 2008.

It is not the objective of this article toreview the different strands of the argumentabout what is and is not acceptable in sukukstructures; it is sufficient here toacknowledge that these differences exist andthat this lack of harmonisation acrossgeographies and organisations createsuncertainty, something financial markets donot like and tends to increase the costs forsukuk issuance. In a sukuk report publishedin late 2010, Standard and Poor’scommented, ‘Malaysia was the first countryto tackle this problem. In 2009, itdesignated the Shari’ah Board of theMalaysian Central Bank as the sole arbiterin Shari’ah compliance matters in thefinancial sector. We believe other countriesare likely to follow suit. Malaysia has nowbecome the locomotive of the sukuk marketand accounts for more than half of allissuances. In addition, sukuk issuance is alonger and more-expensive process becausethere are no standard sukuk structures. Toovercome this obstacle, the DubaiInternational Financial Centre (DIFC) hasstarted a project to standardise sukukissuance.’

The problem is that these initiatives areregionally based. The Utopian solution is astandard that is acceptable across alljurisdictions and to all organisations. Theproblem is that Utopia implies a perfectworld and regrettably we live in animperfect world. In the short to mediumterm probably the best that we can hope foris clear regional standards. Certainly theMalaysian example suggests that Shari’ahclarity is one of the factors that hascontributed to that country’s extraordinarysuccess in the sukuk market and certainly asChairman of the Securities CommissionMalaysia, Y Bhg Tan Sri Zarinah Anwar,speaking at a conference in Kuala Lumpurin January 2011, commented, ‘One of themain attractions of sukuk is the Shari’ahcompliance process, which results inadditional disclosures relative toconventional bond issuances. Multi-layeredinstruments (like CDOs), which are

Malaysia believes it hasavoided a measure of thecriticism that has been levelledat some GCC countries,because it has worked hard todevelop a robust supervisorystructure, establishedgovernance and disclosurestandards and a highlydeveloped legal frameworkand court system aimed atproviding clarity andconsistency in the rules.



NEWHORIZON April–June 2011ANALYSIS

the judgement. One possible reason for thisrefusal could be that a contract wasdeclared incompatible with Shari’ah lawand therefore invalid, even though it hadbeen accepted as Shari’ah compliant by therelevant Shari’ah board at the time of issue.Couple this with the still maturing legalsystems in many of the countries involved,the lack of legal precedent for handlingsukuk default and restructuring andconsequently the length of time it is takingto complete the restructuring of companiessuch as Investment Dar and InternationalInvestment Group and it is easy tounderstand why sukuk tend to be a more expensive than conventionalbonds.

It should, however, be noted thatconventional bond financing also tends tobe more expensive in areas like the MiddleEast, because the investment risks areperceived to be greater than similarinvestments in Europe or the US. Theseconventional bonds do not, however, runthe additional risk of being declared non-compliant with Shari’ah.

The problem is not that there are likely tobe more defaults among sukuk pro ratathan conventional bonds; it is that investorsare less certain about how the situation will be resolved when such defaults dooccur. Malaysia believes it has avoided ameasure of the criticism that has beenlevelled at some GCC countries, because ithas worked hard to develop a robustsupervisory structure, establishedgovernance and disclosure standards and ahighly developed legal framework and courtsystem aimed at providing clarity andconsistency in the rules. Whether or notreaders agree that they have achieved thatclarity and consistency, they have at leastrecognised the issue and made an attempt toaddress it.

It is impossible to eliminate the risk ofdefault with sukuk, just as you cannoteliminate that risk with conventional bonds.Investors will, however, be reassured, whenthere are transparent legal processesavailable to resolve disputes and moreparticularly where the risk of somethingthat has been bought in good faith as

Shari’ah compliant is not later declared tobe non-compliant. That brings us back fullcircle to the need for greater certainty aboutsukuk structures especially their Shari’ahcompliance. Those countries that addressthese requirements will be the winners in thesukuk market as Malaysia has so amplydemonstrated.

Form over Substance (Realising theObjectives of Shari’ah)

In any discussion on sukuk an importantissue that is often overlooked is whether thestructures used distort the higher objectivesof the Shari’ah (Maqasid al-Shari‘ah). Thisalso applies to other Islamic financialinstruments. A common understanding isthat the key fundamental objectives ofShari’ah are simply asset ownership and thesharing of profit and losses. According toAssoc. Prof. Dr. Asyraf Wajdi Dusuki, Headof Research Affairs Department, ISRA, thisdistorted view of the Shari’ah stems from arestricted view of the Shari’ah, focusing onlyon the legal form of a contract rather thanits substance. The over emphasis on formover substance leads to a potential abuse ofthe Shari’ah principles injustifying certain contracts andultimately undermining thehigher objective of the Shari’ahmanifested in the realisation of‘public interest’ which in Shari’ahis synonymous with equity,justice and social welfare. Amajor challenge for Islamicfinance professionals andShari’ah scholars equally is tolook into the realisation ofMaqasid al-Shari‘ah in all sukuktransactions that are undertakenor approved by them.

The Secondary Market

The perceived wisdom withconventional bonds is that avibrant secondary market isessential, because itaccommodates the investor’sdesire for liquidity with theborrower’s desire to have use ofthe capital for a long period oftime. The problem for the sukuk

Dr Asyraf Wajdi Dusuki

A major challenge for Islamicfinance professionals andShari’ah scholars equally is tolook into the realisation ofMaqasid al-Shari‘ah in allsukuk transactions that areundertaken or approved bythem.


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NEWHORIZON Rabi Al Thani-Jumad Al Thani 1432 ANALYSIS

market is that it is not yet sufficiently largeor liquid to support a vibrant secondarymarket and the lack of such a market ishampering the growth of the sector.

Market watchers such as Standard & Poor’sare suggesting that growth did begin toreturn to the sukuk market in 2010 and theearly signs in 2011 look promising, butwhat is needed more than overall marketgrowth is growth in sovereign sukuk,because it is these more highly-ratedinstruments that set the benchmark for therest of the market. Research from KuwaitFinance House (KFH) suggests thatMalaysia continues to dominate this sectorof the market with a share of just over 60%in the first half of 2010. Saudi Arabia andIndonesia trail well behind in equal secondplace with around 14% each. At the end of2010 the general expectation was that themarket would see more activity amongGCC states and in the medium to long termthat is indeed likely, but in the short term this activity is likely to be patchy asgovernment attention may well be focussedelsewhere.

European governments have alsobeen flirting with the idea ofissuing sovereign sukuk with theUK perhaps coming closest toactually doing something, but theTreasury has put the notion onhold for the moment as notrepresenting value for money.Certainly the actual costs ofissuance are higher with the needto devise new legaldocumentation, move assetsaround and pay for Shari’ahopinion. Mohammed Amin,former head of Islamic finance atPricewaterhouseCoopers in theUK, believes, however, that it maybe possible to offset theseadditional upfront costs. Hecomments, ‘In my view, providedthe sukuk is carefully structuredso that it carries a full BritishGovernment guarantee andprovided that it is issued insufficient size that it is liquid,then it should not cost more incoupon than a gilt of the samematurity. Indeed, it may cost less,

as there will be a new category of investors,namely Islamic investors, seeking to buy thesukuk, in addition to conventionalinvestors.’

Another major factor affecting thedevelopment of a secondary market is thelack of liquidity in the sector. Quality sukuktend to be snapped up and held to maturityparticularly by Islamic financial institutionsthat have relatively few instrumentsavailable to them to meet capital adequacyrequirements. The recently establishedInternational Islamic Liquidity ManagementCorporation (IILM) is trying to address theissue of liquidity for Islamic financialinstitutions, but it is going to take time forthis organisation to begin to have animpact.

Summary

It has taken 400 years for the conventionalbond market to get where it is today; thesukuk market has had just a decade. Someof the issues discussed in this article, such astradability, are ones that the conventional

bond market has had to resolve in the past,while others, such as settling Shari’ah-compliance issues, are unique to sukuk.There is, however, no reason to believe that these issues will not be solved giventime, but until they are sukuk marketgrowth is likely to be stately rather thanspectacular.

Malaysia has demonstrated very clearlywhat can be achieved when governmentsand regulatory authorities take positiveaction to foster a sukuk-friendlyenvironment, attracting funds from andbeyond South East Asia. If the will exists,there is no reason why other countries couldnot emulate Malaysia’s lead.

Mohammed Amin

Quality sukuk tend to besnapped up and held tomaturity particularly by Islamicfinancial institutions that haverelatively few instrumentsavailable to them to meetcapital adequacyrequirements.



NEWHORIZON Rabi Al Thani-Jumad Al Thani 1432 COUNTRY FOCUS

expertise in the country and the generalpublic are unaware of whatIslamic banking has to offer. Inresponse to the problem of lackof expertise, in July 2009 theAligarh Muslim University(AMU) launched a course inIslamic banking and finance.Initially the university isoffering a diploma course inIslamic banking and finance,but also plans to offer amasters’ degree through theDepartment of ManagementStudies of AMU.

Opposition to Islamic finance isnot only based on religiousreasons and fears that thatthere is insufficient localexpertise to sustain theindustry, but also on a generallevel of ignorance about Islamic

The Scope for Islamic Banking in India

Globalisation and the convergence offinancial services mean that Indian bankswill face an increasingly tough competitiveenvironment, but there is tremendous scopefor banks, particularly Islamic banks,because India needs major investment in itsinfrastructure. Islamic banking, however,has to be positioned as professional bankingand not religion-based banking, which canhave serious political implications and as aresult the Indian regulatory authorities mustbe approached patiently and logically. Thathaving been said, India does offer greatpromise for the development of Islamicfinancial services, not least because theIndian capital market is the most liberalisedin the world and there is a good financialinfrastructure.

On the downside some experts feel thatthere is a shortage of Islamic banking

Islamic Banking in India – Realising the Dream

By: Fayaz Ahmad Lone, Research Scholar, Department of Commerce, Aligarh MuslimUniversity, India

The fact that India has the third largest Muslim population in the world afterIndonesia and Pakistan may come as something of a surprise to many people, whowrongly assume that partition in 1947 effectively divided the Muslim and Hindupopulations into separate nations – the Muslim-dominated East and West Pakistan(now two states, Pakistan and Bangladesh) and the Hindu-dominated, secular stateof India. There are approximately 156 million Muslims living in India today, 13–14% ofthe population, although that percentage is much higher in some regions such as inKerala and the disputed state of Jammu and Kashmir.

