Scholars call for Shariah board under Central Bank

| Tuesday, June 23, 2009
A central Shariah board under the Central Bank should be created to replace the current practice of each Islamic financial institution having its own board, to oversee Islamic finance and banking activity in the country, Islamic scholars said.

Until such time a central board is created, measures must be undertaken to ensure that the salaries of Shariah board members do not come from their individual retaining banks, but from a central pool. This would ensure neutrality, transparency and above-board decision-making, experts pointed out.

They called on central banks to intervene to help standardise, streamline and control all Islamic transactions.

"It is unprecedented that a scholar is paid by the party seeking a Fatwa. It is also against Islamic principles that the arbitrator is paid by one of disputed parties," said Dr Abdulazeem Jalal Abozaid, Professor of Islamic Law of Transactions at Damascus Univer-sity, Faculty of Shariah, and Shariah Consultant and trainer for Islamic financial institutions in the UAE.

Dr Abozaid pointed out that there is currently a lack of a centralised control on Islamic banking products. Some products that are cleared as "Islamic" are sometimes controversial.

"The situation begs for central banks to intervene and stipulate a set of rules and regulations for joining Shariah boards to help maintain the public's confidence in Islamic banking and ensure global growth," said Dr Mabid Al Jarhi, President of International Assoc-iation for Islamic Economics and head of training and financial expert at Emirates Islamic Bank.

He said Shariah board members should be holders of PhDs from recognised and accredited universities. Dr Abozaid said that central banks should have a special division for Shariah governance.

The Shariah board should consist of an odd number of members to ensure there is a majority whenever voting takes place, added Dr Al Jarhi.

First Ever Islamic Finance Social Responsibility Survey Launched

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United States, Marlboro, NJ, June 21, 2009: Two leading Islamic Finance Industry service providers, DinarStandard and Dar Al Istithmar, today announced that they have begun gathering data for a first-of-its-kind Corporate Social Responsibility (CSR) survey of Islamic Finance Institutions.

The objective of the Survey is to benchmark Islamic Finance Institutions on their social responsibility efforts. The output will be an Islamic Finance CSR Trends Report to be released publicly August 31st, 2009. Each institution submitting the survey will also receive a confidential benchmark report that will highlight their performance compared to their peers in aggregate. Major CSR accomplishments of the Industry will also be recognized by the introduction of Maqasid Al-Shari'a CSR Awards.

"As the Islamic Finance industry transitions to a CSR-oriented approach, tools such as ours will become increasingly important," said Sayd Farook, Senior Consultant at Dar Al-Istithmar.

"It's ironic that an industry, whose fundamentals are in social responsibility, does not have any gauge to benchmark this important aspect. We hope this Survey will contribute to support the CSR efforts of IF institutions and further highlight the Industry's relevance in a time of global economic crisis," says Rafi-uddin Shikoh, Managing Director of Dinar Standard™.

The surveys structure is based on the recently released CSR standards by the Accounting and Auditing Organisation for Islamic Financial Institution (AAOIFI), the international standard-setting organization for Islamic finance. AAOIFI is also an Official Supporter of the Survey.

Questionnaires are currently being sent to several hundred executives of Islamic Financial institutions. Institutions are invited to complete the Survey online as well. Deadline for Survey completion is July 21`st, 2009. The survey and background information can be accessed online at http://www.dinarstandard.com/maqasid/

Link: http://www.zawya.com/Story.cfm/sidZAWYA20090623055920/First%20Ever%20Islamic%20Finance%20Social%20Responsibility%20Survey%20Launched

Islamic Banking As a Solution to the Global Financial Crisis

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Kansas City, MO - infoZine - Islamic Finance has emerged in recent decades as one of the most important trends in the financial world. There has always been a demand among Muslims for financial products and services that conform to the Shariah (Islamic law). With the development of viable Islamic alternatives to conventional finance, Muslims are beginning to find Shariah compliant solutions to their financial needs.

Published by John Wiley & Sons (Asia) Pte Ltd, Islamic Money & Banking: Integrating Money in Capital Theory (ISBN: 978-0-470-82319-4) seeks to prove that Islamic economics, in general, and Islamic banking, in particular – with their premises of cooperation among individuals, and ultimate goal of justice – are the answers to restoring positive synergy to the ailing capitalist system. The concept is lauded an effective solution to check greed and remove the conflict between equity and efficiency.

Islamic Money & Banking presents many new and original ideas that hail the Islamic Banking system as the path to full employment, stable prices, equitable wealth and income distribution, and sustained growth, and finally counter-cyclical apparatus built in the system. It also investigates the nature and functions of money in an interest-less banking system and then for the first time, integrates money in capital theory.

This authoritative study is a maverick amongst the existing literature in Islamic Finance and a must-read for anyone who is interested in this field or in search of an ideal economic system.

Dr. Iraj Toutounchian is a Professor of Economics at Az-Zahra University, Tehran, Iran, where he was the Head, Department of Economics and Social Sciences. He is the author of three books and dozens of papers, all of which are on Islamic banking and finance. His last book, Comparative Money and Banking in Capitalistic and Islamic Systems, was named Economic Book of the Year in Iran.

He was appointed as Chief of Academic Affairs, Bank of Industry and Mine, Tehran, Iran, responsible for implementing Islamic banking. Dr. Toutounchian was formerly the Deputy-Minister for Economics and International Affairs, Ministry of Economic Affairs and Finance and he has also served as a member of the Money and Credit Council, Central Bank of Iran.

Toutounchian earned his doctorate at Texas A&M University. Prof. Arthur S. DeVany, his Ph.D. dissertation adviser, described him as "a superior economic theorist". His dissertation clearly exhibits his ability to do original theory and to bring economic theory to bear upon such complex socio-economic phenomena.

Professor Toutounchian proves once again, in this book, his ability to produce fascinating and original work.

