Introduction of the world’s first Islamic arbitration rules will grow Islamic finance assets

The introduction of the world's first Islamic arbitration rules last month by the Kuala Lumpur Regional Centre for Arbitration (KLRCA) will pave the way for further expansion of Islamic finance with total global assets now estimated to be worth around US$1.2 trillion (RM3.72 trillion) to US$1.3 trillion (RM4.03 trillion).

Not only are the arbitration rules the first of its kind worldwide, it caters to both conventional and syariah-compliant commercial transactions and contracts as well.

KLRCA director Datuk Sundra Rajoo told StarBiz that with these new Islamic arbitration rules, the relevant parties to a dispute could have a complete syariah-compliant process, from the formation of the Islamic products right to the dispute resolution process.

Most disputes relating to Islamic finance ended up in civil courts where usually common law principles on conventional banking were applied, he said, adding that due to lack of expertise and precedents, the courts were less equipped to apply and interpret the relevant syariah principles where required.

Stressing the importance of such rules, Sundra said with the global Islamic finance sector already worth US$1 trillion and set to triple its value over the next decade, he foresee there would be more domestic and cross-border agreements and transactions, hence more disputes arising out of it.

The rules were also a great tool in support of the internationalisation of the Islamic finance, which complemented the Bank Negara Financial Sector Blueprint, he noted.

http://biz.thestar.com.my/news/story.asp?file=/2012/10/22/business/12181506&sec=business

GCC urged to follow unified Islamic finance regulations

The Gulf Co-operation Council (GCC) should have a unified rule under one regulator for Islamic investment products for ensuring lower cost of funds, according to Islamic Wealth Management (IWM) Report 2012.
“The GCC countries could take a leadership role by establishing standards for the registration of Islamic investment products with one regulator,” the Bank Sarasin report said.

The report was launched by Bank Sarasin managing director and head of Islamic Finance Fares Mourad and Monzer Kahf, a leading Islamic finance scholar.

Such unified rule would allow asset managers to market the product to clients across the region, it said.

Currently any offering needs to comply with different regulations in Bahrain, Kuwait, Saudi Arabia, Oman, Qatar and the UAE, resulting in a lengthy and expensive registration process, the report said. “Reducing expenses and increasing the availability would increase competition, benefiting local investors and further the GCC’s development as a centre of excellence for Islamic finance.”

Although unified rules could be done either a state, region or Arab league level, it would be better to have a centralised agency that could interpret the legislations regarding Shariah investments, Mourad said.

Asked whether there was a need for a separate entity for the regulation and supervision of Islamic investments and products, he said “I really would like to have this” but it was for the regulators in the respective jurisdictions to decide.

Kahf said the Islamic Financial Services Board could take the lead in the centralised agency as it consisted of central bankers in the Muslim countries. “Once you have such an agency, there is no need for separate Shariah boards as lawyers specialised in the field could suffix its role,” he added.

The report also took note of the constant criticism of certain Islamic finance structures such as the ‘Tawarruq’, which involves purchasing a commodity with deferred payment and selling it to a third party for cash, hence replicating the effect of a loan.

“Regulations need to be adjusted to allow financial institutions to engineer products that fit the spirit of Islam while meeting legal and regulatory requirement,” it said.

In this regard, the report cited an example of recent co-operation between the halal industry (mostly foodstuffs) and Islamic finance – two sectors with similar goals that have had little contacts.

With issues related to the environment and social practices as well as corporate governance getting more attention, it said there has been more reporting on corporate social responsibility, which is important to Islamic finance.

“There is still much room for improvement with higher standards and a more strategic approach required at the state, company and private level. The Muslim countries face the greatest challenges,” the report said.


http://www.gulf-times.com

Islamic banks object to new law

Say some rules violate Shariah and ask for modification

Islamic banks operating in the UAE have objected to new lending rules enforced by the Central Bank early this year and requested amendments for their own business, saying some of the new rules violate Shariah banking.

The higher coordination committee for the Islamic banks said it had submitted proposals to the central bank asking for common standards for all dealings in Shariah-compliant banks in the second largest Arab economy.