There are, however, no Islamic banks in India and no conventional banks withIslamic windows. As Mr Lone points out in his article there are statutory andregulatory problems for anyone wishing to set up an Islamic bank in India, butperhaps more problematic is the highly emotional response of those opposing anychanges to allow Islamic banking. The emotional issues, which are embedded inIndia’s political history, will be much more difficult to address.

Fayaz Ahmad Lone



NEWHORIZON April–June 2011COUNTRY FOCUS

finance. There is no barrier to non-Muslimswho wish to use Islamic financial services.Islamic finance is meant for all mankind,irrespective of religion and with its moralobjectives of promoting fairness and socialdevelopment, it may also provide a solutionto the problems of unemployment andpoverty in the community. In the Indiantown of Maharastra more than 70 farmerscommitted suicide in 2008, because theyhad taken loans from banks to finance theirgrape crop, but due to unseasonal rain theircrops were destroyed and they were not in aposition to repay the principal amount withinterest. Had there been a fully-fledgedIslamic banking system in India, this maynot have taken place.

The Stock Market

The lack of Shari’ah-compliant investmentopportunities has discouraged IndianMuslims from investing funds, not onlythrough the banks, but also through thestock market. The latter problem is beingaddressed by four asset managementcompanies — Reliance Mutual Fund, UTIAsset Management, Way2Wealth and thenewly-approved Edelweiss Mutual Fund.Some of these organisations have alreadylaunched Shari’ah-compliant mutual fundsand others are planning to do so.

According to UTI sources, the fund house islikely to tie up with Mumbai-based ParsoliCorporation to launch their fund. The

Shari’ah Board in Parsoli Corporation willcertify the scheme and the Parsoli IslamicEquity index will be the benchmark for thefund. Reliance Money has already launcheda Shari’ah-compliant portfolio managementservice for Muslim HNIs (High-Net-WorthIndividuals) and Reliance Mutual Fund isclose to filing its prospectus with theregulator to launch an Islamic fund.Company insiders say that the group is inan advanced stage of talks with an Islamicinstitution to launch the fund. As a nextstep, Reliance is also planning to launch itsentire spectrum of financial services in aShari’ah-compliant form.

It will, however, take some effort on thepart of these funds to get the necessary

Houseboat on a Keralan Backwater




approvals from the market regulator.According to sources in the industry, theregulator is not very happy to approve thesefunds as it feels these schemes —intentionally or unintentionally — onlysolicit investment from a limited class ofinvestors. Moreover, the SEBI (Securitiesand Exchange Board of India) is still uneasyabout the conduct of such funds, forexample the screening process used todetermine whether stocks are Shari’ahcompliant and the method of weeding out‘impurities’ as charity. There are rumoursthat Taurus Asset Management, which wastipped to launch a Shari’ah fund, iswithdrawing its application from the SEBIand perhaps this reflects the difficulties suchfunds are facing in getting approval fromthe authorities.

The motivation of these asset managementcompanies is not altruistic in nature,enabling Muslims to participate in the stockmarket; their rationale for launching suchfunds in the Shari’ah space is purelycommercial. The funds are eyeing scores ofrich and religious Muslims, who do notinvest in interest-yielding instruments ornon-Shari’ah-compliant stocks such as thosewith links to businesses involved in alcohol,cinemas, pork and other forbidden businessactivities.

According to research carried out by Dr. Shariq Nisar, Director, Taqwa Advisoryand Shari’ah Investment Solutions, out ofthe 1000 NSE (National Stock Exchange ofIndia) listed companies, 335 are Shari’ahcompliant. The market capitalisation ofthese stocks accounts for approximately61% of the total market capitalisation ofcompanies listed on the NSE. In fact, thegrowth in the market capitalisation of thesestocks was greater than that of the non-Shari-ah-compliant stocks.

Immense Opportunities

Perhaps, however, the effort will beworthwhile. Talha Sareshwala, chief financeofficer of Ahmedbad-based ParsoliCorporation Ltd, has commented that withbillions of dollars being deployed by devoutinvestors only in those entities that are inconformity with Shari’ah laws, the

opportunities are immense. Since some13–14% of India’s citizens are Muslims,Islamic finance is a domestic fundopportunity as well. Parsoli CorporationLtd, listed on the Bombay Stock Exchange(BSE), is a non-banking finance company(NBFC) that specialises in channelling fundsfrom domestic and non-resident Muslimsinto the Indian market. Islamic investmentsamounting to about $750 million (US) havealready been made in the country’s capitalmarket and infrastructure sector over thepast few months.

Ashraf Mohamdey, chief executive officer of Mumbai-based Idafa Investments PrivateLimited, another Islamic investmentinstitution in India, is of the opinion thatalmost 80% of Indian companies areShari’ah compliant as far as their businessin India is concerned, with only a handfulbeing involved in activities such as gaming,casinos or alcohol production.

Indian experts in the area of Islamic financeare working very hard to fosterdevelopment of the industry in India and as2011 began the Bombay Stock Exchangealong with Taqwaa Advisory and Shari’ahInvestment Solutions Ltd. (TASIS) launcheda Shari’ah Index with 50 Shari’ah-compliant companies within the BSE 500.The index will be known as the BSE TASISShari’ah 50. These 50 companies are highlyliquid and strictly adhere to Shari’ah norms.Dr. Sharique Nisar, Director of TASIS, said:‘BSE has the largest number of Shari’ah-compliant companies in the world, in factmore than the whole of the Middle East andPakistan.’

There are many Shari’ah-compliantbrokerage houses like Parsoli and Idafa inIndia, but a Shari’ah index with the leadingstock exchange in India is a greatachievement. Dr Sharique Nisar said thatthe index would provide Indian Muslims an opportunity to invest in Shari’ah-compliant shares and would bring inthousands of crores of rupees from the Gulfand other parts of the world. The challengenow is to ensure that potential investors inIndia and worldwide get to know about theindex and the investment opportunities itoffers.

New Developments

Islamic banking has been on the rise in theAsia-Pacific region, which now accounts for60% of the global Islamic banking market.Despite its rise in the rest of the region,however, the penetration of Islamic bankingin India has been low. This is especiallysurprising with India having approximately156 million Muslims, the third largestMuslim population in the world afterIndonesia and Pakistan. The Celent report‘The Rise of Islamic Banking in the Asia-Pacific Region’ attributes this primarily to aregulatory block, which allows Islamicbanking to operate only in the form of anon-banking financial corporation. Anamendment in the Banking Regulation Actof India, 1949 is required to allow theIslamic banks to formally operate as fully-fledged banks in India.

The primary reason for the regulatoryproblem is the socio-religious nature of theIndian political scene. This is especiallyevident in the report of the Committee ofFinancial Sector Reforms chaired byRaghuram Rajan; this report was submittedto the Prime Minister of India in 2010.Although the report recommendedprinciples based on Islamic banking, theterm ‘Islamic banking’ was deliberatelyreplaced by ‘interest-free banking’. Thecommittee recommended that measures betaken to permit the delivery of interest-freefinance on a larger scale, including throughthe banking system. With thisrecommendation, the ball is in thegovernment’s court and it is up to it to comeup with appropriate measures to introducethese products in the Indian banking sector.In parallel, however, a rebranding of thevarious Islamic banking products is neededto achieve widespread acceptance and serveits foremost purpose of financial inclusion.In addition to the regulations, some expertsfeel that the infrastructure for Islamicbanking is not yet in place and steps mustbe taken in that regard.

The Rocky Road to Islamic Banking

In 2010 it looked as though the first Islamicbank in the country was about to be set upin Kerala with the active involvement of the



NEWHORIZON April–June 2011COUNTRY FOCUS

businessmen such as Mohammed Ali,MA Yusuf Ali, CK Menon and otherKerala-based industrialists such asAzad Mooppan had shown keen interest inthe venture.

Purely based on Shari’ah principles, thebank would avoid interest-based businessactivities. The proposed Kerala-based bankwould invest funds in infrastructure projectsand two instruments, bay’ al-salam(deferred delivery) and instisna, have beenidentified for such investments. The bankwould invest all its funds in wealth-generating investments and distribute profitsto its shareholders. It would also set apart asocial fund and provide interest-free loansto Gulf returnees to set up businesses orsmall scale ventures.

The concept has widespread support amongthe Muslim community of the state, where alarge number of affluent Muslims practicestrict Shari’ah principles in business. A largeproportion of these individuals do not havea bank account, so the formation of anIslamic bank would be good news for them.According to sources, the biggest challengefacing the Kerala-based bank will be theformation of a Shari’ah supervisory boarddue to the shortage of suitably qualifiedscholars.

In 2010, however, a rather more immediateproblem reared its head, whenDr Subramaniam Swamy, president ofIndia’s Janata party and a formergovernment minister, succeeded in puttingthe project on hold, issuing a writ in the

Kerala government through the Departmentof Industries for Kerala. A high levelmeeting held at Kozhikode on August 122010 approved a project report prepared byErnst & Young. Kerala State IndustrialDevelopment Corporation (KSIDC), whichis the designated agency for the formationof the bank, would hold an 11% stake inthe proposed bank. According togovernment officials, it would be registeredas a non-banking finance company, beforebeing transformed into a fully-fledgedShari’ah-compliant bank. The projectproposed to raise an initial capital ofRupees 500 crore (crore is 10 million in theIndian numbering system) from leadingnon-resident Indians (NRIs) and Indianbusiness houses. According to sources closeto the development, leading NRI

Dal Lake, Srinigar, Kashmir




High Court arguing that the involvement ofgovernment agencies in setting up an Islamicbank runs contrary to the secular principlesenshrined in the Indian constitution. InFebruary 2011 The Kerala High Courtdismissed the writ, observing that they hadno objection to KSIDC carrying on abusiness that was in accordance withShari’ah law in addition to complying withthe laws of the country. They also statedthat, although the institution was based onreligious principles, its motive was not topropagate religion and the state’sparticipation in it was based on purelycommercial reasoning.

