Dubai Crisis: Islamic Bonds the Problem? Before and After the Bailout

By Dr. Zubair Hasan

Professor of Islamic Economics and Finance -( INCEIF ) Malaysia

The government of Abu Dhabi and the UAE Central Bank stepped in with a $10 billion bailout offer for the state-run Dubai World, which has recently been in debt.

Out of the allocated amount, $4.1 billion is meant to take care of the World's immediate debt obligations comprising Shari'ah-compliant bonds (sukuk) of the Nakheel, the property development arm of the company, which was due on December 14, the announcement date.

The company announced to meet its obligation within the next 14 days. The remaining $5.9 billion of the bailout will help meet the obligations to trade creditors and contractors of the Dubai World.

Though it was not an unexpected step, many, including the International Monetary Fund (IMF), hailed the UAE move to address the crisis.

Dubai World had suddenly asked for time from its creditors until the end of May 2010 to repay their loans of about $59 billion.

The announcement caused a quiver in global financial markets. The reason in part was a failure to distinguish between delay and default.

The Bailout

The debacle started with Dubai's booming real estate industry going bust at the start of 2008.

The bailout announcement came in time. It has calmed the nerves, reassuring investors, financial and trade creditors, employees, and common people that the government will always act to uphold the market principles and globally acceptable business practices.

Stock markets have since turned their tails up. The US dollar looked up against the Yen; the Euro rode on the back of both.The yen fell sharply against other currencies on the news, and the dollar shot up to 88.90 yen and the euro also jumped to 130.43 yen. Asian credit default swaps tightened after the news, and risk appetite got boosted.

When Dubai World declared postponing payments on $26 billion in debt, the Dow Jones Industrial Average fell 155 points, or 1.5 percent, European stocks dropped, and oil prices plunged.

Dubai economy was initially raised on petrodollars, but the fast-dwindling reserves of the Emirate helped it to diversify its economy.

The Emirate (Dubai) decided to develop service and tourism sectors, and it has positioned itself as an international finance, trading, and sports center.

High-rise buildings, grand hotels, and luxury resorts soon dotted the land all around.
Property prices were at a full gallop until the close of 2006. Then the tide of global crisis has also reached this tiny outpost.

The debacle started with Dubai's booming real estate industry going bust at the start of 2008.

In an exuberant market, competition created excess supply, property prices crashed — the average fall being around 40 percent of their value in 2009 alone, takers are thinning, and profit margins are vanishing.

The abrupt declaration on November 26 by Dubai government asking the creditors to reschedule repayment made the financial world panic, and shares went tumbling across the world.

The reaction was sharper in the West as boom Dubai was heavily financed by foreign funds, especially from the European banks like the Royal Bank of Scotland (RBS) and Standard Chartered.Four British banks( HSBC, Lloyds, RBS, and Standard Chartered) are said to have exposure of $5bn to Dubai World.

Developing countries did not express much concern. India feared the unemployment that the crisis could cause to its workers in Dubai, but the overall feel was that mountain was being made out of molehill.

The Rupee amount involved was small, and the exposure of the Indian banking system to Dubai was limited.

Sukuk's Security

Dubai was in part a victim of global meltdown and was in part overtaken by unguarded optimism and mismanagement.

Sukuk have been under cloud since the time Taqi Usmani, a prominent scholar on Islamic economy, questioned that their Shari'ah compliance in most cases (85 percent) slows down sukuk's popularity.

One consequence is that experts tend to tell about whatever adversity they find in sukuk. Dubai crisis has been no exception. Most comments, including some coming from the more sober academic world, contained disproportionate voicing of alarm and warning on the role of the Islamic bonds in Dubai turmoil.

The reason why sukuk attracted in the crisis the attention of the market was that their payment due on December 14 was the center of time-resetting negotiations; Islamic bonds, so to say, triggered the crisis.

The government announcement of its intention to enforce payment rescheduling immediately led both Moody's and Standard services to heavily downgrade the bonds — let alone sukuk — of various government-related entities in Dubai.

A more realistic approach could not have missed the point that the amount due was no more than 6 to 7 percent of the total money involved, and failure has not yet taken place.

Rating agencies could have shown little restraint in their decisions. They wield enormous power in the global bond markets, and they can literally force any government regarding debt issues.

There are increasing murmurs as to why these agencies are allowed to continue rating debt issues.

As bond issuers themselves have to pay for the evaluation exercise, there candidly is scope for the ratings moving in tandem with the payments.

It is not very clear what rules of conduct these agencies follow, who design these rules, and who oversees their observance. There is presumably a case for setting up regulatory frameworks for the rating agencies even for establishing separate ones for Islamic bonds.