Islamic Money & Banking:
Integrating Money in Capital Theory
Published by John Wiley & Sons, Inc.
Publication Date: 24 April, 2009
US$90.00; Cloth; 412 pages; ISBN: 978-0-470-82319-4

Tawarruq resolution raises many questions

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The International Council of Fiqh Academy (ICFA), which is an organ of the Organization of the Islamic Conference (OIC), has published a resolution on Tawarruq, a cash management instrument used by some Islamic banks.
The International Council of Fiqh Academy (ICFA), which is an organ of the Organization of the Islamic Conference (OIC), has published a resolution on Tawarruq, a cash management instrument used by some Islamic banks.

The resolution was adopted by the ICFA at its recent session held in Sharjah.

While bankers have welcomed the resolution in principle, a number of them are keen to get further clarification as to whether the resolution also applies to commodity Murabaha contracts as they are currently practiced.
Badlishah Abdul Ghani, CEO of CIMB Islamic Bank, stressed that "The classical concept of Tawarruq is acceptable under Shariah principles". He said: "There are certain applications of Tawarruq that have caused concern in the market. We would like further clarification between the so-called organized Tawarruq and reverse Tawarruq on the one hand and the classical commodity Murabaha contract." In the classical Tawarruq, the third party has to be identified and cannot have any link with the financier or bank. In a commodity Murabaha this is not necessarily the case.

Resolution 179 reads: "Tawarruq can be defined as a person (Mustawriq) who buys a merchandise at a deferred price, in order to sell it in cash at a lower price. Usually, he sells the merchandise to a third party, with the aim to obtain cash. This is the classical Tawarruq, which is permissible, provided that it complies with the Shariah requirements on sale."

The ICFA jurists clearly stipulate in Resolution 179 that: "It is not permissible to execute both organized and reverse Tawarruq because simultaneous transactions occurs between the financier and the Mustawriq, whether it is done explicitly or implicitly or based on common practice, in exchange for a financial obligation. This is considered a deception, i.e. in order to get the additional quick cash from the contract. Hence, the transaction is considered as containing the element of riba."

The Fiqh Academy recommends: "To ensure that Islamic banking and financial institutions adopt investment and financing techniques that are Shariah-compliant in all its activities, they should avoid all dubious and prohibited financial techniques. All transactions must conform to Shariah rules in order to ensure it meets the objectives of Shariah (Maqasid Shariah). In addition, such a move will ensure the progress and actualization of the socio-economic objectives of the Muslim world. If the current situation is not rectified, the Muslim world would continue to face serious challenges and economic imbalances that will never end. The council encourages the application of Qard Hasan and establishment of Qard Hasan funds by financial institutions to shift the people who are in need of fund from Tawarruq."

Shariah resolutions relating to Fiqh Al-Muamalat (Islamic law relating to financial transactions) can have a direct and sometimes negative unintended impact on the Islamic financial market. The statement by the Shariah Committee of the Bahrain-based Accounting and Auditing Organization of Islamic Financial Institutions (AAOIFI) in February 2009 relating inter alia to ownership rights and guaranteeing of principal in Musharaka and Mudaraba Sukuk, for instance, did unwittingly cause confusion in the market especially relating to retrospective application of the ruling. Some Islamic capital market players confirmed that it partly contributed to the slowdown in the market, which was already being affected by the fallout of the credit crunch and the global financial crisis.

Another major decision relating to Shariah issues was the ruling in April 2009 by the Malaysian Appeal Court that the Al-Bai Bithaman Ajil (BBA) deferred payment contract as practiced in Malaysia is a valid Islamic sale contract.

The appeal court overturned a ruling earlier by a lower court that it was not a valid Islamic contract and is tantamount to a loan, which is riba and therefore not permissible. The earlier judgment had caused considerable anxiety amongst Islamic financial institutions in Malaysia for fear of potential increases in defaults in their BBA contracts and uncertainty as to the validity of BBA agreements. The Malaysian Appeal Court ruled that BBA agreements are valid and binding in Malaysia; these agreements must not be compared to loan agreements, as the BBA contracts are sale transactions and not money lending transactions.

In Bahrain in May 2009, the senior Saudi Shariah advisory, Mohamed Elgari, appealed for a more scientific approach to issuing resolutions by Shariah scholars and organizations relating to Fiqh Al-Muamalat and suggested a rigorous peer review process and market consultation before any resolution is adopted.

Tawarruq has hitherto been practiced in most countries where Islamic finance is provided except perhaps in Qatar where the Shariah scholars have discouraged its use per se. However, more and more Islamic banks in countries including Saudi Arabia, Malaysia, Kuwait and UAE, are now shunning Tawarruq, even the accepted form, perhaps to avoid market confusion.
Link: http://www.cibafi.org/NewsCenter/English/Details.aspx?Id=3891&Cat=0

Call for intellectual works to boost Islamic finances

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There is an urgent need for intellectual works to boost Islamic financial products, Dr. Ahmad Mohammad Ali, President of the Islamic Development Bank (IDB) said here on June 20, 2009.
There is an urgent need for intellectual works to boost Islamic financial products, Dr. Ahmad Mohammad Ali, President of the Islamic Development Bank (IDB) said here on June 20, 2009.

Addressing a forum to attract support of institutions for Executive Islamic Financial Management (XIFM) Program at Effat University here on June 20, 2009, Dr. Ali said it was important to make the students aware of Islamic banking tracks, such as, Islamic financial and development challenges, Islamic banking opportunities and the financial crisis and partnership opportunities between universities and Islamic banking.

“Some researchers have estimated the average annual growth of the Islamic finance since the beginning of the new century to about 32 percent with assets worth $700 billion over the end of the year 2007,” said Dr. Ali.
The (XIFM) program is in collaboration with Ecole Supérieure des Affaires (ESA) in Beruit, and the Rotterdam School of Management(RSM) at Erasmus University. The Islamic Development Bank (IDB) is supporting the program in this forum.

A number of businessmen, faculty members of the university and IDB representatives attended the forum aimed at making the XIFM program as a headquarter and home for all researchers and students by mixing between the Islamic financial material and traditional finance and to exchange the experiences with the Effat’s faculty members and students in Islamic financial field.