Quoting an unnamed official from the committee, the Dubai-based Emarat Alyoum Arabic language daily said Islamic banks found that some of the new rules on personal and retail credit introduced by the central bank in May are not compatible with Shariah-compliant banking, including overdrafts, punitive interest on debt default, increasing loans and cheque deduction.

“We therefore asked for amendments to these rules so Islamic banks can enforce them easily…we have submitted a memorandum to the central bank’s committee in charge with this issue,” the official said.

“We are awaiting their response in this respect…the committee has demonstrated great flexibility in considering our request and asked us to prepare a draft contract that will be agreed on by all Islamic banks.”

The official said such a draft had already been prepared in coordination with the Emirates Banks’ Association and had been sent to the central bank.

“It covers the deposit and account system as well as all services and funding facilities offered by Islamic banks…this contract or common standard will be binding for all Islamic banks after it is approved by the central bank.”

The new lending law introduced by the central bank for the country’s 23 national banks and 28 foreign units capped personal loans at 20 times a borrower’s monthly salary and stipulated the loan must be repaid within 48 months.

The regulations cover all retail loans including personal, car, housing loans and credit credits. They are intended to control lending activity and excessive charges by banks following public complaints about a surge in bank fees.

The UAE, which has the largest banking sector in the Middle East, has eight Shariah-compliant banks, with combined assets of nearly Dh268 billion at the end of 2010, accounting for 16.2 per cent of the overall banking assets.

The banks had 260 branches at the end of last year, controlling about Dh198 billion in deposits, nearly 10.9 per cent of the total bank deposits.

In the first half of 2011, the net income of UAE-based Islamic banks soared by 29.3 per cent to Dh1.63 billion from Dh1.25 billion in the first half of 2010.

http://www.emirates247.com

The Importance of the Sharia Group in the Administrative Structure

Riyadh, Asharq Al-Awsat - An Islamic Bank's commitment to the provision of Islamic Sharia law and the accuracy with which it implements these laws are considered critical factors when Islamic finance clients are choosing between one Islamic institution and another. Therefore we find that Islamic financial institutions try to exploit this factor and focus on this aspect of their operations and market themselves as an Islamic financial institution, utilizing a variety of methods such as the design of the institution's logo in order to express its Islamic identity, as well as selecting language that evoke the institute's Islamic identity and vision. Other measures that aim at instilling confidence in the client's subconscious include appointing figures who are well known to the target audience to the Sharia group administration. These marketing methods may have been effective in the past however clients today are more conscious and aware of the criteria that a financial institution must fulfil before it can truly be considered an Islamic financial institution. An Islamic logo or the presence of well-known Islamic figures is no longer sufficient to grant the confidence of customers in the Islamic integrity of financial institutions. Perhaps the most important criteria that clients look at is the location of the Sharia group in the Islamic financial institution's administrative structure, and whether this guarantees the Sharia group influence and independence with regards to decision making.

An Islamic financial institution is comprised of three departments; firstly there is the product development or research department that develops [financial] services and products that are compliant with the provisions of Islamic Sharia law in collaboration with the institution's administration. The second department is the Sharia commission department, and this presents these products and services to the Sharia authority and coordinates between the Sharia authority and the Islamic financial institution. The third department is the Sharia oversight department, which oversees the institution's financial activities and ensures that they fall within the provisions of Islamic Sharia law. Therefore it is not acceptable for the administration of the Sharia group to be affiliated to any department within the financial institution, but instead this should be directly tied to the Chief Executive of the institution and should also have direct representation on the Board of Directors review commission. Due to the sensitive and delicate tasks carried out by a Sharia group, the financial institution should be very careful in selecting staff-members, employing only those who possess knowledge of the Sharia, vocational competence, and administrative experience, because the Sharia group represents the financial institutions commitment to the provisions of Islamic Sharia law, and it is the gateway to competing in the Islamic financial market.

Observers today are surprised by some financial institution's claims that they are Islamic financial institutions when in fact the institution has no Sharia group whatsoever, or at best its Sharia group is powerless. What is even more astonishing is that one might find an Islamic financial institution that enjoys a good reputation in terms of its commitment to Islamic Sharia law as a result of the efficiency and independence of its Sharia Group – as this Sharia Group need only compete against its counterparts – that voluntarily gives this up by weakening its Sharia group and eliminating its independence. The Quran says: "And be not like her who unravels her yarn, disintegrating it into pieces after she has spun it strongly." [Surat al-Nahl; Verse 92].