Important Aspecsts

Sukuk was not so much the issue in Dubai crisis as some have tried to make it.

Some analysts see the Dubai fiasco from a historical angle; to them, the causes of Dubai turmoil were noticed the moment Sheikh Mohammad Al-Maktoum, its ruler, took the decision to invest his, as also the Emirate's, wealth in US real estate markets through the foreign arm of Emaar; the second largest property developer in Dubai.

The company ultimately went bankrupt, extending the US subprime crisis to the Emirate.
The Washington DC and Abu Dhabi connection has pressured Dubai to join the "international community" in taking a tougher stance against Iran,which is one of the main trade partners of the Emirate.

Dubai has also decided to enact an insolvency law on the US-British model to provide protection to local companies, like the World, from its creditors.

Abu Dhabi may also be looking for some concessions from Dubai in return for its bailout. It may, for instance, seek concessions on trade with Iran and on the future of the Emirates Airline.

Sukuk was not so much the issue in Dubai crisis as some have tried to make it. Sukuk market remained calm and unaffected across countries, including the leading market of Malaysia. Dubai was in part a victim of global meltdown and was in part overtaken by unguarded optimism and mismanagement.

The crisis has compromised Dubai's reputation as an economic power house in the region it may find difficult to retrieve. It still faces the daunting task of restructuring the remaining $22 billion of Dubai World's debts.

Important the issue is what is going to be the fate of Dubai's huge investments sunk in high-value property mostly in anticipation of foreign demand, especially from the West.

The future is quite uncertain, if not bleak. The Emirate must proceed with caution.

Link: http://www.islamonline.net/servlet/Satellite?c=Article_C&cid=1260258086411&pagename=Zone-English-Muslim_Affairs%2FMAELayout

Huge growth potential seen for Takaful market

A leading industry expert has predicted a huge growth potential for Qatar’s Takaful (Islamic insurance) market, estimating its annual growth at 25%.

Dr Ali Mohayeddin al-Qaradaghi, a professor of Islamic jurisprudence at Qatar University, said that the local Islamic insurance market has lots of expansion opportunities since “every policy holders with the conventional insurance firms is willing to turn to the Takaful scheme”.

“I believe that the Takaful market is very active. Before ten years, we had only one Islamic insurer, now we have three big companies and other Islamic branches launched by local conventional insurers,” Dr al-Qaradaghi stated.

He was delivering a lecture on Monday for the staff and managers of the Al Khaleej Insurance and Reinsurance company, the recent conventional insurer to switch to the Islamic system.

Dr al-Qaradaghi said the Islamic Takaful scheme is “totally different” from the conventional insurance, which he said, involve prohibited practices by Islam.

“Securing the needs of people and reaching them out in difficult times like accidents and death is one of the Islamic principles.

This should be the responsibility of the country, but as countries do not do it, then individuals should take it over through Takaful companies,” he said.

About the Islamic insurance, the scholar explained that although policy holders at any Islamic insurance would pay a contribution, which he said was the equivalent of the premium in conventional system, they will be sharing the surplus made by the company at the end of the year.

“The big difference between the two schemes is that the surplus in Islamic system should be divided among the policy holders who retrieve an amount ranging from 1% to 20% of their earlier contributions,” he added.
He also hailed the decision of Al Khaleej insurance and reinsurance to switch to the Islamic system, saying that both shareholders and policy holders will benefit from the company’s step.

The Al Khaleej Insurance and Reinsurance’s chairman, HE Sheikh Abdullah bin Mohamed bin Jabor al-Thani said, in a speech, that his company, which is set to impark on its activities according to the Takaful system from January first next year, seeks to be a leading player in the Islamic insurance industry in the country.

“We promise our clients that we keep offering them the best products and services they need. In Islamic insurance, the main focus is not the profit, but rather to address risks and alleviate their impacts,”
The scholar also estimated the annual Zakat that should be given by banks and companies listed in region’s stock markets at $100bn, which he said, can tackle the poverty problem in the world if invested in aid programmes.

“Based on a recent study I made, I calculated the value of the Zakat due by companies and banks in Gulf and other Islamic states can make $200bn. If this amount was properly invested through a ten-year plan to eradicate poverty, there would be no more poor people who starved to death around the world,” he added.