“There is a lack of qualified managers in the Islamic financial sectors based on Islamic Shariah. The Islamic financial institutions are planning carefully to overcome this and to take advantages of banking opportunities available to our students,” said Dr. Haifa Jamal Al-Laial, Dean of Effat University.

Dr. Ali said money cannot alone solve the global crisis. It can be tackled by supporting the intellectual work to redraw the development strategies, and to double the amount of funding and investment within the limits of financial caution.

Furthermore, Dr. Iman Mohammad, chief of the extension programs department said that XIFM program will provide nine scholarships for male and female students. Two of them will be given as a complete scholarship covering all costs of the program amounting to SR135,000.

Three grants will cover about 50 percent, and other four grants will cover 25 percent.

Afaq Khan sees healthy prospects for Islamic finance

| Monday, June 15, 2009

Standard Chartered Bank has been offering Islamic financial services to clients for over two decades. Clients have included many established families in the Middle East, South and East Asia, including the family of former Malaysian prime minister, Abdullah Badawi. After some initial uncertainties relating to the development of Standard Chartered Bank’s global Islamic business, the bank has now settled into offering one of the more proactive Islamic banking value propositions especially in the Middle East and in Southeast Asia, especially Malaysia, where it has a stand-alone Islamic banking license. Since joining Standard Chartered Saadiq, the global Islamic banking business of Standard Chartered Bank, in 2003, Afaq Khan has been responsible for the strategic build up of a global Islamic banking business covering retail, corporate and investment banking. With over 20 years of Islamic banking experience, including a stint at HSBC Amanah, Khan has been involved in a number of transactions including leading the HSBC team that structured and successfully placed the first global Sukuk by Malaysia and more recently, the first local currency Sukuk programs issued by Pakistan and the Monetary Authority of Singapore. Here Afaq Khan, CEO of Standard Cahrtered Saadiq, discusses with Mushtak Parkerthe bank’s Islamic banking strategy and the prospects for the global Islamic finance sector over the next few years.

Excerpts:

Global banks often have a problem in navigating their Islamic banking business. In 1999 for instance, Standard Chartered launched its Islamic banking division only to close it nine months later. Is Standard Chartered committed to developing its Islamic banking business?

We started with Islamic banking in the group in Malaysia in 1993, but I joined Standard Chartered in 2003 with a global Islamic banking mandate. We do end-to-end business, ranging from consumer banking to global banking to specialized banking such as project finance, shipping finance to hedging. We offer consumer-banking services in 6 countries — Pakistan, Bangladesh, Bahrain, UAE Malaysia and Indonesia, where we operate through Permata bank, in which we have an equity stake. We offer wholesale, corporate and investment banking in many countries. In 1999 the commitment of the bank was still there. But in the aftermath of the Asian financial crisis, it had to prioritize and restructure. As such, it could not make the investment to its Islamic banking business that was required. In 2003, when I was asked to join the bank, I had the same concerns, but the bank convinced me that it is committed to Islamic finance. Today we have branches in six countries. We have been in these countries for over a century and our customers today stress that they prefer Islamic banking products. We have to service these requests and as such we are in these markets for the long-term. At Standard Chartered Saadiq, we do not offer a niche strategy, for instance structuring Sukuk or derivatives only, but a total solutions strategy. We want customers to have their savings, operating accounts, hedging, private banking etc — all with our bank.

Market conditions are currently very tough. What are the prospects for the Islamic finance sector going forward?

Overall the Islamic finance business remains healthy and robust. We are competing aggressively. Yes the Sukuk market has been negatively affected, but we have to understand the reasons why. Sukuk is a means to raise term capital for expansion and is based on underlying assets which have to be valued. When asset prices are falling sharply, you have to make sure that they are stabilized. When the economy is growing healthily, then you have an x amount of expansion taking place. There is overcapacity which the market is trying to work through. Because of the crisis, the need for term capital has gone down. If you compare the conventional bond market with the Sukuk market, the former has been even more badly affected.

Is Asia taking the lead in the Sukuk market revival?

Yes, we led the recent $650 million government of Indonesia sovereign Sukuk issuance, which had an offer price of 8.8 percent which has since tightened and which was heavily oversubscribed. Contrary to the news reports, there is liquidity in the market. In March 2009, the Dubai Electricity and Water Authority raised a $2.2 billion term facility syndication from the market, a transaction we also led. It was raised successfully and oversubscribed. We also worked with the Pakistan government to come up with an instrument for the State Bank of Pakistan, the central bank, to allow the Islamic banks there to participate in the reserve requirements. In high inflation countries such as Pakistan, a 10-12 percent reserve requirement is a significant matter. We have set up a 45 billion-rupee program for the State Bank of Pakistan, and many issuances have already been done under this program. We have set up a similar program for the Monetary Authority of Singapore but on a reverse enquiry basis.

How do you duplicate this on a global basis because the need is global?

You are absolutely right. Bahrain and Malaysia already have such programs in place. Other countries where Islamic finance is provided must look into this issue of managing reserve requirements Islamically.

What about expanding Islamic finance into nontraditional markets? Is there potential for doing this?

Yes, but there has to be a lot of market education. And it cannot be based on pricing only, because then it will be expensive. We have to convince these non-traditional players that we can mutually benefit each other through Islamic finance inter alia through investment and trade. We have to build bridges. As long as you have only marginal utility, it will always be priced high. Relationships don’t get priced, transactions always get priced. We understand that many of these non-traditional countries want Islamic finance and investment to flow into their markets, and Islamic investors and institutions should diversify away from their home markets and expand because of their balance sheet requirements. But this process has to be a two-way one.

What are the pressing challenges for the sector’s going forward?