There are also moves in Jammu andKashmir, India’s most northerly state, whereJamiat Ahladith is planning to launchIslamic banking, but they will need thepermission of the Indian government to doso. This state, however, has special statusconferred by article 370 of the constitutionand the state can pass the resolution forIslamic banking in the state legislativeassembly with little modification from thecentral government, so there is anexpectation that this state will alsocommence Islamic banking in the not toodistant future.

As this issue of NewHorizon went to pressTurkey’s Bank Asya were reported to beexpecting the RBI to rule within 45 days ontheir application to open a branch offering

Shari’ah-compliant lending facilities inIndia.

The Regulatory Position

Although an RBI (Reserve Bank of India)study group had rejected the concept ofIslamic banking, it got the backing of theRaghuram Rajan committee on bankingreforms. Commenting on the issue,Dr D Subbarao, governor of the RBI, saidthat under the present Banking RegulationAct it was not possible to licence Islamicbanks, because many of the bankingprinciples in place are based on interestpayments; separate legislation would beneeded to make Islamic banking a reality.Apparently the RBI is now revisiting theissue and a decision is expected shortly.

Conclusion

There is no doubt that a huge potential forIslamic banking in India exists, but, it willneed some strong policy decisions to make ita reality. With a population of 156 millionMuslims India stands to gain tremendousadvantages, not least by attracting around$1 trillion US in Islamic investment fundsfrom Gulf countries. This would help thenational current account and keep the fiscaldeficit in check. Regulators are still indoubt, however, about Islamic banking,having approached the issue from a purelyreligious perspective. A committee toanalyse the impact of Islamic banking on

Downtown Nairobi

Indian communities regardless of theirreligious faith has never been establishedand so the potential of Islamic banking tohelp to resolve India’s real economicproblems has not been appreciated.

There is also a fear that Muslims may cometo dominate the Islamic banking industry inIndia. Islamic banking, however, requires aprofessional expertise beyond religiousbelief, because it deals with commercialprojects not just monetary credit and debittransactions. While Indian Muslims mayhave an edge in terms of Islamic ethics, theylack the professional expertise to managemodern commercial banking based onIslamic ethics, so perhaps this fear ismisplaced.

At the same time it must be borne in mindthat Islamic banking can provide immenseopportunities to energise the Indianeconomy with the participation ofpreviously excluded Muslims in Shari’ah-compliant banking and at the same timecould lead to substantial inward investmentto boost India’s further development. Itwould also help the poor and vulnerable,allowing small manufacturing, retail andagricultural enterprises to access finance aswell as providing equity funding forinfrastructure projects such as irrigation,dams, roads, electricity and communicationsprojects, which are key to the developmentof the Indian economy.


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The concept of ibra’ in Islamic laws hasnormally been discussed and applied inissues regarding debts (duyun) and rights(huquq). The word ibra’ is derived from theArabic word bara’a which means removalor acquittal from something. According toIbn Al-Arabi, bara’a has severalconnotations, i.e., to free, to purify, to avoidand to remind. Technically, ibra’ is definedas either ‘considering one’s debt as a gift tohim’ or ‘absolving the ownership that is inone’s liability’. In the context of Islamicbanking and finance, ibra’ generally refersto giving ownership or absolving one’srights in the debts that are another’sliability, either partially or totally.

In certain legal documentation in Islamicfinance, it is a practice to include an ibra’clause in sales contracts involving anelement of debt such as bay‘ bithaman ajil(BBA), murabahah, bay‘ al-‘inah and bay‘al-tawarruq. In Malaysia, for instance,almost 80% of Islamic banks apply an ibra’clause whether it is expressly or implicitlystipulated in the contract. The bank at itsabsolute discretion, as a party who hasrights in the debt, will grant ibra’ forprepayment (early settlement) ortermination of the contract due to breachand default. Nevertheless, the application ofibra’ has recently caused disputes in thecourts. Almost 90% of registeredmu’amalah cases at the High Court ofKuala Lumpur between 2003 and 2009were related to both retail and corporateproducts of BBA, in which the disputesrevolved around the quantum of a bank’sclaim when BBA contracts are terminateddue to customers defaulting.

The findings of the High Court in Lim KokHoe & Anor and other appeals were held tobe in error by Court of Appeal, because theHigh Court failed to hold that the sum due

and payable upon termination is the balanceof the sales price. Essentially the High Courthad ruled that BBA was not a sales contractsimpliciter and therefore upon prematuretermination of the agreement the bank mustgrant ibra based on the unearned profit.

The Court of Appeal, however, asserted thatBBA contracts are sales contracts andwhereas banks must grant ibra in cases ofearly settlement, they need not do so incases of default. The bank should beallowed to claim the balance of the salesprice that remains unpaid at the time ofdefault. They also stated that ibra did notequate to unearned profit. They furtherindicated that such contractual disputeswere not issues in which the courts shouldbe asked to intervene. The Court of Appealruled, therefore, that the decision in LimKok Hoe was wrong.

This decision goes against the judgment inAffin Bank Bhd v Zulkifli Abdulla in 2006.In this case the court compared the BBAfinancing with a conventional loan, anddismissed the bank’s claim for unearnedprofits and only granted the profits up tothe date of judgment, plus a penalty anddaily profit until the full settlement of thejudgment sum. The latest decision of theCourt of Appeal, however, becomes theprecedent and binds the court. The case ofAffin Bank Bhd v. Zulkifli Abdullah was anauthority for the proposition that it wouldnot be equitable to allow the bank torecover the sale price as defined when thefacility was terminated prematurely. Thisruling was also applied in the case BankingBhd v Marilyn Ho Siok Lin in 2006.

The Shari’ah Advisory Council, the highestauthority on and reference point for Islamicfinance also held on 24 April 2002 thatbanks are honour bound by the promise to

LEGAL MATTERS

give rebate or ibra’. This approach mirrorsthe concept of giving a discount on the priceor reducing the debt of those customers whomake early settlement based on the conceptof dho’ wa ta’ajal, which is acceptable inShari’ah.

The current decision given on 20 October2010 creates uncertainty in the industry.The court of Appeal granted the full saleprice to the appellant (BIMB) and a fullacknowledgement of the right of the bankto enforce payment of the full sale priceunder the property sale agreement (PSA). Ifsome payment had been made, the sum dueand payable upon termination is the balanceof the sale price.

The BBA saga seems to be never ending.Something needs to be done. The decision isassociated with legal risk and is no longerabout the validity of the contract but moreabout in-depth Shari’ah issues. The practiceof granting a rebate is a good one topromote the concepts of justice and theelimination of hardship (raf’u al-haraj) and‘Hardship Begets Facility’. To promote theindustry within Malaysia there is a need forthe legal framework to be certain andstrengthened. We do not want this case toaffect the efforts of the central bank and ourgovernment in promoting Malaysia as thehub for Islamic finance.

Sale Contract in Bai’ Bithamin Ajil: Court of Appeal held No Ibra’(rebate)

By: Hakimah Yaacob

Hakimah Yaacob is currently an associateresearcher at the International Shari’ahResearch Academy for Islamic Finance(ISRA). She is the author of several booksincluding ‘ISRA Report on International LegalFramework in Islamic Finance’, ‘MalaysianLegal History’ and ‘Alternative DisputeResolution in Islamic Finance’. She graduatedin law from IIUM (International IslamicUniversity of Malaysia) and is currentlyreading for a PhD.


www.newhorizon-islamicbanking.com 25 IIBI

Several writers have proposed that khiyar shart(conditional option) should be the structure inan Islamic option; however, the utilisation ofthe concept provokes debates about whetheror not the concept could be employed for morethan three days. Instead of using thiscontentious principle, the Malikis School ofLaw has a unique type of sale, namely bay al-ikhtiyar, which has been defined as:

Selling one of the two or many goodswith a price that is mutually agreed,but where the buyer will have the rightto choose the goods within thespecified period of time.

This type of sale is acceptable according tothe Hanafis, Maliki and certain Hanbalischolars. The Shafi’is reject the sale as thesubject matter is jahalah (unknown) andindefinite at the time of the sale, hence theydeem the sale to be null and void. Theproponents of ikhtiyar (choice) sale rely onqiyas (deductive analogy in which theteachings of the Hadith are compared andcontrasted with the Qu’ran in order to applya known injunction to a new circumstanceand create a new injunction) and indeedsuch an arrangement is necessary to easesales transactions. Hanafi jurists, therefore,argue that it is allowable, on the basis ofistihsan (juristic preference), where juriststake a lenient view on the application of aruling on the basis that an act may causedistress or unfairness. While they admit theelement of ignorance and the unknown inthe sale, they believe that these elements aretrivial and tolerable, as they typically do notlead to arguments from both parties.

An Illustration

To illustrate how the concept would betransformed into an option-like structure,

let us take a putative transaction with thefollowing characteristics:

Transaction date: 28 September 2010Buyer: ClientSeller (equivalent to

option writer): XYZCommodity: Land with a specific

sizeOption type: Call option (to buy)Expiration: 23 January 2011Strike price: $10 million Compensation cost: $25,000

Firstly, the seller needs to identify twoseparate assets for the structure. Once theassets are already in place, the major assetwould be the identified land, while the other(say a computer) will be used for the choice.

Secondly, if the client is planning topurchase the above-mentioned land, butwith special option features, he canapproach the seller (XYZ) and purchaseboth the land and the computer. Inaccordance with bay al-khiyar (option torescind the sale) or khiyar al-ta’yin (anoption of determination, where a personhaving purchased two or three things of thesame kind, stipulates a period to make aselection from the purchased stock)prescriptions, the buyer will then have theright to decide which of the two assets hewould like to conclude at an agreed date,which will be 23 January 2011.

Thirdly, if the anticipation is correct (whichis that the government has announced thedevelopment of the nearby land for a newuniversity campus), instead of the computer,the buyer would decide to choose the land.If the opposite occurs, the buyer concludesthe purchase of the computer.

As a result of the above transactions, theseller will either receive full payment for theland, already set out in the purchaseagreement or he will gain a minor profitfrom the selling of the computer, whichequals the option premium payment.

In practice, the only minor obstacle withregard to the structure is the seller’s need tohave another asset, which has the samevalue as the desired premium payment. Forthe structure to be suited to the financialintermediaries’ derivatives product,however, it would create several practicaldifficulties as well as issues related toShari’ah compliance. This is due to the factthat the bank needs to have both assets in itspossession at the time the bay al-khiyartakes place; this could be difficult for thebank as there will be a whole new risk inowning both assets without knowing whichone will be sold. Notwithstanding this fact,the bank does have the capability to managesuch a risk by hedging or performing asimilar and parallel structure with anotherfinancial entity. As such, in the event thatthe buyer decides not to choose the mainasset, it will be sold immediately to theother party.