Link: http://www.gulf-times.com/site/topics/article.asp?cu_no=2&item_no=333454&version=1&template_id=36&parent_id=16

Best Domestic Middle East Islamic Bank award for Doha Islamic

Doha Islamic has been adjudged as the  Best Domestic Islamic bank in the Middle East - 2009. The accolade was conferred by the prestigious Banker Middle East Awards 2009 for excellence in a glittering ceremony held at Emirates Tower Hotel, Dubai. The ceremony was attended by elite gathering of government officials, academicians, regulators, dignitaries and senior bankers.

The award conferred on Doha Islamic is in recognition of the trust and confidence by the local financial services community and an acknowledgement of Doha Islamic’s customer centric approach and progressive outlook committed in providing one-stop-financial service experience to its ever expanding customer base.

Doha Islamic commenced its banking operations on June 15, 2005. Nowadays, Doha Islamic has a network of five branches in Qatar and dedicated in providing new and innovative Islamic banking products and services. This award reflects the continuous growth of Doha Islamic and efforts in excelling within the Islamic Banking industry noting that the total assets has reached $880m within a span of three years. Doha Islamic provides financial corporate solutions to finance new and existing business, in order to make it grow and prosper, be it for specific commercial commodities, production materials or infrastructure. Furthermore, an array of products and services, tailored to meet customers  financial needs, are available at Doha Islamic and are supported by a team of highly qualified Consumer Finance representatives.

Sheikh Fahad bin Mohammad bin Jabor Al Thani, Chairman Doha Bank, said: “Doha Islamic is taking many strategic initiatives to provide the best value to our customers, our stakeholders and to our society at large. Our dedicated team of professionals has consistently set high standards in performance, innovation, security and quality, being the hallmarks of Doha Islamic, in this highly competitive market. It will be our ongoing challenge to manage and sustain these strengths and Doha Islamic is proactively enhancing these in the current year.

Yousuf Hashim Al Yousuf, Acting Head Doha Islamic while receiving the award said: “It is the Doha Islamic’s Board’s visionary and participative leadership philosophy, which has taken Doha Islamic to newer heights. The bank has been completely transformed into a dynamic entity with strong values and customer-centric approach. The Board has steered Doha Islamic to become a market pioneer in introducing innovative products and services.

Doha Islamic is determined to build on a solid base by undertaking the necessary restructuring and creating an image, while also enhancing productivity through the employment of state-of-the-art technology. The enhancement of Islamic banking through partnership with other Islamic institutions and the development of a wide range of Islamic products is an integral part of Doha Islamic’s strategy. This step comes in line with the strategy to meet the increasing demand in Islamic banking products and services, and Doha Islamic offerings in particular, from various sectors of the community. As there will be new branches in the pipeline, this will enhance Doha Islamic’s delivery channels across Doha and will increase banking convenience for their customers.

Link: http://www.thepeninsulaqatar.com/Display_news.asp?section=Business_News&subsection=Local+Business&month=December2009&file=Business_News2009122191813.xml

ITS Named ‘Best Technology Provider’ at Islamic Business and Finance Awards

Al-Said:- The Award is new achievement for our strategy to offer Solutions for Islamic Banks.

International Turnkey Systems Group (ITS), a leading ICT (Information Communication Technology) provider, announced today that it has been named the ‘Best Technology Provider’ of the year at the Islamic Business and Finance Award ceremony. The Award is a testament to ITS continued pioneering position in the Islamic Banking technology solutions field of business.

The Islamic Business & Finance Awards have been designed to recognize and reward excellence throughout the global Islamic Finance community. They honor Islamic Financial institutions from around the world and emphasize on the importance and growth of Islamic finance.

Khalid Faraj Al-Said, Managing Director and General Manager of ITS, accepted the award during a gala ceremony attended by CEOs, industry professionals and top officials representing several IT firms, banks and financial institutions from the Gulf region and beyond.

“We are proud to receive the Best Islamic Finance Technology Provider Award. This award is recognition of ITS’ strategic vision, management depth and our belief in Islamic banking principles,” said Al-Said. “Over the past year, we have invested heavily in our Sharia-compliant software and solutions. With the current financial crisis, I see a prospering future for Islamic finance as it still promises stability and success in difficult times.”

Al-Said also pointed to the fact that ITS has amassed a large number of awards over the past few years which demonstrates the company’s leadership and innovative spirit in the Islamic banking solutions market. The Islamic Banking market is considered one of the fastest growing economic sectors globally, which makes it one of the most competitive as well.

The Islamic Business & Finance Awards were launched in 2005 in response to the phenomenal growth of the Islamic finance industry.

ITS also walked away victorious at the recently concluded International Islamic Finance Forum Awards when it won the Best IT Solutions Provider to the Islamic Finance Industry at a ceremony honoring the region’s best Islamic finance products and services.