We have to leverage the potential for Islamic derivatives. Islamic balance sheets are now of that size that they must have the tools for risk management because even if you are an Islamic bank you are still exposed to the external risks of the economy. It is the right of the Islamic investor that when you provide term capital finance whether it is Sukuk, syndications, project finance and aircraft finance, then 100 percent of the economic return of that transaction should come to the Islamic, because we will distribute it to the rab-ul-mal. I do not see a good reason that the financing is done Islamically and the hedging is done conventionally. Leakage is a major issue. If I am taking the risk, then the collateral business should come to an Islamic financing entity as well.

Link: http://www.arabnews.com/?page=6&section=0&article=123662&d=15&m=6&y=2009

‘Islamic banks face liquidity challenges’

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The International Islamic Rating Agency (IIRA), headquartered in Bahrain and set up two years ago by the Islamic Development Bank (IDB), has warned in its latest research report titled “Liquidity Assessment of Islamic Banks” that “Islamic banks face challenges from declining liquidity in the markets”.

This is partly reflected by the fact that many Islamic banks became net borrowers from the interbank market during 2008 from net providers of funds in 2007 indicating increased liquidity needs.

The subprime mortgage crisis, stressed the report, resulted in a loss of confidence among banks. As a consequence, many banks declined to participate in interbank markets. The result was diminished liquidity at a crucial time in the banking system. “Lack of liquidity,” explained the report, “means loss of depositor’s confidence and the resulting systemic risk which has caused runs on a number of banks. Since the origins of the crisis rest in the diminution of asset values, especially asset backed securities; the nature of Islamic banking with its prohibition on interest has served to protect Islamic banks to some extent. That is not to suggest they are entirely immune from the impact of declining real estate values and restricted real estate lending. However, Islamic banks are less likely than conventional institutions to suffer negative outcomes beyond their capacity to sustain core profitability and capital.”

The report was based on the liquidity evaluation of eight banks for the period 2007-2008, which included AlBaraka Islamic Bank, Bahrain, Al-Salam Islamic Bank, Bahrain, Bahrain Islamic Bank, Dubai Islamic Bank, Jordan Islamic Bank, Khaleeji Commercial Bank, Kuwait Finance House Bahrain (KFH) and Meezan Bank Pakistan Ltd. This is a disappointingly small evaluation sample and also pitches together commercial banks with investment banks, which is like evaluating apples with pears, because their business models and product offerings hence the risk and liquidity considerations would differ. Albaraka, Al-Salam and KFH-Bahrain are effectively investment banks while the others are commercial banks. But the balance sheet of Dubai Islamic Bank is by far the largest compared to the others. As such the funding needs and exposure of the latter would far outweigh those of the others.

Nevertheless, the report stressed that at year-end 2007, the Islamic banks under evaluation had a strong liquidity position. They were holding a large amount of liquid assets on their balance sheets — an average of 47 percent of the balance sheet, reflecting the constraints in deployment of funds imposed by Shariah guidelines.

The most liquid Banks in 2007 were Al-Salam and Khaleeji Commercial Bank which were new start ups in 2007. Excluding these, the average dropped to 32.5 percent of liquid assets in 2007, indicating strong liquidity irrespective of jurisdictions.

IIRA defines liquid assets as cash or cash equivalents, short-term placements to banks or financial institutions and liquid quoted investments such as government paper and quoted Sukuk. Short-term liabilities include deposits and borrowings. The least amount of liquid assets were held by KFH-Bahrain at 9.9 percent and the most liquid was Jordan Islamic Bank at 45 percent. On average, excluding the ratios of the two start up banks, the liquid assets declined to 26 percent of total assets during 2008 from 32.5 percent in 2007. This, explained the report, showed that on average, during 2008 the impact of global crisis on the liquid assets remained limited. This decrease, however, stressed the authors, should be seen in the context of an increase in loans to core funding ratio which indicates that some of the liquid assets were transferred to loans and advances.

Loans to core funding is a measure that captures resource utilization of the bank and is the funds available from customers deployment of resources. Two principal components of core funding are the stable portion of customer deposits and unencumbered capital. As a result of the need to book only Shariah-compliant assets, say the authors, this ratio has historically been low for Islamic Banks representing underutilization of the resources, stressed the report.

This however proved to be an advantage for Islamic banks as the conservative posture of their balance sheet helped them to cope with the repercussions during the crisis situation. Depending on their market, business model and risk positioning a bank often keeps 75-95 percent of its core funds in customer assets. The remainder is kept in liquid assets and investment portfolio in order to provide liquidity and enable the bank to earn a small spread. Most of the banks under evaluation registered a healthy increase in their utilization ratio.

Similarly, the interbank ratio is to assess if the bank is a net taker of funds or a net contributor of funds to interbank market. Many Islamic banks who were net providers of funds to the interbank market in 2007 became net borrowers during 2008. The report showed that KFH-Bahrain, Dubai Islamic Bank, Bahrain Islamic Bank, and AlBaraka Islamic Bank became increasingly reliant on the interbank and brokered deposits for their financing needs.

An additional significant measure to assess the liquidity position is the maturity profile of assets and liabilities of the Islamic bank — also known as Gap analysis, which gives an indication of how well the bank is expected to meet its maturating obligations with the help of inflows from maturing assets. The deficit needs to be covered with the help of external borrowings. From the analysis, Bahrain Islamic Bank and KFH-Bahrain “are facing challenges with respect to the liquidity position.”

Large maturities in the shorter tenure indicate reliance on borrowings and using short-term sources to advance longer tenure customer assets such as loans and advances. A bank is considered to have positioned itself adequately in terms of maturities of assets and liabilities as long as negative Gap in up to 3 months does not exceed 10 percent of total assets.

Excluding the above two banks, the IIRA report concludes that five of the remaining six banks “are adequately covering the maturing liabilities from maturing assets”. Dubai Islamic bank seems to be the exception having not reported maturing assets and liabilities in their 2008 published accounts.

Link: http://www.arabnews.com/?page=6&section=0&article=123664&d=15&m=6&y=2009

Muslims get interest-free loans

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ONE of Australia's major banks is planning to introduce "Muslim-friendly" loans that do not charge interest, to comply with Sharia law.