Islamic financial institutions should be aware that clients today are inclined towards suspicion rather than trust and against giving institutes the benefit of the doubt as if they mean to say "if they do not have evidence to back up their claims then they are frauds." This is as a result of the media attention on Islamic finance which has effectively put the spotlight on the judicial disputes surrounding a number of Islamic financial services, and the mistakes made in the application of these financial services. Therefore these institutions must provide evidence of the credibility of their claims. The strongest and most credible evidence that an Islamic financial institution can provide is the existence of a strong, independent, and effective Sharia group, with a trusted and reliable staff. If they are unable to show this, these Islamic financial institutions will lose out

Link: http://aawsat.com/english/news.asp?section=6&id=20003

IFSB takes a look at legal angles in Islamic finance

Fourth IFSB seminar on legal issues in the Islamic financial services industry to be held in Malaysia.

The specificities of Shari`ah-compliant financial services offered by banking and financial institutions need to be supported by a strong legal framework, according to the Islamic Financial Services Board (IFSB).

It says that legal firms rendering services to institutions Islamic financial services (IIFS) need to understand the specificities of these institutions and the parameters in which they operate as well as establish a legal framework within these parameters.

The IFSB is orgranising it’s fourth seminar on Legal Issues in the Islamic Financial Services Industry on 28-29 September 2009.

The IFSB said the seminar aims to achieve the following objectives:

• To collect and record data on the various legal environments in which IIFS operate, and draw from the experiences of different jurisdictions in order to better understand and analyse the effectiveness of appropriate legal and regulatory framework for Islamic finance;
• To review the legal requirements in specific areas which are developing but critical in driving the industry forward. In particular, to focus on areas such as Shari`ah Board's functions, liquidity management and dispute resolutions; and
• To discuss in depth the interface between the Shari`ah and modern legal frameworks, as such interaction is fundamental to every single Shari`ah-compliant finance contract used by IIFS. This requires that the knowledge and understanding of Shari`ah scholars and legal practitioners of these issues are both hands-on and up-to-date at all times.

The Seminar will attempt to contribute to the Shari`ah and legal aspects of the Islamic financial services industry by discussing the following topics:

• Recent experiences in introducing legal and regulatory framework for Islamic financial services;
• Shari`ah and legal issues in Islamic structured products;
• Insolvency and asset recovery framework: gaps and challenges;
• Interlink/interface between civil law systems and Shari`ah rules and principles and effective dispute resolution mechanism; and
• Challenges in managing legal risks in Islamic financial services: case studies.

The keynote address of the seminar will be delivered by Sir William Blair, High Court Judge of the Queen's Bench Division while the opening address will be by Professor Rifaat Ahmed Abdel Karim, Secretary-General of the IFSB. Joining them are 17 chairpersons and speakers from among the leading industry experts. The confirmed personalities are:

1. Y.Bhg. Tun Abdul Hamid Haji Mohamad, Member, National Shariah Advisory Council, Bank Negara Malaysia and former Chief Justice of the Federal Court, Malaysia

2. Gopala Krishnan Sundaram, Assistant-Governor, Bank Negara Malaysia

3. Thomas C. Baxter, General Counsel and Executive Vice President, Federal Reserve Bank of New York

4. Dato’ Dr Nik Ramlah Nik Mahmood, Managing Director, Securities Commission, Malaysia

5. Dr. Mohamed Akram Laldin, Executive Director, International Shariah Research Academy

6. Stefan Gannon, General Counsel, Hong Kong Monetary Authority

7. Ashraf Mohammed, Principal Counsel, Asian Development Bank

8. Roberta Calarese, Legislative Counsel and Director in Policy and Legal Services Division, Dubai Financial Services Authority, UAE