Link: http://www.bobsguide.com/guide/news/2009/Dec/21/ITS_Named_%E2%80%98Best_Technology_Provider%E2%80%99_at_Islamic_Business_and_Finance_Awards.html

The Future of Talent: An Islamic Finance Perspective. by Fuwad Beg, Managing Director, Yasaar Human Capital

Although figures vary there is no doubt that the Islamic Finance sector has a predicted growth rate which is unprecedented within the current climate. At the heart of this growth is the necessity to build organisations globally and to capitalise on both the weak economic trust left by the conventional market as well as the resolute appetite from investors to look at the Islamic Finance sector much more favourably; thus fuelling the demand for the development of more products to market.

A direct consequence of this growth and investor appetite is the need for Islamic Finance sector organisations to attract, grow and develop their talent.

Hiring:
Even with this predicted growth, the downside of the current climate is that the majority of the global Islamic Finance sector companies are in a holding pattern when it comes to hiring on general level. Although clearly there is a natural cycle of attrition that is within the market place and although this is inevitable within the Islamic Finance sector it is know where near the attrition rate of the conventional market place.

Even with the flow of candidates from the conventional finance market place to the Islamic one there is a ‘war for talent’ simply because the competencies required are very much finite and it is not always as easy as studying for the IFQ and then jumping straight into an Islamic Finance sector position.

Of course the Islamic Finance sector does need to do its part in developing new talent and hiring new blood into the system but the current roles are focussed towards more senior individuals who have experience within the industry as opposed to the requirements for fresh graduates for example, something which is also currently reflected in the conventional market place.

Nuances:
When hiring within the GCC, for example there are other regional nuances which affect hiring. Due care and attention needs to be taken when hiring candidates that work for affiliated or partner companies, because simply, many company boards are run by a few key individuals which in itself is not a good situation but one which is a current reality. Therefore, when CEO’s try to recruit key individuals, ethics dictate that they really should try to avoid hiring candidates that come from companies which are related to activities of Board members.

Although, in reality it creates a shortage of candidates especially if fresh talent is not being developed within an organisation or the industry in general.

Within South East Asia and in particular within Malaysian, Hong Kong and Singapore market place very few regional nuances actually occur and generally speaking the hiring process in the region very much follows universal norms.

However, it would be foolish to suggest that any region within the Islamic Finance map is without internal stereotypes of one form or another which translates to preferences given by Boards for senior appointments to people who are either natives of the country, friends, brothers etc, etc, but it is certainly far from the equivalent of the political analogy of, ‘smoke filled rooms.’

Simply, the closer and more expansive the network the more chances of getting a job which one would argue is a universal norm and also applies to Islamic Finance.

Competencies:
The competencies of employees that are required by Islamic Finance sector organisations are very much similar to those required by conventional organisations. For example within the banking sector the intricate knowledge of how the industry works, client lists, the ability to sell and market experience is invaluable to any organisation and these pre-requisite norms also apply to the Islamic banking sector, especially as many large conventional banks have Islamic windows and this logic also applies to takaful or re-takaful companies. Potential candidates must possess knowledge of Islamic Finance that is relevant to their job or market, coupled with the usual experience required to perform the job that they are required to do.

However, specific skills such as structuring contracts or products and of course, detailed Shariah services as carried out by scholars, whom are all required to have an in-depth and intricate knowledge of Shariah Law and its implications in order for candidates to execute their job functions correctly and this is applied across all regions, mature or developing.

Human Capital Leadership:
For the leaders at the helm of Islamic Finance sector companies, the responsibility is to foster and develop talent and best practice within their own organisation and the industry as a whole.

Human Capital strategies across the Islamic Finance sector are currently very diverse in effort and nature. In multinational corporate, ‘Islamic windows’ the development and use of human capital strategies which cover talent attraction, development and retention as well as human resource development and training are very much in line with conventional industry standards and such create internal value for both current and future employees and the industry as a whole.

However regions such as the Gulf show us that there are many instances where Islamic Finance and Takaful organisations have not yet been successful in fully developing human capital strategies especially in the area of compensation and benefits.

A recognised framework for comparative salaries and benefits has not been developed across the Gulf and what tends to happen is that some countries and their subsequent organisations pay salaries dependent upon country norms rather than industry norms.

This, on an internal perspective is fine, however, can also be detrimental for a company in the attraction of talent from different Gulf countries as well as on a Global basis and when hiring is essential in the development of the company such strategies pay dividends.