Bay al-khiyar (khiyar al-tayin) for call andput options

Taking into consideration the Hanafi Schoolof law judgments, it can be seen in theillustration provided that the principle ofbay al-khiyar is practical as an alternative tocall and put options. Having said that, theapplicability of the concept is debatable.

In order to structure any sale transactionusing the bay al-khiyar principle, severalconditions have been emphasised byShari’ah scholars:

NEWHORIZON Rabi Al Thani-Jumad Al Thani 1432 ACADEMIC ARTICLE

An Alternative to Call and Put Options: A Hybrid of Bay al-Ikhtiyar and a Normal Sale

By: Dr. Zaharuddin Abd Rahman, Fellow of the International Islamic University ofMalaysia and Shari’ah Advisor




❑ The selection must be among two orthree and not more options.

❑ The seller agrees explicitly to this option,e.g. by saying to the buyer ‘I have sold you oneof those two or three items, and you have theoption of selecting which one.’ If the sellerdoes not agree to this option, the sale isrendered defective based on ignorance.

❑ The subject matter is non-fungibles (notinterchangeable) such as clothes orfurniture and not fungibles such as newprinted books, since there is no benefit inspecifying an item out of a group offungibles that are virtually identical.

❑ The period must be limited to three days;however, Abu Yusuf and Muhammad tookthe view that any known and mutuallyagreed period is acceptable.

In accordance with the above conditions, itseems that the official view of the Hanafischolars is that the khiyar must not be longerthan three days. If such a view is taken intoconsideration, this structure might not be thebest principle, as the option period will mostlikely exceed three days. It is also stated that,since this type of khiyar is a branch of khiyarshart (conditional option), it must abide bysimilar requirements to the conditionaloption, one of which is that it is not toexceed three days.

Notwithstanding this fact, two of thehighest level Hanafi scholars, Abu Yusufand Muhammad Al-Hasan Al-Shaybani, areof the opinion that the vital feature is themutual agreement on a specific period,regardless of its length. Viewed from thisperspective, I am inclined to their opinionas the agreement and period specificationare sufficient to circumvent the possibilityof jahalah (ignorance) and gharar in thatparticular matter. This is also in line withthe basis of the acceptability of the concept,which is based on istihsan and not a qiyasto the khiyar shart principle.

In addition to that, unlike the urbun(unrefundable deposit) and hamishjiddiyyah (down payment) concepts, which are only applicable to the buyer, bay al-khiyar is applicable to either theseller or the buyer and hence the call

and put options can be replicatedaccordingly.

In accordance with the examples given bythe classical scholars, the concept of bay al-khiyar is normally used to give an option orchoice to either the buyer or the seller inassets that are rather similar in their value,type and price, e.g. if a person buys anunspecified item of clothing out of two orthree, where he has the option to takewhichever one he wishes within three days.Now, the question at hand is whether ornot it is permissible to provide a choicebetween two different assets, which areenormously divergent in value and price?

Ibn ‘Abidin, one of the most renownedHanafi scholars, clarifies:

Khiyar al-ta�yin is valid for the qimiyat(asset, which is different in value) not themithliyyat (asset, which has similar types,kind and value), for they are similar to eachother (thus need no option).

Based on the above-mentioned condition,transacting the khiyar al-ta’yin between acomputer and land, as in the example given,should not trigger any Shari’ah issue, forthey both fall under the category of qimiyatand not mithliyat.

In addition, considering the absence of anyexplicit text regarding the issue, we shouldalso look at it from the general theory offreedom of contract in Islam. In line withthe Islamic legal maxim, which states that‘All contracts are permissible unless provencontradictory to the explicit text’, Imam Al-Shafi’i further elaborates ‘in principle allcontracts are permissible if they areconcluded with the full consent of theparties unless there is an explicit text fromthe prophet to prohibit such a sale or such aprohibition could be understood from theexplicit text’. Moreover, the condition madeis neither paradoxical to the muqtada al-aqd (general objective of the contract) norcould it lead to coercion and oppression to

ACADEMIC ARTICLE

either transacting party. In accordance withthis logic, I am of the view that the optionsbetween two different items are permissibleas long as every transacting party is awareof the option and grants consent.

Conclusion

I am of the view that a combination of khiyaral-tayin with several acceptable salescontracts such as murabahah could offerflexibility to Islamic financial institutions inreplicating the key features of call and putoptions. This khiyar, however, is onlyapplicable to the commodity option; itcannot be applied to purchasing currenciesand financial debts to avoid riba. In spite ofthat, since most Islamic financial institutionsemploy the tawarruq concept, which involvesthe sale and purchase of a real commodity,the concept may serve the purpose.

Dr. Zaharuddin Abd Rahman is a fellowof and lecturer at the InternationalIslamic University of Malaysia, as well asbeing an associate lecturer at theMarkfield Institute of Higher Education inthe UK. He is also a Shari’ah advisor toseveral financial organisations in bothMalaysia and the GCC and a regularcontributor to several publicationsfocussing on Islamic financial issues.

I am of the view that the options between two different itemsare permissible as long as every transacting party is aware ofthe option and grants consent.



NEWHORIZON Muharram-Rabi Al Awwal 1432 POINT OF VIEW

The 10th Anniversary Islamic FinanceSummit Conference held in London at theend of February could not have been timedmore perfectly, held as it was against thebackground of newspaper headlinesscreaming ‘Libya Ablaze’ and followingmore than a month of turmoil across theMENA (Middle East and North Africa)region. Political regimes in Tunisia andEgypt tumbled away like weeds in a desertstorm and Muammar Qaddaffi and those ofsimilar ilk in Yemen, Algeria and Bahrainwere looking as though they were in dangerof being unceremoniously bundled into thedustbin of history. I was on a short businesstrip to London from my base in Riyadh atthe time, so I thought what better momentthan this to take a day off, stop by at theconference and try to get a quick, first-handpeek at how pundits and purveyors ofIslamic ‘Wall Street’ were bracingthemselves to respond to the emergingrealities of their Brave New World.

The conference was Euromoney’s show puton to celebrate the 10-year journey ofIslamic finance, but many assembled there

that momentous morning seemed to bemore anxious about the ten thousand yearsstill ahead – uncharted and unexplored.

Islamic Finance – The Supply and DemandSides

The turnout of delegates was impressiveboth in numbers and profile. About 400delegates trooped in from as near asMorocco and Nigeria and from as far asAbu Dhabi and Malaysia; distinguishedcentral bankers, grave Shari’ah scholars,university dons, academicians, hard-corebankers, strait-laced credit analysts, ratingartists, staid auditors, wide-eyed studentsand bemused journalists.

On the delegate list, I was perhaps the soleodd man out; you might say I did not inany way represent the industry from ‘insideout’. Instead, I was perhaps the onlydelegate who came from ‘outside in’, i.e. Iwas someone who represented theconsumer or the customer of Islamicfinance. This made the conference seem tome like an unabashed talk-fest of, by and

for Islamic financiers rather than a placewhere the supply side and demand sides of‘Planet Islamic Finance’ converged anddiscoursed. On later reflection, I thoughtthis was a tellingly (or chillingly?) candidcommentary on the whole of the summit,‘Into your 10th anniversary year, oh ye mostvenerable purveyors of global IslamicFinance’. I found myself silently askingdelegates, ‘Oh ye venerable ones, have yeforgotten to commemorate those who camethese last 10 years and placed preciouscustom at your doors? Have ye forgottenthem in your celebrations andcongratulations today, remembering onlythose seated behind shiny glass counters,working the spreads and margins?’

What a difference it would have made to theconference, if the summit had also provideda platform to publicise and celebrate thecustomers’ sentiments too (much in the waythe Oscar prize-giving ceremony recognisesthe nominations of the industry’sconsumers). Imagine how electric theatmosphere would have been if there hadbeen a session devoted entirely to presenting

The Journey for Islamic Finance: Ten miles behind me andten thousand more to go

By: Sudarshan K Madabushi

A wind of change is blowing through many parts of the Muslim world. Ordinarypeople have taken to the streets to demand improvements in their daily lives. Againstthis background Sudarshan K Madabushi attended the 10th Anniversary FinanceSummit in London and observed an industry that is, in his view, out of step with thezeitgeist. He argues that the Islamic principles of fairness of social justice, iftranslated into practice in Islamic finance, would make the industry a credible andpowerful alternative to its conventional counterpart and at the same time make asignificant contribution to the development and reconstruction that the demonstratorsare demanding. His plea can perhaps be best summarised in Shakespeare’s words,‘There is a time and tide in the affairs of men, which, when taken at the flood, leadson to fortune.’




snippets of outstanding examples of, say, thetop 10 best Islamic finance deals transactedfor customers across the world in the last 10years.

Where are the leaders of the Islamic financeworld?

Who are the present-day leaders of theIslamic finance world? Who could bedescribed as the Intel or Microsoft ofIslamic banking today? Is there a daringSteve Jobs out there that the industry canboast about? Is there a Peter Drucker ofIslamic finance and banking? I wonderedabout it as I sat through the heavy andsometimes somnolent sessions addressed bya galaxy of Shari’ah-panel scholars.

One of the speakers from Malaysiabemoaned the lack of zeal amongst youngMuslims, asking why they were not preparedto come forward and commit themselves to alife-long career in Shari’ah law and Islamicfinance. ‘How do you expect young Muslimsto want to become Shari’ah scholars, myfriend’, I wanted to tell him, ‘if the Islamicfinance world does not have its own folkloreof heroes, gurus and pioneering legends? ForGod’s (or Allah’s) sake, where are theindustry-leaders here in this conference?Where are the Al Rajhis and the DIBs andthe KFHs? Why aren’t they here, sharingwith us happy success stories or eventragedies and tragi-comedies?’

How can a 10-year-old industry hope toproduce heroes and heroics for the nextdecade, if it does not know how to narrateindustry-legends that can inspire hero-worship? Surely, that is not in the job-description of a Shari’ah scholar, is it?

Islamic Finance: A new paradigm of globalfinancial order?