Instead, the National Australia Bank will structure an Islam-approved line of finance to make money from alternative methods.

These include profit-sharing on the transaction, joint-ventures or leasing-type arrangements.

For example, to get round the Islamic ban on usury - or unfair lending - a Muslim mortgage often works by the bank buying the property, then selling it to the customer at a profit, with the customer then repaying the entire sum in instalments.

In this way the profit margin is built in from the start. It also has the advantage of making the loan immune from future interest rate rises.

NAB said the loans, which will start out small, will have to be cleared by a Sharia Advisory Board to ensure they meet strict criteria before they can be made available to the public.

"We are dipping our toe in the water with this scheme and thought we may be able to offer this product in high-density Muslim areas," said Richard Peters, head of community finance and development at NAB.

"We suspect there is demand out there, but we don't know how big it is, so we will trial a few products first."

For the trial's purposes NAB will pump $15 million from its not-for-profit finance division into the program, which will distribute the funds through various community finance schemes around the country. The bank will monitor the take-up and assess potential demand.

Interest-free loans of up to $1000 will be available to help finance household items, such as washing machines and fridges.

The loans would also be available to non-Muslims.

The news comes just days after federal Assistant Treasurer Chris Bowen said that Australia could exploit international demand for Islamic finance to create more jobs.

Link: http://www.news.com.au/dailytelegraph/story/0,27574,25632250-5006009,00.html

Majid Al-Refai named Banker of the Year

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Accepting the award, Al-Refai emphasised that financial expansion cannot be decoupled from real economic growth in Islamic finance and urged Islamic banks to work with their conventional counterparts to build a more robust financial system.

Majid Al Sayed Bader Al-Refai, the Founder, Managing Director and Chief Executive Officer of Unicorn Investment Bank, has been named ‘Banker of the Year’ as part of the Banker Middle East Industry Awards for 2009.

Al-Refai is considered to be one of the pioneers of Islamic finance, has been an active proponent of the industry for over 20 years and has established several Islamic finance institutions throughout his career, including Commerce MGI in Malaysia and First Islamic Investment Bank (now renamed Arcapita) in Bahrain. In 2004, he established Unicorn Investment Bank, headquartered in Bahrain. Al-Refai has previously been recognized for his ‘Life and Continuing Contribution to Islamic Finance’ and ‘Outstanding Contribution to the Industry’.

Commenting on the award, Nigel Rodrigues, Chief Executive of CPI Financial, publisher of Banker Middle East, said: “Mr. Al-Refai is well-known throughout the Islamic finance industry, and the fact that he has been voted ‘Banker of the Year’ by his peers is an indication of the esteem in which he is held. Mr. Al-Refai has dedicated his career to promoting Islamic finance and is a recognised industry pioneer, leader and innovator. It is a most deserved award.”

In accepting the award, Al-Refai referred to the challenging operating environment for financial institutions globally and pointed out that Islamic banks have been insulated somewhat by their lack of direct exposure to the toxic assets that precipitated the crisis. He emphasised that financial expansion cannot be decoupled from real economic growth in Islamic finance and urged Islamic banks to work with their conventional counterparts to build a more robust financial system.

Link: http://www.cpifinancial.net/v2/News.aspx?v=1&aid=2599&sec=Islamic%20Finance

Right time to promote Islamic banking

| Saturday, June 13, 2009
The worst financial crisis in a century can pave the way for Islamic finance to reach world banks. The banking industry is forced to reassess its functioning. Therefore, banks will be more receptive to alternatives now more than ever before.

The worst financial crisis in a century can pave the way for Islamic finance to reach world banks. The banking industry is forced to reassess its functioning. Therefore, banks will be more receptive to alternatives now more than ever before.

“No one is saying we are glad the financial crisis has happened but now all banks are being forced to reassess what they do. That is not to say that our solution, the Islamic banking, was not right before. It was always right but sometimes opportunities like this make it easier for people to be more receptive,” Azhar Khan, head of finance at the European Finance House, told Arab News during the Saudi International Conference that concluded this week.

The common criticism of Islamic banking is that it is not really Shariah compliant. Islamic banking was developed 20 to 30 years ago. The approach was to try and replicate products that were already there in the market. “We do not have to keep replicating. We have a wider solution that we should now be telling the world about. We need not be afraid to go forward with some of the advanced and further developed methodology with Islamic finance,” he said.

According to him, Islamic banking has more openness. There is a fairer sharing of risk and reward and that there is more ethical investment. Ethical investment and ethical products are important to non-Muslims and “talking as a Muslim, we know that there is wisdom in Islamic products and it is for us to go out and explain this to people,” Khan said. Things have changed recently and global banks, whether conventional and Islamic, had a wake up call about the need to reassess. “If there is no demand for the things that we want to move toward, then it becomes very difficult. We are there to serve our community and provide products for our clients. But it is also important that our market, our customers want to move with us as well and then we can move everything forward.”

Sami Al-Suwailem, senior research advisor at Islamic Research and Training Institute, Islamic Development Bank, said that causes of the crisis were uncontrolled debt financing and uncontrolled risk-taking. Both led to an inverted pyramid of wealth which has a larger debt on top. “Profits are privatized while losses are nationalized. People will pay for the losses. The system will prefer capitalism during an upturn, while communism downturns combining the worst of both worlds,” he said. Al-Suwailem added that Zakah was a very effective solution for deflation which is happening now. It is a benevolence tax on hoarded money. Zakah is against hoarding.

He pointed out that gambling and usury are the “roots of danger” in finance. In gambling, the loss is more than gain. “If Islamic finance had been adhered to, the crisis could have been avoided,” he said. According to him, Islamic finance is a self-safety system. Islam has Zakah, interest-free lending, forbearance and other social facilities that would make the crisis less damaging and less costly.