The Far East and in particular Malaysia which is one of the most mature markets within the Islamic Finance sector, looks more towards regional trends as opposed to global trends when it comes to compensation and benefits which are actually on par with other parts of the world.

The Malaysian market also provides an additional attraction to candidates considering the region simply because if they have worked within this maturity level then the experience it provides on a global level is invaluable.

The future:
The old adage goes that, ‘... the future is not ours to see,’ although the predictions for the industry are generally very good. We will most likely see a growth in the amount and types of products available as well as the availability in more geographical areas, which will mean that unless resources are put into training and developing new and existing talent then there will be an even more finite pool of candidates to draw from.

Although HR activity within Islamic Finance sector is developing, it is only fully developed in Islamic Finance windows which have a larger corporate system to extend HR best practice.

In Malaysia there are a variety of HR Acts and a government ministry as well as the forging of best practice through the Malaysian Institute of Human Resources.

Although governments within the GCC are committed to developing human capital its is very much from a national perspective rather than a industry perspective and generally there is not a single voiced regional HR body represented within the GCC, that looks at HR best practice such as the CIPD in the UK.

Conclusion:
As the industry grows the requirements for qualified candidates to enter the market will also increase. As of yet the two biggest markets are the GCC and Malaysia but there are institutions across the globe that are looking at developing Islamic Finance products be it a bond, an index or another vehicle for investment.

Clearly there is a long way before Islamic finance will be on par with conventional finance but one thing that the current climate has show us is, that the industry is certainly here to stay and for people looking to get into the industry although now may not be the best time, it is a viable career option at all levels.

Link: http://www.opalesque.com/OIFI136/Opinion_Column_The_Future_of_Talent_An083.html

Dubai 'crisis over; emirates united'

The economic crisis in Dubai is over, the United Arab Emirates foreign minister Sheikh Abdullah Bin Zayed al-Nahayan said on Thursday. The $10 billion aid package this week from Abu Dhabi to Dubai had proved the unity of the UAE, he added.

Speaking to Reuters during a visit to the Israeli-occupied West Bank, he said the UAE government was 'committed to dealing with the effects of the global crisis' for all UAE members. 'The economic crisis in Dubai is over,' he said.

The lifeline to fellow-member Dubai 'is proof that the UAE is united politically and economically', Sheikh Abdullad added. 'It is also proof that UAE remains committed towards local government to deal with effects of the global economic crisis.

'I believe the (global) crisis will be behind us once the United States recovers, and we believe the US is recovering, which will reflect on other countries.'

Dubai World rocked global markets on November 25 when it asked creditors for a standstill in debt mainly linked to its two property firms, Nakheel and Limitless World.

Abu Dhabi came to the rescue of Dubai on Dec. 14, several days after state-owned conglomerate Dubai World asked creditors for a delay on payments of debts totalling some $26 billion.

The UAE safety-net, in the form of bonds to head off a bond default, cheered Gulf and global markets but raised questions about the undisclosed terms.
Link: http://www.tradearabia.com/news/newsdetails.asp?Sn=BANK&artid=171994

Short Selling in Islamic Finance by Nikan Firoozye, Ph.D

Islamic Finance Theoreticians and Islamic Economists often get caught up in the doctrinaire. Rather than exploring the feasibility of an arrangement, they will find arguments against it based on legitimate (but to some extent overused) sources. In the case of short-selling, many would quote the truly famous hadith, where the Prophet (pbuh) was quoted to have said ‘Do not sell what is not with you.’ This hadith is the basis for much speculation about the inner meaning of Islamic Finance and has even been cited and miscited by Western Economists as a rationale for why Islamic Economic systems must be more stable than conventional. (see Kamali, Islamic Commercial Law: An Analysis of Futures and Options, chapter 10 for a deep discussion of this hadith).

We can only point to the recent announcements of Dubai World as an example of the lack of stability of any system based on huge amounts of leverage, as well as an opportune time for discussing the mechanisms for a short-sale. Certainly, shorting DP World or Nakheel a few months back might have made perfect sense, given the questionable support of the Abu Dhabi government for the speculative excesses of its super-trendy neighbour.

But, given the explicit authorization of bai as-salaam contract (forward sale, where payment is made upfront and the sales item is delivered at a later date), which certainly calls the applicability of the above-mentioned hadith into question, we leave the open debate (see for instance our Linkedin discussion here for a lively debate on the topic) of whether something should or should not be allowed behind in order to tackle the specifics of just how would short-selling be accomplished.