After attending two post-lunch, heavy-metalsessions dealing with the subject of Shari’ahfatwas and how to bridge Shari’ah law andIFRS accounting standards overlaid withsovereign central bank regimes andregulations, I began pondering graveexistential questions.

What is Islamic finance really all about?Does it seek to be a different paradigm of

public lending and borrowing? Has itsucceeded only in emerging as a new-agefad of alternative financing? It claims to beinnovative, but seems far more likeimitation? Is it, in truth, ethically moreevolved than its conventional counterpart,which, as we know today post-2007 tumultand disaster, is a deeply flawed and unjustsystem of financing, rooted as it is in andshaped by the history of rapacious Westernmercantilism? Will Islamic financing everemerge as a standalone, self-contained andself-sustainable system? Can it provide agenuine alternative to its so-calledconventional competitor, the good old‘Global Financial Order’ on which the restof the world (for good or worse, in goodtimes and bad, during boom and bust, inhealth and sickness, in life and in death)continues to feed?

I doubt it and for two main reasons:

❑ Islamic financing, in essence and in effect,has come to represent no more and no lessthan a certain style of lending, just as so-called conventional banking is a lending-styletoo. No matter what style of lending isadopted, the grim, inescapable fact of theworld is that the substance of lending remainsever the same and that substance is what wecall risk. As long as Islamic financingpossesses no worthy and alternativeconceptual or theoretical framework for risk,one that is truly and radically different fromthe one used by the conventional, western-based system of banking and finance, it will itsurely continue to remain in the shadow of itsmore prevalent, more resourceful and moreuniversal competitor. As long as it continuesto avoid the challenge of addressing ordealing with risk squarely in newer, bolder,more distinctively out-of-box and indeed intruly Islamic ways, Islamic banking willcontinue to symbolise nothing more than anempty triumph of fluffy style over realsubstance.

❑ The soul of Islamic financing is, ofcourse, the firm and enlightened body ofprinciples called Shari’ah. Scholars havedemonstrated that Shari’ah is rooted inhuman ethics and justice, but after all theseyears they are yet to reveal fully andconvincingly that Shari’ah can and indeed

POINT OF VIEW

As long as Islamic financingpossesses no worthy andalternative conceptual ortheoretical framework for risk,one that is truly and radicallydifferent from the one used bythe conventional, western-based system of banking andfinance, it will it surelycontinue to remain in theshadow of its more prevalent,more resourceful and moreuniversal competitor.



NEWHORIZON Muharram-Rabi Al Awwal 1432 POINT OF VIEw

also does energise the irrepressible spirit ofhuman entrepreneurship and providescredible outlets for its expression andmanifestation.

Islamic Finance in a Brave New World:Growing tall or growing fat

The Secretary-General of AAOIFI, Dr.Mohamad Nedal Alchaar, in his keynoteaddress at the inaugural session of theconference made one very insightful remark.While lauding the Islamic finance industryfor having achieved the milestone of half-a-trillion dollars in transaction-value, hewarned industry-players that they were fartoo obsessed with and self-congratulatoryabout horizontal growth, whereas the futurefocus ought really to be vertical growth. Itwas a polite circumlocution to drive homethe point the industry was only gettingfatter instead of taller as the years went by.

There is no way Islamic finance can growtaller without stepping boldly out of thejungle that is the world of conventionalfinance. It has to break away from theshackled thinking of Western monetarytheories and gospel. It must re-discover itsethical underpinnings founded in Shari’ahroots and then apply them with radical zealand earthy common sense.

How may this process of growing tall andnot fat be achieved? I am not a Shari’ahscholar; I am not even Muslim, but I knowjust enough about the system to realise thatit is founded on strong values of fairnessand human honesty. I know enough aboutthe system to know that it abjures greed andvenality; that it does not look upon moneyand profit as an end in itself, but as themeans to nobler human ends. I knowenough about the system to say that it istime Islamic finance re-invents and re-fashions itself in a newer, bolder andradically different pan-Islamic mould. If theIslamic world of politics is due now forapocalyptical reform, can the world ofIslamic finance afford to lag behind?

So here are a few ideas to ponder:

❑ The bed-rock of Islamic finance andbanking ought to be the founding of a

pan-Islamic central bank governed by pan-Islamic Shari’ah principles. The world musthave an ‘International Islamic MonetaryFund’. When will Islamic nations turn thisdream into a reality?

❑ Islamic finance today must wake up tothe new realities that the brave newemerging order of the Islamic world willusher in soon. It must prepare to jettisonnarrow goals of mercantilism. It must learnto embrace the larger goals of nationaldevelopment and reconstruction. It mustreflect humbly on what really inspired thegreat street revolutions of Tahrir Square,Benghazi and Pearl Roundabout. It wasindeed nothing but the crying needs ofpeople for food, security, education andemployment.

These are the basic human needs that will hold centre stage in the next decades.The political climate, the demographictrend, the economic compulsion of the timesall indeed point in this direction – thegreatest good of the greatest number ofpeople in the Islamic world will beinextricably linked to the sustaineddevelopment of structures that will meetthese needs.

❑ Islamic finance must somehow find a wayto shed its habit of imitating the styles andpractices of conventional banking andfinance. It must abandon and end, once andfor all, the systemic short-termism, theendemic myopia to which it clings as it goesabout defining and creating its mercantilemodels, products and paradigms. Thesystem must strike out instead on its ownchosen path, where banking and finance isfounded on the vision of development andreconstruction for a modern Islamic epoch –an epoch where food, security, educationand employment will come to occupy thecommanding heights of the pan-Islamiceconomy. If Islamic financial institutions donot hitch their wagons to satisfying thesebasic human needs and if they fail tocontribute to their growth and development,then they will truly have missed an historicopportunity to re-shape their own destiny ina world that holds the only future hope fortheir own religious ethos.

The bed-rock of Islamicfinance and banking ought tobe the founding of a pan-Islamic central bank governedby pan-Islamic Shari’ahprinciples.

Sudarshan K Madabushi is a Fellow ofthe Institute of Chartered Accountants ofIndia. He is the Chief Financial Officer ofAl Rajhi International for Investments, asubsidiary of the Al Rajhi Group, whichspearheads the Group’s globalinvestments in agriculture and food-security. The views expressed by him inthis article are his own.


IIBI NEwS

April

10–11: 6th World Takaful Conference,DubaiThis conference is all about managing risk,innovation and driving growth. One of thehighlights of the event will be the launch ofErnst and Young’s 2011 World TakafulReport, which addresses how the Islamicinsurance sector can drive growth in anindustry, whose growth has so far beenslightly disappointing.Contact: Sophie ShahTel: +9714 343 1200Email: [email protected]

1–13: 6th Annual Middle East RetailBanking Forum, DubaiEntitled ‘Redefining Growth Opportunitiesin Retail Banking’, this conference willaddress current issues and the way forwardin the still growing retail banking business inthe Middle East. Speakers will address issuessuch as identifying the best retail bankingmodels for the region, the importance ofchannel management and best practice in theregion and internationally. Contact: Sakib BazazTel: +91 9902 774 751Email: [email protected]

12: 4th Annual One-Day Workshop:Sukuk, Their Applications andChallenges, LondonThe workshop presented by industry expertswill acquaint the participants with the mostpopular Shari’ah-compliant contracts used inSukuk structuring; issues arising in structuringSukuk transactions with help of case studies;how Sukuk may be used for project financing;the process of Shari’ah compliancecertification; key points of AAOIFI’s standardson sukuk and taxation issues for UK-basedsukuk issuers and investors.Contact: Mohammad ShafiqueTel: +44(0)20 7245 0404Email: [email protected]

12–13: 1st Annual Middle EasternBanking Conference, DubaiThis launch event will take place at DusitThani Dubai. It is designed to provide ahigh-profile platform to specifically focus onthe opportunities and challenges that areforging the Islamic banking, finance andinvestment landscape in the region.Contact: Sophie ShahTel: +9714 343 1200Email: [email protected]

May

10–13: 8th Islamic Financial BoardSummit – Enhancing Global FinancialStability: Challenges and Opportunitiesfor Islamic Finance, LuxemburgThe topics of discussion at the conference,hosted by the Central Bank of Luxembourg,will cover international developments in thefinancial regulatory landscape, theimpediments and prospects for regional andinternational cooperation and thedevelopment of capacity building toenhance financial stability, as well as issuesin transparency and market discipline andinformation environment. Contact: Yazmin AzizTel: +606 2698 4248 (ext, 133)Email: [email protected]

30–31: MEFTECThis major technology exhibition andconference has moved venue and date and isnow taking place at Bahrain’s InternationalExhibition and Convention Centre, just fiveminutes from Manama’s financial district. In 2010 the event attracted more than 700visitors from 27 countries and 150exhibitors and with improving financialconditions the hope is that 2011 will beeven bigger and better.Contact: Syed Faisal AbbasTel: +973 17215665Email: [email protected]

June

3: Islamic Derivatives and StructuredProductsThe Islamic Finance Access Programme(IFAP) aims to provide Islamic financialintelligence to those interested in Islamicbanking and finance. This event will beattended by industry leaders in Islamicderivatives and structured products.Contact: Rizwan MalikTel: +44 207 147 9970Email: [email protected]/our-brands/ifap

8–9: 2nd World Annual World IslamicBanking Conference: Asia Summit,SingaporeThe theme of this year’s conference isbuilding bridges across Asia and the MiddleEast. Keynote speakers will include H. E. Lim Hng Kiang, Minister of Tradeand Industry, Singapore, H.E. Rasheed M Al Maraj, Governor of the Central Bank ofBahrain and H.E. Sultan Bin Nassar Al Suwaidi, Governor of the Central Bankof the UAE. Contact: Sophie ShahTel: +9714 343 1200Email: [email protected]

July

22–24: Structuring Innovative IslamicFinancial Products, CambridgeThe Institute of Islamic Banking andInsurance’s ever popular residential summerworkshop is in its fifth year and as usualtakes place at Clare College, Cambridge.Attracting delegates from all over the world,this is a unique opportunity to benefit fromthe formal sessions and the offlinediscussion and exchange of ideas.Contact: Mohammad ShafiqueTel: +44 (0)20 7245 0404Email: [email protected]

Diary of Events endorsed by the IIBI


mwww.newhorizon-islamicbanking.com30 IIBI


Mega Ad.


www.newhorizon-islamicbanking.comIIBI 32

Robert Owen was appointed chairman of the Islamic Bank of Britain (IBB) on 1 January 2011. He joined the IBB’s boardin February 2007 and is currently ChiefExecutive of Chambers Harris Limited.From 2000 to 2006, Mr Owen was ChiefExecutive of London Mortgage Company,leading the company through its successfulprogramme of securitisations.