Ahmed Belouali, researcher and assistant professor, Islamic Economic Research Center at King Abdulaziz University, said that Islamic financial guidelines would help us at least minimize the causes of this crisis.
Frank Vogel, professor of Islamic law at Harvard University, said that he had studied Islamic law and looked into the prohibitions of Islam and said, “I never absorbed well and understood the implications that we do not sell what we do not own but when the crisis happened, I realized the importance of this.”

Australia Sees Rescue in Islamic Finance

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Grappling with a chocking financial meltdown, Australia is eyeing a share of the booming Islamic finance market to beat a growing recession and create more jobs.

Grappling with a chocking financial meltdown, Australia is eyeing a share of the booming Islamic finance market to beat a growing recession and create more jobs.

"I think there's great opportunities such as Islamic finance," Chris Bowen, Minister for Financial Services, Superannuation and Corporate Law, told the Sydney Morning Herald on Monday, June 8.

He said Sydney is seeking to take a portion of the booming Islamic finance market from Asia.

"The majority of the world's Islamic population lives in Asia, and Singapore and Kuala Lumpur are trying to corner this market for themselves," he explained."I think Australia can play a role."

Islamic finance is one of the fastest growing sectors in the global financial industry.
The Islamic banking industry, which began almost three decades ago, has made substantial growth and attracted the attention of investors and bankers across the world.

Currently, there are nearly 300 Islamic banks and financial institutions worldwide with assets predicted to grow to $1 trillion by 2013.

Islam forbids Muslims from usury, receiving or paying interest on loans.

Islamic banks and finance institutions cannot receive or provide funds for anything involving alcohol, gambling, pornography, tobacco, weapons or pork.

Recession Beater

Bowen, who was formerly the assistant treasurer, said luring Islamic finance would help rejuvenate the Australian economy and create more jobs.

"Even if we only take a small percentage of the market it could generate a lot of wealth and a lot of jobs in Australia."

A global financial crisis has swept the US and the world since September and knocked down Australian markets.
Thanks to its transactions that don't deal in toxic assets or pay interests, Islamic finance institutions have managed to largely survive the crisis.

Minister Bowen regretted that Australia has not yet passed a law allowing the operation of Islamic finance institutions.

"This is just one example of the untapped opportunities out there for Australia."
There are no Islamic banks incorporated in Australia.

The country launched its first Shari`ah-compliant real estate fund in May in Bahrain with the aim of luring Muslim investors looking for opportunities in alternative investments and in new markets.
"We are very good at managing money, and in superannuation we have the fourth-largest pool of funds under management in the world," Bowen said.

"We've developed really good skills but we don't export those skills."

Link: http://www.cibafi.org/NewsCenter/English/Details.aspx?Id=3714&Cat=0

Launch of Islamic finance program

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AN ISLAMIC finance training program based in Wales has been launched for finance professionals.

AN ISLAMIC finance training program based in Wales has been launched for finance professionals.

Islamic finance has gone through a rise in popularity as an alternative banking system over recent years.

The underlying principle that governs it is mutual risk and profit sharing between parties, the assurance of fairness for all and that transactions are based on an underlying business activity or asset.

Established in partnership with Islamic Banking & Finance Institute in Malaysia (IBFIM) and Cardiff University’s Business School and Centre of Islam, the Islamic Banking Finance Centre UK (IBFC-UK) is recognized as one of the leading training centers in the UK, with an international reputation for delivering high quality training courses and research for the public and private organizations in Islamic banking and finance.

Its clients include public and private banks, corporations, insurance companies and academic institutions.

Akmal Hanuk, chief executive of IBFC-UK, pictured right, said: “The Islamic finance sector is expanding at an exponential rate and is now estimated to be worth $1.2 trillion globally and growing faster than any of the conventional banks, between 15-20%.

“This is due to its strong financial principles and ethical values, which prohibits the charging or paying of interest and encourages mutual risk and profit sharing between parties.

“We are very pleased to be the one of the first organizations in Europe to address the growing demand of trained professionals in the Islamic banking and finance sector, as we want to make sure that the UK is at the forefront as this sector develops and that it stays there.

“We are also pleased that this initiative is coming out of Wales, which will enhance its reputation as one of the leading centers of training, skills and development.”

Ieuan Wyn Jones, minister for the economy and transport, described the announcement as a particularly significant breakthrough for Wales in reaching out to new financial markets.

He said: “Despite the current global financial crisis, Islamic finance continues its growth as an increasingly viable alternative banking system for both Muslims and non-Muslims. It will be a vital component of the new global financial infrastructure.”

Link: http://www.cibafi.org/NewsCenter/English/Details.aspx?Id=3746&Cat=0

Launch of Islamic finance program

|
AN ISLAMIC finance training program based in Wales has been launched for finance professionals.

AN ISLAMIC finance training program based in Wales has been launched for finance professionals.

Islamic finance has gone through a rise in popularity as an alternative banking system over recent years.

The underlying principle that governs it is mutual risk and profit sharing between parties, the assurance of fairness for all and that transactions are based on an underlying business activity or asset.

Established in partnership with Islamic Banking & Finance Institute in Malaysia (IBFIM) and Cardiff University’s Business School and Centre of Islam, the Islamic Banking Finance Centre UK (IBFC-UK) is recognized as one of the leading training centers in the UK, with an international reputation for delivering high quality training courses and research for the public and private organizations in Islamic banking and finance.

Its clients include public and private banks, corporations, insurance companies and academic institutions.

Akmal Hanuk, chief executive of IBFC-UK, pictured right, said: “The Islamic finance sector is expanding at an exponential rate and is now estimated to be worth $1.2 trillion globally and growing faster than any of the conventional banks, between 15-20%.

“This is due to its strong financial principles and ethical values, which prohibits the charging or paying of interest and encourages mutual risk and profit sharing between parties.

“We are very pleased to be the one of the first organizations in Europe to address the growing demand of trained professionals in the Islamic banking and finance sector, as we want to make sure that the UK is at the forefront as this sector develops and that it stays there.

“We are also pleased that this initiative is coming out of Wales, which will enhance its reputation as one of the leading centers of training, skills and development.”