If this justification for our discussion were not sufficient, the possibility of Islamic Hedge Funds had been much in the news within the past two years. Perhaps this was just the dreams of structurers who always want to solve the next puzzle, rather than a case of genuine demand. And, recently the role of hedge funds in the Global Financial Crisis may call to question the wish to Islamize many of their activities. Nonetheless, the primary obstacle to the development of Islamic Hedge Funds was seen to be the lack of a short-selling mechanism, although some would cite at least three requisites in order to launch a hedge fund: leverage, short-sales, and compensation schemes (see, for example this article on the death of hedge funds from 1969). We hope to tackle issues of leverage (through Shariah-compliant repos for instance) in later articles. As we shall see here, the structuring teams have been very active when it comes to developing the means for short-sales.

Although we shall discuss four methods for short-sale below (with links to three already detailed in Islamic Finance Resources), further methods and nuances of each of these are likely to emerge over the coming years, given the level of activity and interest among market participants in finding solutions to the issue of Islamic Hedge Funds.

1. Short-sale by Salaam:
This uncovered short-sale method was originally used by Newedge in their hedge fund platform, which has some following in KSA due primarily to the Shari’ah Advisor. It came under more scrutiny after AAOIFI issued a standard on bai as-salaam, which explicitly limited salaam sale to commodities. Effectively rejecting this limitation, Malaysia’s SC recently elaborated on the mechanism for salaam sale, extending its applicability to short-sale of financial securities (see reference link here for a more detailed discussion in Islamic Finance Resources).

2. Short-sale by exchange of (conditional) promises (wa’dan)
This method for covered short-sales has been used by Amiri Capital in their hedge fund platform. It allows for the exchange of two promises or wa’d (unilateral promises, dual wa’dan, plural wu’d), one by short-seller, one by lending party where the conditions for entry are different for each promise, effectively skirting the prohibition on bilateral promises (muwa’dah). This method is discussed in further detail in Islamic Finance Resources (see reference link here).

3. Short-sale by Sale and Promise:
The Malaysian SC developed a method for a covered short-sale involving the purchase and sale of a security to a central exchange with the promise to buy back at some later date. The exchange would similarly enter into a sale and promise with a subsequent purchaser. In effect the exchange will circumvent the need for bilateral promises (and may not act like a ‘rational economic agent’). This method is also detailed in Islamic Finance Resources (see reference link here).

4. Short-sale by Arboon (down-payment sale):
This method for a covered short-sale was developed extensively by Shariah Capital as the basis for its own hedge-fund platform (upon which its own commodities hedge fund has been successfully operating for several years now). Arboon sale or down-payment sale (buyer pays a downpayment in order to have the option to purchase a security in the future) is a call option with far less flexibility than the unilateral promise, which has been approved only for the Hanbali maddhab (school of jurisprudence, followed primarily in KSA) and mostly disapproved in the other maddhabs. Nonetheless, modern fuquha (scholars) have been approving its use in a wider and wider range of applications, irrespective of the school of thought. We aim to write more on this method in Islamic Finance Resources, but the following white paper by Sh Yusuf Talal DeLorenzo (see reference link here) provides further details.

We may very well see new developments and methods for short-sales in the future as well as a quest for dominance of one prime brokerage platform (and method) over the others. As different as those methods might be, it seems the lack of a cohesive approach to alternative investments represents yet another hurdle for this sector. Nonetheless, looking at the mechanisms for the individual methods (with their respective pros and cons) can give further insight into the plausibility of both hedging and benefiting from the speculative excesses of others.

Link:

Islamic Finance Theoreticians and Islamic Economists often get caught up in the doctrinaire. Rather than exploring the feasibility of an arrangement, they will find arguments against it based on legitimate (but to some extent overused) sources. In the case of short-selling, many would quote the truly famous hadith, where the Prophet (pbuh) was quoted to have said ‘Do not sell what is not with you.’ This hadith is the basis for much speculation about the inner meaning of Islamic Finance and has even been cited and miscited by Western Economists as a rationale for why Islamic Economic systems must be more stable than conventional. (see Kamali, Islamic Commercial Law: An Analysis of Futures and Options, chapter 10 for a deep discussion of this hadith).

We can only point to the recent announcements of Dubai World as an example of the lack of stability of any system based on huge amounts of leverage, as well as an opportune time for discussing the mechanisms for a short-sale. Certainly, shorting DP World or Nakheel a few months back might have made perfect sense, given the questionable support of the Abu Dhabi government for the speculative excesses of its super-trendy neighbour.