A formerdirector of theFinanceIndustryStandardsAssociation andPrima InsuranceCompany, Mr Owen’sexperienceincludes roles atLloyds TSB,KensingtonMortgage

Company and Yorkshire Building Society.Mr Owen has BA and MBA degrees and heis a Fellow of the Chartered Institute ofBankers.

The International Islamic LiquidityManagement Corporation (IILM) hasannounced the appointment of Mr Mahmoud AbuShamma as its first ChiefExecutive Officer (CEO) for a three-yeartenure effective 1 February 2011.

Prior to his appointment at the IILM, Mr.Mahmoud served as the Global Head ofHSBC Amanah Coverage at HSBC BankMiddle East Limited, Dubai in charge ofcritical HSBC Amanah relationshipsglobally, including governments, high-net-worth individuals and top corporate clients.He was instrumental in establishing theHSBC Amanah Syariah unit – the firstforeign bank to open an Islamic retailbanking unit in Indonesia and served as itsHead from 2003 to 2010. In London, he

On the Move

APPOINTMENTS

established and headed the HSBC’s IslamicTreasury Unit and originated the firstIslamic Syndication by HSBC Amanah.

Mr. Mahmoud will lead a team of Islamicfinance experts and professionals chargedwith realising the IILM’s mandates,particularly to issue highly-rated, short-termShari’ah-compliant financial instruments inmajor reserve currencies and to developplatforms to enhance cross-border Islamicfinance activities. As the CEO, Mr. Mahmoudwill report to the IILM’s governing board,which will set its strategic policy directionand to the board executive committee for itsgeneral conduct of operations.

The IILM has also announced theappointment of Her Excellency Dr ZetiAkhtar Aziz, Governor of the Central Bankof Malaysia, as chair of its governing boardand His Excellency Yves Mersch, Governorof the Central Bank of Luxembourg, as thedeputy chair.

The governing board of the IILM has alsoappointed six internationally-renownedscholars to sit on its Shari’ah committee fora three-year tenure.

The Securities Commission Malaysia (SC)has announced the appointment ofEncik Zainal Izlan Zainal Abidin asExecutive Director with effect from 12 January 2011. Encik Zainal Izlan willlead and drive the Commission’s agenda for the Islamic Capital Market and will be responsible for the SC’s operational,strategic and developmental initiativesaimed at strengthening and sustainingMalaysia’s leading position in this area.

Encik Zainal brings with him over 20 yearsof industry experience and internationalexposure. Prior to joining the SC, EncikZainal was the Chief Executive Officer of i-VCap Management Sdn. Bhd.


Dubai Islamic Bank (DIB) has announcedthe appointment of Ahmed Fathy Al-Gebali, a senior financial servicesprofessional with over 23 years ofexperience, as Chief Financial Officer(CFO) at the bank.

Prior to joining Dubai Islamic Bank, Al-Gebali served as the CFO at BoubyanBank, Kuwait. During his 23 years ofprofessional experience, Al-Gebali has heldsenior positions at Global InvestmentHouse, Gulf Investment House, KuwaitFinancial Centre and International FinancialAdvisors.

Al-Gebali holdsa B.Sc inFinance fromAin ShamsUniversity,Egypt, adiploma inComputerScience fromthe AmericanUniversity,Cairo, and anMBA from theAmerican

University of London. In addition, he isregistered as a Certified Public Accountantby the University of Illinois in the UnitedStates.

Neil Miller, a 20-year veteran at NortonRose, has left the company to join KPMG,where he will establish a global Islamicfinancial advisory business. Following hisdeparture Norton Rose Group’s globalIslamic practice will be led by threepartners, who will act as regional heads.Mohammed Paracha, based in Bahrain, willbe responsible for the Middle East andAfrica, Farmida Bi in London for Europeand Davide Barzilai in Hong Kong for AsiaPacific.

Ahmed Fathy Al-Gebali



Promoting Islamic Finance

IIBI LECTURESNEWHORIZON Rabi Al Thani-Jumad Al Thani 1432

December: Risk

Concentration, Deposit

Protection and Shari’ah

Engineering in Islamic

Finance

Although the Islamic finance industry wasless affected by the financial crisis thanits conventional counterpart, it has beenaffected by it and is facing manychallenges. Dr Nienhaus discussed someof the key issues related to theconcentration of investments in few assetclasses; the lack of risk managementtools; the protection of investors’ rightsand Shari’ah governance mechanisms inthe Islamic finance industry.

Islamic finance is not an unalloyed successstory. There have, for example, beenbailouts of Islamic banks and non-performing sukuk in the last two years. Theretail Islamic finance market wasoverestimated in the West with the onlystandalone Islamic retail bank in the region,the Islamic Bank of Britain, which has madelosses since the start of its operations in2004, recently having to be rescued by acapital injection from Qatar. The retailbanking situation is not much moreencouraging in Malaysia, which is a globalleader in Islamic finance having stronggovernment support and a robust Islamicfinance infrastructure. Approximately 20%of Islamic deposits in Malaysia are held byprivate individuals, which is far less thanthe 50% held by government and otherfinancial institutions.

Underlying Issues in Islamic Finance

Dr Nienhaus suggested that Islamic banks’risk management techniques are inadequate,because they have heavy exposure in a fewsectors, in particular the exposure to thehard-hit real estate sector in some GCC

countries. There have also been hugedeficiencies in the implementation ofaccounting, auditing and reportingstandards developed by standard-settingbodies such as the Accounting and AuditingOrganisation for Islamic FinancialInstitutions (AAOIFI) and the IslamicFinancial Services Board (IFSB).

In addition Islamic banks are relativelysmall with a limited financing capacity,especially for large infrastructure projects,where they usually become part of asyndicate with other Islamic orconventional banks. Importantly, theIslamic finance market is very fragmented

and there is lack of mutual recognition ofproducts especially in the key markets ofMalaysia and the GCC, which is primarilydue to the lack of standardisation ofShari‘ah requirements. Broadly, the Islamic finance industry has no establishedprocedures for restructuring, recovery orresolution of disputes in relation toproducts or institutions with practicesvarying from one jurisdiction to another,which leads to legal challenges.

He drew attention to the number of issuesthat have surfaced in the Islamic financeindustry over the last two years. Heparticularly highlighted the facts that manyIslamic financial institutions are highlyexposed to bubble-prone, real-estatemarkets; they have to cope with anunderdeveloped liquidity managementinfrastructure and they have to handle thecapital impairment risk of investmentaccount holders, which leads to the issue ofdisplaced commercial risk. On the positiveside, he highlighted the fact that, althoughthe Islamic finance liquidity managementinfrastructure is underdeveloped, there havebeen a number of initiatives, such as theLiquidity Management Centre and morerecently the International Islamic LiquidityManagement Corporation (IILM) toimprove this situation.

Shari’ah Engineering

Some of the latest products of Shari’ahengineering, a process of makingconventional products Shari’ah-compliantin ‘form’ and not necessarily in ‘substance’,open new avenues for the financial tradingactivities of Islamic banks with onlymarginal, if any, real asset backing.Although it is claimed that Islamic financepromotes the real sector of the economy,such highly-engineered products have inreality decoupled Islamic finance from thereal economy. Dr Nienhaus cautioned thatit is open to debate whether this will reduceor enhance the risk positions of Islamicbanks and improve or damage the systemic

Dr Volker Nienhaus is a professor ofeconomics; has held an honoraryprofessorship at the University ofBochum since 2004 and is also avisiting professor at ICAM Centre,Henley Business School, University ofReading. He is a member of severalacademic advisory committees andboards and has published numerousarticles and books on Islamiceconomics and finance since the 1980s.


February: Takaful – A

Practitioner’s Viewpoint

Mr Ajmal Bhatty has kindly

provided a synopsis of the main

points of the lecture he gave to

the IIBI in February 2011.

With annual premiums of $5.3 billion in2008, the takaful industry was still anembryonic sector of the worldwideinsurance business estimated to be worth$4.2 trillion. It had, however grown by astaggering 39% per annum between 2005and 2008, compared to the 7% enjoyed bythe insurance industry overall. Ernst andYoung estimate that in 2010 global takafulpremiums reached $8.9 billion, whichsuggests that for the time being the growthrate of the sector is increasing even faster.Even if growth slows as the industrymatures and achieves just 9–12% perannum, this could conservatively produceannual premiums of $20–30 billion by2020.

In the scramble to take advantage of thegrowth opportunities that seem to be onoffer it is important for organisationsoffering takaful insurance to remember that

what differentiates takaful fromconventional insurance is its value chain. Ifthey lose sight of the differentiators, thenthey run the very real risk of simplybecoming imitators of the conventionalinsurance industry.

Definition of the Takaful Value Chain

The takaful value chain is a system ofmutual and co-operative help that enablesthe channelling of wealth and capital withsocial conscience and responsibility, infairness to others for the risk shared andundertaken. It provides just rewards; itencourages the distribution of wealththrough savings and insurance protectionbased on equity, justice and fair play; ithelps to enlarge a caring and transparentsystem dedicated to the welfare of society,free from exploitation and utilising wealthfor generating economic activity inbusinesses that are socially responsible andeco-friendly. It discourages creating moneyfrom money and hence prohibits interest,linking deposits and investments to realunderlying assets for a sustainable takafulproposition.

Some Challenges for the Takaful Industry

Improving Understanding of Takaful –Customers are generally oblivious to the

benefits of the takaful value chain. Whereasthey may have an understanding of surplussharing, they have no feel for what is meantby mutual and co-operative principles orwhy it is a fairer system.

The industry needs to move on from itsinitial stance, which was to demonstratewhy takaful was needed for Muslims, towhy takaful is good for everyoneirrespective of religion. A concerted effort isneeded to promote the value of takaful toall potential customers.