9. Mansoor Shakil, Director - Asset Management Group, Al Rayan Investment L.L.C., Qatar

10. Dr. Mahmood Ahmad Ghazi, Professor of Shariah, Qatar Faculty of Islamic Studies, Qatar

11. Muddassir Siddiqui, Partner, Head Islamic Finance – Middle East, Denton Wilde Sapte, UAE

12. Hanim Hamzah, Resident Partner, Roosdiono & Partners, Indonesia

13. Michael J.T. McMillen, Partner, Fullbright & Jaworski LLP, New York, USA

14. Yeo Wico, Partner, Allen & Gledhill, Singapore

15. Hamid Yunis, Partner, Taylor Wessing, UK

16. Dr. Charles Proctor, Partner, Bird & Bird, UK

17. Me Nada Abdelsater-Abusamra, Partner, Raphael & Associes Law Firm, Lebanon

Link: http://www.cpifinancial.net/v2/News.aspx?v=1&aid=3081&sec=Islamic%20Finance

Islamic laws of finance a cushion in hard times

The recession gripping the nation has taken less of a toll on American Muslims who follow age-old Islamic laws against paying – or charging – interest.

They've also been shielded by socially responsible retirement plans because Shariah– Islamic law – forbids investments in banks and mortgages as well as tobacco, alcohol, gambling, pornography or weapons.

"If everybody was Shariah-compliant, there would be no recession," said Farouk Fakira, a Yemeni immigrant who moderated a discussion on Islamic finance at Sacramento's Masjid Annur last week.

Fakira, 57, rents a home – like hundreds of other local Muslims – because "interest is pretty much forbidden. If you're making money off of money, the only person who benefits is you."

Shariah – 1,400 years of Islamic legal knowledge based on the words of the Prophet Muhammad – guides Muslims in daily life, said Imam Muhammed Abdul Azeez of Sacramento Area League of Associated Muslims, or SALAM.

Shariah prohibits usury, which often took advantage of a desperate person who needed to feed or protect his family, Azeez said. "There's an element of exploitation here."

The bottom line for many Muslims is, "if I don't have the money to buy something, that means I can't afford it," said Deya Dean Elghassein, who's Palestinian American.

His family helped him buy his home in Folsom with cash. "I do use credit cards, but they have to be paid off in full at the end of the month," he said. He wouldn't invest in Costco because it sells pork and alcohol, but he and others shop there "out of necessity."

About 20 percent of the Sacramento area's 50,000 American Muslims closely follow Islamic rules of finance – especially the prohibition against interest – said Irfan Haq, an economist who's president of the Council of Sacramento Valley Islamic Organizations , an umbrella organization representing 10 mosques.

"Muslims in general have been much less affected by the recession because they're very cautious and conservative in matters of finance and take a longer-term view of life," Haq said. "They want to invest their funds in a way that pleases God so they can sleep peacefully – they care about the afterlife."

Along with avoiding interest, another tenet of Islamic finance is not to invest in enterprises that violate Shariah: alcohol, gambling, banking and weapons. Azeez counsels his Muslim flock not to buy businesses that sell alcohol because "you cannot be in the business of spreading sin: Drunk driving kills."

Mohammed Memon, a Pakistani American project manager for Oracle in Rocklin, has a 401(k) through Amana Mutual Funds – a Shariah-compliant fund based in Bellingham, Wash.

"They're relatively better than other funds; I'm down 15 to 20 percent while many of my friends are down over 50 percent," said Memon, 38.

Amana's income and growth funds avoid bonds and interest-paying securities.

"We screen about 5,500 stocks a month for our 75,000 shareholders, and 2,200 to 2,400 pass," said portfolio manager Nick Kaiser. "The growth fund's biggest holding is Apple Computer. We buy technology, health care stocks and stocks with low debt. The income fund focuses on drug companies, energy stocks, mining."

Shariah also prohibits gharar – the Arabic word for uncertainty or risk – and maysir – gambling – which includes real estate speculation.

Metwalli Amer, founder of SALAM, said he knows Muslims who speculated in real estate and lost their shirts.

Amer, 75, said Islamic finance is about living within your means and helping the needy. "If Muslims had followed that, we'd be much better off," said Amer, an Egyptian immigrant.

But he said the majority of Muslims he knows "became greedy."

Islam doesn't prohibit wealth as long as you give back, he said. "The Quran promotes going into business and trading ventures that share the profits and loss."

Amer said one Sacramento Muslim who was able to become a millionaire while adhering to Islamic financial principles is Kais Menoufy.

(The Sacramento Bee)