Ieuan Wyn Jones, minister for the economy and transport, described the announcement as a particularly significant breakthrough for Wales in reaching out to new financial markets.

He said: “Despite the current global financial crisis, Islamic finance continues its growth as an increasingly viable alternative banking system for both Muslims and non-Muslims. It will be a vital component of the new global financial infrastructure.”

Link: http://www.cibafi.org/NewsCenter/English/Details.aspx?Id=3746&Cat=0

KFH-Bahrain appoints ITS to provide integrated 'Ethical Banking' solution

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Kuwait Finance House - Bahrain (KFH-Bahrain) announced on June 10, 2009 that it has appointed the computer group International Turnkey Systems (ITS) to provide an integrated 'Ethical Banking' solution to support the Bank's expansion plans.

Kuwait Finance House - Bahrain (KFH-Bahrain) announced on June 10, 2009 that it has appointed the computer group International Turnkey Systems (ITS) to provide an integrated 'Ethical Banking' solution to support the Bank's expansion plans.

The one year contract includes upgrading the Bank's core banking system, integrating the branch automation system, trade finance, Islamic finance, internet banking, in addition to nical services related to human resources and treasury. The combined solutions will benefit the customer by providing greatly enhanced services from the Bank.

Commenting on the appointment, Mr. Abdulhakeem Alkhayyat, Managing Director and CEO, KFH-Bahrain, said:
'We realize that our bank's requirements are unique and that our customer servicing facilities need to be multi-faceted. In a fast changing environment, it is essential to reach out to them and offer the best-in-class services.'


'Our diverse needs to provide our customers with a superior service meant that we were looking for a one-stop-shop solution. An integrated yet flexible IT solution that would provide us operational excellence and at the same time streamline our processes. Our rigorous selection process in identifying the right IT solutions provider, included a long evaluation of business solutions presented by various vendors and we are very pleased to appoint ITS as our technology partners. An influencing factor of the appointment was that we identified their close alignment with our strategies and that they were the best equipped to help us fulfill our business objectives,' he added.

The Managing Director and General Manager of ITS Group, Mr. Khaled Faraj Al Saeed commented after the signing ceremony, 'KFH-Bahrain's selection of ITS solutions represents a continuation of a long business relationship that goes back since the inception of KFH-Bahrain. It underlines the bank's confidence of the level of technical services we continue to provide. We are proud that ITS solutions and our technical services are a key part of the growth strategy of one of the leading Islamic banks operating in the region.'

Al Saeed said that the solutions offered by ITS to Islamic banks and financial institutions tend to be an integral part of their strategic plans to gain a higher market share and provide better services to its customers. ITS systems allow for more than 4 million transactions per day.

Link: http://www.cibafi.org/NewsCenter/English/Details.aspx?Id=3745&Cat=0

Pakistan Center of Excellence and landmark for Path Solutions

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Pakistan, famed for hosting among its people the most talented resources in the Islamic Finance and Information Communication Technology sectors, is an ideal environment to develop Islamic banking.

Pakistan, famed for hosting among its people the most talented resources in the Islamic Finance and Information Communication Technology sectors, is an ideal environment to develop Islamic banking.

“Pakistan has shown high commitment and dedication to Islamic finance; our market studies show that the annual growth of Islamic banks in Pakistan will double by 2013; thus Pakistan became the first choice in Path’s expansion plan”, commented Naji Moukadam, Path Solutions’ President, during the office inauguration reception that took place in Karachi on May 6th, 2009.

“We are not only opening a support office in Karachi to serve our existing clients, but rather a new resource hub that will cater to all our clients in South Asia, the Middle East and Europe”.

“We have great faith in the Pakistani level of expertise in both information technology and Islamic banking and finance”; he then added: “our aim is to boost the service level for the banks in Pakistan, assist our banks whether local or international in the product engineering through our business analysts and subject matter experts, innovate solutions and tools to match the new market trends, promote diversity and innovation in products and services”.

Path Solutions has 16 years of market experience using unrivalled software implementation expertise at forward-thinking banks and financial institutions. Path Solutions’ strong market share is testament to its ability to maintain technology advantage. The company is now present in 17 countries around the world and plans to shortly add Central and Eastern Europe to its network.

Link: http://www.cibafi.org/NewsCenter/English/Details.aspx?Id=3725&Cat=0

Tawarruq declared impermissible by the OIC Fiqh Academy

| Sunday, June 7, 2009

Analysis on Islamic Banking, June 2009

AAOIFI

As the key product in the Islamic banking industry is declared impermissible and attention turns to AAOIFI - the industry standards body - for direction, Islamic Banker investigates the ruling and its repercussions.

Tawarruq, also known as Reverse Murabaha or Monetization, is a widely used instrument to obtain cash immediately.

As shown by the below diagram, Tawarruq is essentially very similar to the standardMurabaha structure, with one additional leg. The standard part of the structure involves the Bank buying the commodity from the "Goods Supplier", paying £100. The bank then sells the commodity to "UK Purchasing Company" on a deferred basis, that is, the bank charges "UK Purchasing Company" £110 due in, say, five years time. The final step involves UK Purchasing company selling the commodity to the "Goods buyer" for an immediate cash payment of £100.

Tawarruq

Source: Tax Adviser; Mohammed Amin Islamic Finance Blog,

What makes this contract popular with the bankers? Tawarruq is not only easy to use, but it is also flexible. In an industry that is very short on Sharia compliant products that provide cash "today", the Tawarruq contract was seen as an alternative. Secondly, it is also possible to roll over the contract, hence providing additional funding.

OIC Fiqh Academy Ruling

According to the Fiqh Academy there is a real distinction between "classical" and "contemporary" practice ofTawarruq. The cash obtained in the classical Tawarruq is determined by market forces, whereas, in the contemporary version the contract is "arranged"... that is "simultaneously, the mustawriq ("UK Purchasing Company") and the financier executes the transactions, usually at a lower spot price".