Making Takaful an Attractive BusinessProposition – What is the attraction for anentrepreneur in starting a takaful venture?Is it not the business proposition, albeit abusiness that has a social conscience,although by the very definition of Islamicfinance, all businesses are supposed to havethis social conscience and sense ofresponsibility?

Why, therefore, should a shareholderinvesting in a takaful business be at adisadvantage in getting a decent return onhis capital when compared to otherfinancial businesses such as banking,investment and finance? The issues ofgharar and maysir in relation to insurancebusiness are taken care of by applyingmechanisms to minimise these, such as the


NEWHORIZON April–June 2011IIBI LECTURES

stability potential of the Islamic financeindustry.

Shari’ah Governance Structures

Discussing the controversies surroundingsome sukuk structures and tawarruq, hepointed out that serious consideration needsto be given to the Shari’ah scholars’governance framework. The leadingShari’ah scholars sit on many boards, insome cases holding more than 70 positions,which poses the question of whether theycan fulfil their roles properly and diligently.Some of these scholars are also part ofAAOIFI’s Shari’ah board and the Shari’ah

committees of some national financialregulators: this is clearly a situation whichcould lead to conflicts of interest. Inaddition their remuneration packages aregenerally not transparent.

At present, the majority of Islamic financeproducts may be legally Shari’ah-complaint,but in substance, they are almost identicalto conventional financial products. As theprincipal difference between Islamic andconventional finance is Shari’ah-compliance,the strengthening of the governanceframework for Shari’ah scholars andShari’ah compliance is vital for building theconfidence of stakeholders and for the

further growth of the Islamic financeindustry.

In Conclusion

Dr Nienhaus concluded the lecture bystating that while the agenda of incrementalreform by the IFSB and AAOIFI,development of the liquidity infrastructureand prudential standards clearly have meritin solving the pressing issues faced by theIslamic finance industry, it may not be abad idea to look at the system and itsobjectives in their totality and considermore fundamental reform, such as a movetowards ‘narrow banking’.



NEWHORIZON Rabi Al Thani-Jumad Al Thani 1432 IIBI LECTURES

concepts of tabarru (a freely given act ofcharity), transparency and surplusdistribution.

Qard (interest-free loan) exposesshareholders to financial risks and adverselyaffects return on capital. Qard, however, isnot considered obligatory by Shari’ahscholars.

Complying with International Standards –If takaful companies have to competedomestically and internationally, can they

comply with international accountingstandards? AAOIFI and IFSB are workinghard to achieve standardisation, but howdoes the industry close the big gaps betweenthe forthcoming standards of the IASB(International Accounting Standards Board)and the IFRS (International FinancialReporting Standards) and current takafulaccounting practices?

Aligning the Interests of Participants andShareholders – One of the main pillars oftakaful is its mutual and co-operative

structure, which is unlike a conventionalmutual. In a takaful business, theshareholders supply the enabling capital; noshareholders, no takaful. This begs thequestion that the co-operative principlesought to be seen to be broader than justapplying to the participants in sharing risk.

In reality risk sharing at the participant levelworks only because the shareholders’capital enables this mutual risk sharing totake place, which effectively means that andshareholders’ capital is exposed to the veryrisks the participants are mutuallyprotecting against. We know that thefundamental difference between takaful andconventional insurance is between risksharing and risk transfer. In a way, theshareholders are exposed to this risk sharingalbeit in a different sense. Risk sharing isthe domain of takaful funds and theshareholders are part of this risk sharing onthe basis that their capital is undeniably andinescapably exposed to the financial risksemanating from the outcome of risks relatedto the insured events that may or may notoccur.

One aspect of Shari’ah consideration is tosee how the spirit of co-operative principlescan embrace the community of all whobring their capital to takaful propositions.This is not about shareholders benefitingfrom the participants’ fund as this would bemaysir and exploitation, but aboutsomehow compensating shareholders forthe financial risk they are obliged to take inmaking the risk sharing possible forparticipants.

Conclusion

In my view, one shared by many in theindustry, the interests of stakeholders needto be aligned better than they are at thepresent in the current stage of takafulevolution. The danger is that if takafulcompanies do not or cannot adhere to thetakaful value chain, then a takaful companyand a takaful product would look like, feellike and be like conventional insurance.

Ajmal Bhatty is President and CEO of Tokio Marine Middle East based in Dubai.Previously, Mr. Bhatty served in senior positions in HSBC as Global Head of Takaful, atTakaful International Bahrain as its CEO and in Arab Insurance Group Bahrain and the OldMutual in the UK. He is also the chairman of the Takaful Advisory Board at IIBI.


Aliyah Bakali, Corporate Credit Analyst, Citibank India

Qamar Hussain, UK

Amir Abd El Hamid El Kazak, Senior Manager, KPMG, Kuwait

Mahmoud El-Hossainy Abdel-Baky, Latham & Watkins LLP, SaudiArabia

Mohammed Abdul Shakeeb, Assistant Manager, Operations,HSBC, India

Sherif Audu Idi, FinBank Plc, Nigeria


NEWHORIZON April–June 2011IIBI NEwS

To date students from nearly 80 countries have enrolled in the PGD course. In the period January to March 2011, the following studentssuccessfully completed

Lassaad Boukari, Project Manager, Banque Zitouna, Tunisia

Mahmad Ziad Emambocus, Cargo Officer, Air Mauritius

Mohamed Araar, Chief Manager, Multi Currency SettlementsSystems Department, Central Bank of Tunisia

Olayiwola Abd’Kabir Baruwa, Senior Manager, Zenith Bank plc,Nigeria

Yasin Nazir Karim Yakub, UK

Anjath Basheer, India

IIBI Awards Post Graduate Diplomas

Sofiène Azaiez, Senior Financial Manager,Tunisian Post Central, Tunisia

This course is highly recommended for bothacademics and professionals especially those whoare operating in the finance field.

Mohamed Musa Mohamed, CorporateRelationship Manager, Institutional Banking,Kenya Commercial Bank Ltd, Kenya

The course content addresses the contemporaryissues faced by Islamic finance experts and theummah at large, particularly takaful. Keep up thegood work.

Mazar Rashed Jalal, Head of Compliance andMoney Laundering Reporting Manager,International Investment Bank, Bahrain

This course can assist senior level employees tounderstand the key concepts and operationalaspects of Islamic banking, which will not only

contribute to the growth of those employees but to Islamicfinancial institutions as a whole.

Umar Dikko, Solicitor, Union Bank of Nigeria

The course content is very rich and prepared in asimple way that makes it easy to grasp.

Amjad Ali, Financial Analyst, India

This is an excellent course that helps to developa solid foundation in Islamic banking conceptseven for those who do not have any priorknowledge of them. The tutor’s thoroughreviewing and feedback was commendable.

Wissam Boustany, Business DevelopmentManager, Socofinance SA, Switzerland

The questions I asked were all thoroughlyexplained. It was a pleasure to work under Mr. Qayuum’s supervision.

Aliyah Bakali, Corporate Credit Analyst,Citibank, India

I most appreciated the emphasis onunderstanding rather than merely rote learningand the fact that senior people in the Instituteparticipate in reviewing students’ assignments

and contributing to their development.

Muhammad Dikko Abdullahi, Director, Bureauof Public Enterprises, Nigeria

Generally the course is excellent and being onlineit is a good source of additional knowledge to alot of people who may not be able to take timeaway from their jobs to pursue full time study.



NEWHORIZON Rabi Al Thani-Jumad Al Thani 1432 TECHNOLOGY NEwS

MEFTEC Rescheduled and Relocated

At the beginning of March theorganisers of MEFTECannounced a change of datesand venue for their 2011exhibition and conference. Theevent, originally scheduled to beheld in Bahrain from 18–19April 2011, will now take placeat ADNEC, Abu Dhabi, UAEfrom 30-31 May 2011.

The decision to relocate theevent was taken as a result ofconcerns raised by internationalparticipants over recentdevelopments in Bahrain andthe travel advice issued by theUS, the UK and some EUcountries. This is the first timeMEFTEC will take place outsideBahrain in its seven-year history.

‘Abu Dhabi is well-positioned tohost the financial IT industry’smost important gathering,’ saidSyed Faisal Abbas, ProjectDirector of MEFTEC. ‘As theworld’s wealthiest city andhome to the world’s largestsovereign wealth fund, AbuDhabi is fast emerging as aglobal centre of banking andfinance. Moreover, with itsworld-class infrastructure,excellent air connections, richtourist attractions and secureenvironment, Abu Dhabi is alsoa first-rate meeting venue.’

According to a report by theUnion of Arab Banks (UAB), theUnited Arab Emirates, of whichAbu Dhabi is the capital, boasts

the largest banking sector in theArab world, with the combinedassets of its banks totallingaround $430.2 billion at the endof 2010. UAE banks also hadthe largest capital base of about$72.5 billion and deposits ofnearly $197.2 billion.

The organisers say that theevent is a sell-out with morethan 100 exhibitors on boardand a 10% year-on-year growthin exhibition size. MEFTEC’sHosted Delegate Programmehas drawn more than 300 CIOs from 25 countries andtotal attendance will be more than 600 delegatesrepresenting some 300 financialinstitutions.

Some of the major vendors ofcore banking systems will besupporting the event including:

ERI Bancaire, the Swissheadquartered core bankingsystem supplier, will berepresented at MEFTEC bytheir partner Interlace. Interlaceare a Chennai-based IT servicesorganisation, who opened aDubai office in late 2010. TheOlympic banking system fromERI is able to handle a range ofIslamic instruments and thecompany claim that theflexibility of their system allowsit to be adapted to thesometimes differentrequirements of individualShari’ah boards. The system isavailable either to purchase orvia an ASP (Application ServiceProvider) model based onservers located either in theMiddle East or in Europe.

Path Solutions will be focusingon iMal 12, the latest, enhancedversion of their suite of financialapplications. Launched late in2010, the new version includesenhancements to existingmodules, as well as newmodules such as iMal Collectionto track overdue accounts, iMalBusinessIntelligence to enhancerisk management and iMalSukuk and iMal IPO, which arecradle-to-grave applications formanaging sukuk and IPOsrespectively.

TCS BaNCS, a PlatinumSponsor of the event, have morethan 25 customers in the regionand will be showing theirintegrated product suite forfinancial services institutionscovering retail and corporate

Entrance to ADNEC



banking, payments, wealthmanagement, private banking,securities trading andprocessing, capital marketsinfrastructure and insurance.