But, given the explicit authorization of bai as-salaam contract (forward sale, where payment is made upfront and the sales item is delivered at a later date), which certainly calls the applicability of the above-mentioned hadith into question, we leave the open debate (see for instance our Linkedin discussion here for a lively debate on the topic) of whether something should or should not be allowed behind in order to tackle the specifics of just how would short-selling be accomplished.

If this justification for our discussion were not sufficient, the possibility of Islamic Hedge Funds had been much in the news within the past two years. Perhaps this was just the dreams of structurers who always want to solve the next puzzle, rather than a case of genuine demand. And, recently the role of hedge funds in the Global Financial Crisis may call to question the wish to Islamize many of their activities. Nonetheless, the primary obstacle to the development of Islamic Hedge Funds was seen to be the lack of a short-selling mechanism, although some would cite at least three requisites in order to launch a hedge fund: leverage, short-sales, and compensation schemes (see, for example this article on the death of hedge funds from 1969). We hope to tackle issues of leverage (through Shariah-compliant repos for instance) in later articles. As we shall see here, the structuring teams have been very active when it comes to developing the means for short-sales.

Although we shall discuss four methods for short-sale below (with links to three already detailed in Islamic Finance Resources), further methods and nuances of each of these are likely to emerge over the coming years, given the level of activity and interest among market participants in finding solutions to the issue of Islamic Hedge Funds.

1. Short-sale by Salaam:
This uncovered short-sale method was originally used by Newedge in their hedge fund platform, which has some following in KSA due primarily to the Shari’ah Advisor. It came under more scrutiny after AAOIFI issued a standard on bai as-salaam, which explicitly limited salaam sale to commodities. Effectively rejecting this limitation, Malaysia’s SC recently elaborated on the mechanism for salaam sale, extending its applicability to short-sale of financial securities (see reference link here for a more detailed discussion in Islamic Finance Resources).

2. Short-sale by exchange of (conditional) promises (wa’dan)
This method for covered short-sales has been used by Amiri Capital in their hedge fund platform. It allows for the exchange of two promises or wa’d (unilateral promises, dual wa’dan, plural wu’d), one by short-seller, one by lending party where the conditions for entry are different for each promise, effectively skirting the prohibition on bilateral promises (muwa’dah). This method is discussed in further detail in Islamic Finance Resources (see reference link here).

3. Short-sale by Sale and Promise:
The Malaysian SC developed a method for a covered short-sale involving the purchase and sale of a security to a central exchange with the promise to buy back at some later date. The exchange would similarly enter into a sale and promise with a subsequent purchaser. In effect the exchange will circumvent the need for bilateral promises (and may not act like a ‘rational economic agent’). This method is also detailed in Islamic Finance Resources (see reference link here).

4. Short-sale by Arboon (down-payment sale):
This method for a covered short-sale was developed extensively by Shariah Capital as the basis for its own hedge-fund platform (upon which its own commodities hedge fund has been successfully operating for several years now). Arboon sale or down-payment sale (buyer pays a downpayment in order to have the option to purchase a security in the future) is a call option with far less flexibility than the unilateral promise, which has been approved only for the Hanbali maddhab (school of jurisprudence, followed primarily in KSA) and mostly disapproved in the other maddhabs. Nonetheless, modern fuquha (scholars) have been approving its use in a wider and wider range of applications, irrespective of the school of thought. We aim to write more on this method in Islamic Finance Resources, but the following white paper by Sh Yusuf Talal DeLorenzo (see reference link here) provides further details.

We may very well see new developments and methods for short-sales in the future as well as a quest for dominance of one prime brokerage platform (and method) over the others. As different as those methods might be, it seems the lack of a cohesive approach to alternative investments represents yet another hurdle for this sector. Nonetheless, looking at the mechanisms for the individual methods (with their respective pros and cons) can give further insight into the plausibility of both hedging and benefiting from the speculative excesses of others.

Takaful International, Hannover Retakaful in Takaful Partnership

Bahrain-listed Takaful International Co. BSC [90250] said it has signed an agreement with Hannover Retakaful [78849] to increase its family takaful insurance coverage up to US$5 million per individual, aiming to improve its insurance services and portfolio expansions.

Takaful International's chief executive officer, Younis J. Al Sayed, said in a statement that the agreement would give the company higher capacity, especially in family takaful, which provides protection to individuals including savings schemes, children's education schemes, personal loan protection and individual income protection.

Mahomed Akoob, Hannover Retakaful's CEO, said he believes the agreement will extend both companies' cooperative relations. "We are glad to be a part of their expansions in respect of takaful portfolios and services," he said in a statement.