With this in mind, the Fiqh Academy has thrown its weight behind the classical version of the Tawarruq contract, whilst declaring the widely used contemporary version impermissible.

Are there any other alternatives? The Fiqh Academy suggests that the market should embrace Qard Hasan(benevolent or interest free loans) and "institutions are encouraged to set up special Qard Hasan Fund."

One thing is for certain - the ruling by the Fiqh Academy is certainly brave and the implications of this announcement might be huge. In an industry, where the vast majority of transactions are "arranged" rather than left to market forces, many practitioners will be worried about other products coming under the Fiqh Academy's radar, including the ubiquitous Murabaha contract.

This point can be cemented further - AAOIFI standards 2/1/3, for Murabaha, state: "... it is permissible to prepare a single set of documentation to include both the customer's stated wish that the institution should buy the item from the supplier and a promise to buy the item from the institution, which the customer signs..."

Indeed, speaking at the Utrujj foundation in the UK, Shaykh Nizam Yaqubi, a leading scholar and a member of the AAOIFI Sharia' board, expressed disappointment that a compromise was not reached.

In particular, Shaykh Nizam rejected the idea of Qard Hasan as a solution arguing that Islamic banks were socially responsible banks that had to deliver returns to their shareholders.

The need for cash...

Ultimately, this boils down to one question: what do you say to an individual/institution that wants cash immediately? Should they be referred to the conventional system (where there is universal agreement on theimpermissibility) or should Islamic banks come up with solutions?

We can deal with the question head on, by asking: why does the individual need cash immediately? Certainly, Islam encourages people to live within their means and simply placing emphasis on credit will cause long term damage. However, in reality, the vast majority of people choose to live beyond their means, with the banking industry facilitating this process.

As attention turns to AAOIFI, there is no doubt that the OIC Fiqh Academy's ruling will be a wake-up call to many market participants. To the idealists in the industry, it is hoped that the focus will shift from debt to equity. However, the realists continue to argue that as long as the industry remains in the "nascent" stage, it has no choice, but to replicate conventional products.

Notes:

1. Mohammed Amin, et al., (Sept. 2008), Islamic finance: the tax adviser's role, Tax Adviser

2. Mohammad Nejatullah Siddiqi (Feb. 2007), Economics of Tawarruq

3. AAOIFI (2008), Sharia Standards for Islamic Financial Institutions,

4. Mohammed Amin, (Feb. 2007), Foreign investors applying Shariah compliant finance when investing into the United Kingdom, Islamic Finance Blog

5. ISRA (Apr. 2009), OIC Fiqh Academy Ruled Organised Tawarruq Impermissible


Link: http://www.islamicbanker.com/tawarruq-fiqh-academy-aaoifif.html

Islamic finance escapes worst of crisis

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The Islamic finance industry has been relatively, although not completely, immune to the effects of US subprime problems, the ensuing credit crisis and global economic downturn.

“I have not found any Islamic bank that has lost money by exposure to toxic assets – because they were forbidden,” says Humayon Dar, chief executive of BMB Islamic, one of the biggest managers of alternative investments for Muslims.

Indonesia easily raised $650m (£397m, €459m) recently with the first global dollar-denominated sukuk Islamic sovereign bond of the year. The issue was oversubscribed, and set an encouraging example for Bahrain’s expected $1.5bn-$2bn of sukuk this month.

Nevertheless, issuance of sukuk – or Islamic bonds – fell by more than half last year, to $20bn. But difficulty raising money was inevitable as the financial crisis led investors to shun debt, whatever their religion.

There is evidence that what happens in the world of conventional finance affects the Islamic financial world with a time lag. The first signs that US problems were worse than expected, and could have international repercussions, emerged in the middle of 2007.

“All of a sudden there was a lack of liquidity,” Mr Dar says.

“Mainstream markets started to fall at that point, but that struck Islamic banks only in September 2008, [although] they were affected indirectly.

“Because they did not lose money, they are in a relatively better position than their [conventional] counterparts.”

As a result, Islamic banks have more funds as compared to conventional lenders. They have not had to rebuild their balance sheets in a panic, or seek emergency help from governments.

“Once the opportunities are there in the market, they will be able to capture them in a better way than their traditional counterparts,” says Mr Dar.

Western banks have been active in Islamic finance – both institutional and personal – for a while now. They often have superior marketing skills to regional competitors.

But that has not guaranteed success. “They haven’t done as well as fully fledged Islamic banks have done,” Mr Dar says.

“There’s a perception in the Islamic world that they are in Islamic finance because they are making money. Once they are not, they will wind up their operations.”

Muslims, he says, are more likely to trust in fully fledged Islamic banks that will stay in the sector through thick and thin.

But at the same time, some Middle East banks have relied on what he calls a “sharia premium” – expecting Muslims to bank with them simply because they are Islamic, and failing to provide competitive services. That is changing.

“Even in Gulf Co-operation Council countries, there is an indication the sharia premium is going down,” he says. “Islamic consumers are becoming more demanding.”

Islamic banks should also learn from western counterparts such as UBS and HSBC on issues of corporate social responsibility. “This is something that western banks have excelled at,” he says.

“You pick any Islamic bank. They don’t have a well defined corporate social regime that they must follow. They have been charitable.

“But corporate social responsibility isn’t just about charitable giving. It’s about all the stakeholders. You have to be seen to be serving the community.”

Mr Dar is particularly critical of Islamic institutions that have seen a big rise in profits in recent years and kept the money to themselves.

“It’s wonderful to be profitable, it’s even more wonderful to be equitable in your distribution of profits,” he says. “Islamic banks should be distributing benefits among stakeholders.”

Depositors should receive more money as a result of banks’ bigger profits, he says, and he is particularly critical of overpaid executives. “If the benefits are going to bankers in the form of bonuses, then you are not really benefiting all the stakeholders.”

Link: http://www.ft.com/cms/s/0/28e16ac6-5341-11de-be08-00144feabdc0.html?nclick_check=1