Temenos will be exhibiting atMEFTEC under the motto‘Delivering growth withTEMENOS T24’. Their productfocus will be core banking witha special emphasis on Islamicand retail banking. In additionthey will also be promotingtheir business intelligence (BI)solution, Insight, with a focuson data mining.

The conference alongside theexhibition will be chaired byChris Skinner, an independentcommentator on financialmarkets, with a background infinancial IT. He is currentlyChief Executive of the firm hefounded, Balatro, andChairman of the FinancialServices Club. Other speakersinclude representatives of bankssuch as Mehmet Aydemir, Headof PMO, Bank Asya, Turkeyand U.V.K. Kumar, Head ofInformation Technology, DohaBank and representatives of ITcompanies such as AndrewBond of Oracle and Sanath Raoof Infosys.

MEFTEC’s organisers workhard to make sure that theattendees at the event dorepresent real purchasing powerand influence in the financialindustry. A central feature ofMEFTEC is its highly coveted,invitation-only Hosted DelegateProgramme®, as part of whichprofessionals operating in thetop echelons of IT in thefinancial industry attend asHosted Delegates and enjoycomplimentary admission to the

event. A large number of theseexecutives are fully hosted withtheir flights, accommodationand transfers organised byMEFTEC. In doing so,MEFTEC not only maximisesthe executives’ time – enablingthem to focus on their objectives– but also delivers a guaranteedaudience of the highest calibreto the exhibiting vendors. Theyclaim that the result is a highlytargeted, time-efficient andcarefully choreographed event

that allows participants toachieve a year’s worth ofcontacts in just two days.

The 2011 event is expected tofeature more than 500 HostedDelegates and 100+ exhibitorswhich represents a 10% year-on-year growth in exhibitionsize. Delegates are expectedfrom Mediterranean rimcountries in the Middle Eastand North Africa, GCC statesand the sub continent.

NEWHORIZON April–June 2011TECHNOLOGY NEwS

Path Solutions have won fournew orders in West Africa withBanque Islamique du Sénégal,Banque Islamique deMauritanie, Banque Islamiquede Guinée and Banque Islamique du Niger pour le Commerce etl’Investissement. The fourbanks are owned and managed

by Dakar-based Tamweel AfricaSA.

Zakiyoulahi Sow, ManagingDirector of Tamweel HoldingGroup believes that iMAL willhelp the banks ensure fullyShari’ah-compliant operationswhile delivering high qualitycustomer-oriented services and

competitive Islamic financingproducts. The system will alsobe used at the new affiliates thatTamweel Africa is consideringestablishing in Mali, Benin,Gambia and other countries.

The four banks will bedeploying iMAL 12 which willallow them to benefit from the

functionalities of the newrelease. The projects areexpected to go live in 2011with Path Solutions’ iMALproviding transaction bankingfunctionality including accountservices, profit calculation, riskmanagement, trade finance,Islamic investment, reportingand delivery channels.

Path Solutions Make Inroads in West Africa

Inside ADNEC


MEFTEC Ad



NEWHORIZON April–June 2011BOOK REVIEwS

The publication of this book comes at a timewhen there is a call for reform of the financialsystem. There is a growing challenge toovercome the debt culture and failures offinancial regulation in curbing the culture ofgreed, the pursuit of unbridled profit and thevulnerability and fragility of financial systemsthat are based principally on fixed-price debtcontracts. As the authors say, with rapid

innovation in debt instruments, transparencyhas been replaced by opacity. Islamic bankshave largely been unaffected by placinggreater emphasis on equity financing andrisk sharing built on trust, disclosure andupholding the Shari’ah objectives thatpromote equality and social welfare. Theauthors point out that this has sparkedinterest in Islamic, equity-based finance, notonly in Muslim majority countries but alsoin countries with small Muslims populations.For the Islamic financial services industry tothrive in the global environment, the bookaddresses the overarching question: Howlikely is it that conventional and Islamicfinance will converge as they both gothrough the globalisation processes? Canconventional finance and Islamic financebegin to reinforce one another?

While Islamic finance has come a long wayin recent years, it still has a long way to goto achieve its objective of maximising risk-sharing. In the chapters dealing withglobalisation and Islamic finance the authorsexamine the institutional structures withinwhich Islamic finance is required to operateand analyses the reasons for the lack ofprogress of Islamic finance towardsachieving its full potential. They also discussimportant issues and policy considerationswhich may facilitate the bridging of gapsbetween Islamic finance theory and practice.

Globalisation & Islamic Finance:

Convergence, Prospectus &

Challengesby Hossein Askari, Zamir Iqbal and Abbas Mirakhor. Publisher: John Wiley & Sons(2010)ISBN: 978-0-470-82349-1The authors are highly qualified scholars who have written a number of books onIslamic finance and economics. They are Hossein Askari, Zamir Iqbal and Dr AbbasMirakhor.

In the authors’ view, there is evidence thatfinancial globalisation has not been as helpful,as expected, given the potential of its benefitsfor growth of investment, employment, andincome, as well as reducing income inequalityand poverty. The success of financialglobalisation depends on the spread anddegree of risk sharing around the world. ForIslamic finance to sustain long-term growth,Muslim countries must liberalise theireconomies, embrace efficient institutions andadopt consistent macroeconomic policies,while also addressing the all-important issuesof social and economic justice. The Islamicfinancial sector can become a major force forchange in Muslim majority as well as Muslimminority countries embracing Islamic financeand equity-based assets more generally. Theauthors believe that that it is quite likely thatconventional and Islamic finance willconverge if global finance comes to rely moreextensively on equity or equity-like flows andinnovates with a wider spectrum of risk-sharing instruments.

The book provides a unique view of Islamicfinance, not only from the perspective ofhow Islamic finance fits within globalisationin general and in particular within theglobalisation of finance. This is a must readfor anyone interested in the prospects andchallenges to the internationalisation ofIslamic finance.



BOOK REVIEWSNEWHORIZON Muharram-Rabi Al Awwal 1432

The Art of Islamic Banking and

Finance: Tools & Techniques for

Community Based Bankingby Yahia Abdul-Rahman. Publisher: John Wiley & Sons (2010)ISBN: 978-0-470-44993-6 The Art of Islamic Banking and Finance by Yahia Abdul-Rahman looks at theemergence of interest-free banking and finance (referred to as riba-free banking)incorporating Islamic principles into everyday banking and investment operations.Yahia is considered to be the father of riba-free banking in USA and has been abanking scholar for many years. He is also the founder and chairman of Americanfinance house, LARIBA, a company that has offered Islamic finance and bankingresearch and instruments in America.

Yahia begins by analysing the position ofriba-free banking in other faiths and makesthe proposition that the ProphetMuhammad (pbuh) presented Islam as anexpanded Judeo-Christian-Islamic set ofrules concerning the financing of trade andbusiness based on a riba-free system thatcould be used for just, fair and equitablebanking and financing. He also examineshow these rules work, how they affectconsumer behaviour and how they change the role of the banker/financier. Hepoints to Islamic finance and banking as away to emphasise socially responsibleinvesting.

From a practical viewpoint, Yahia shares hisexperience of working at LARIBA and usescase studies to address how to includeimportant aspects of Islamic finance such asusing commodity indexation and markingthe items to be financed to market in orderto avoid participating in economic‘bubbles’. He also discusses the culture ofIslamic banking and comes to the

conclusion that it is very reliable whencompared to what he refers as 20th centurymodels that use financial engineering andstructuring techniques to circumvent theIslamic principles governed by the Shari’ah.

The book covers the quest for starting andoperating riba-free banking in the USA andreaders will learn from Yahia how effectivethis approach can be and how it affects therole and behaviour of the banker/financier.Yahia concludes with his vision for thefuture of riba-free banking and some advicefor newcomers.

On The Art of Islamic Banking and FinanceRichard Bushman, Professor of HistoryEmeritus, Columbia University, says that it‘gives a powerful, practical, and provenanswer to the question of the hour: how tomake banks responsible to the public theyare meant to serve. The book offers not atheory but a report on how Islamic bankinghas successfully functioned in modernAmerica.’



NEWHORIZON April–June 2011GLOSSARY

arboun

An Islamic version of option, a deposit for the delivery ofa specified quantity of a commodity on a predetermineddate.

bai al-ina

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.

commodity murabaha

A murabaha contract using certain specifiedcommodities, through a metal exchange.

fatwa

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.

gharar

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.

Hadith

A record of the sayings, deeds or tacit approval of theProphet Muhammad (PBUH).

halal

Activities which are permissible according to Shari’ah.

haram

Activities which are prohibited according to Shari’ah.

ijara

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.

ijara sukuk

A sukuk having ijara as an underlying structure.

ijara wa iqtina

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.

istisna

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.

maysir

Gambling – a prohibited activity, as it is a zero-sumgame just transferring the wealth not creating newwealth.

mudarabah

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.

mudarib

In a mudarabah contract, the person or party who actsas entrepreneur.

murabaha

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.

musharakah, diminishing

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.

qard hasan

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.

rab-al-maal

In a mudarabah contract the person who invests thecapital.

retakaful

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.

riba

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

Salam means a contract in which advance payment ismade for goods to be delivered later on.

Shari’ah

Refers to the laws contained in or derived from theQuran and the Sunnah (practice and traditions of theProphet Muhammad (PBUH).

Shari’ah board

An authority appointed by an Islamic financialinstitution, which supervises and ensures the Shari’ahcompliance of new product development as well asexisting operations.

shirkah

A contract between two or more persons who launch a business or financial enterprise to make profit.

sukuk

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.

ta’awuni

A principle of mutual assistance.

tabarru

A donation covenant in which the participants agree to mutually help each other by contributingfinancially.

takaful

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.

tawaruq

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.

ummah

The diaspora or ‘Community of the Believers’ (ummatal-mu’minin), the world-wide community of Muslims.

wa’ad

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.

wakala

A contract of agency in which one person appointssomeone else to perform a certain task on his behalf,usually against a certain fee.

waqf

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.

zakat

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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ISSUE NO. 179 HORIZON RABI AL THANI-JUMAD AL THANI 1432...

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Transcript of ISSUE NO. 179 HORIZON RABI AL THANI-JUMAD AL THANI 1432...