Prior to this agreement, Takaful International signed an agreement with Kuwait's Takaful International Company for Takaful Insurance, and with Qatar Islamic Insurance Co., to provide female-dedicated "Heya" (meaning "she") products in the Kuwaiti insurance market and the Qatar insurance market, respectively.

Established in 1989, Takaful International claims to be the first Islamic insurer in the Middle East region. It provides insurance coverage in line with the Islamic Shariah principles.

In December 2006, Hannover Re set up a wholly owned subsidiary Hannover Retakaful B.S.C., in Manama, Bahrain, for the underwriting of worldwide reinsurance in conformity with Islamic law.

Link: http://insurancenewsnet.com/article.aspx?id=148098&type=newswires

Tamkeen and Ernst & Young to train 130 Bahraini graduates

Tamkeen has signed a $1.2m contract with Ernst and Young to train 130 Bahraini graduates in Islamic finance and business accounting, the labour fund’s CEO said on Monday.

Bahrain’s emergence as a banking hub in the region has created a growing need for professionals qualified in Islamic financial work, Tamkeen said.

A recent survey conducted by the firm found that more than 1,340 banking and investment specialists are needed to fill vacancies in the financial sector.

“One of the major challenges facing Islamic finance was the availability of a trained national workforce,” said Deen Jayah, the director of Ernst & Young's Business Community Training Center.

The Bahraini government plans to increase the number of nationals working in the private sector by 185,000 people over the next five years, with at least 35,000 locals to be trained in post secondary graduate and doctoral programmes to replace qualified expats.

Abdulellah Ebrahim Al Qassimi, chief executive of Tamkeen, said: “There are even greater opportunities in the Islamic finance area and we were keen to tap this arena of career growth for Bahrainis."

Ernst & Young is the only approved training provider for the Chartered Institute of Management Accountants (CIMA-UK) programmes in Bahrain.

As part of a new initiative by the CIMA, graduates will study and sit exams for the Certificate in Business Accounting or the Certificate in Islamic Finance, over a one year period. Students will also be trained to work in private banks at the same time, Jayah said.

Students will be separated into three batches, with training provided by professionals at the Ernst & Young's Business Community Training Center. Applicants will be selected through a competitive exams, interviews and group discussions.

Al Qassimi added that the scheme intends to empower Bahrainis by giving them opportunities to stand out as employees of choice, who can power the growth of the nation.

Link: http://www.arabianbusiness.com/576289-tamkeen-and-ernst-aamp-young-to-train-130-bahraini-graduates

Proposed GCC currency name ‘too general’

A proposal to name the new GCC common currency Khaleeji has been turned down, it has emerged.

Finance Ministry resources and information assistant under-secretary Ismail Al Marhoon said the name had been suggested ever since the common currency was mooted, but it was felt it was “too general”.

He was addressing a Press conference to launch a commemorative medal to mark the 10th anniversary of His Majesty’s accession to the throne, at the ministry in Diplomatic Area.

He said it was felt the term ‘Khaleeji’ was used for anyone from the Gulf and the name would be inappropriate for a currency expected to become over time the second most
important monetary union in the world after the Euro.

“A new name is being thought of and there are suggestions on what it is going to be called.

“The name will apparently be finalised once discussions are over.”

He said it was still not clear whether Oman and the UAE would join the proposed union but everyone hoped they would.

The GCC Summit agenda includes plans to push ahead with a monetary union to pave the way for a common currency like the euro.

The plans, in the works for years, suffered a blow when the UAE, the region’s second largest economy, said in May it was backing out. Oman also said it was not joining.

Kuwaiti Foreign Under-Secretary Khaled Al Jarallah was earlier quoted as saying that “an agreement on the time-frame to realise the common Gulf currency was reached” during a GCC foreign ministers’ meeting.

Officials had said they aimed to launch the unified currency by 2010

Link: http://www.tradearabia.com/news/newsdetails.asp?Sn=ECO&artid=171926

Reuters to launch Islamic finance portal

Financial services information company Thomson Reuters plans to launch a new portal early next year that could transform the Islamic financial industry.

Detail of the Islamic Financial Gateway were unveiled at the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI)-World Bank annual conference on Islamic banking and finance which closed at the Crowne Plaza last night.

The portal, which will offer a wide range of real time Islamic finance information and date aims to improve professionals ability to access information, increase work flow in the industry to make it more internationally connected and open up the industry to conventional finance looking to use Islamic financial products.

'There are three major issues facing the Islamic finance industry that this portal has been developed to address,' said Thomson Reuters global head of Islamic finance Rushdi Siddiqui.

'Firstly it will reduce information search costs by posting data and indices in real time for a variety of product and developments.

'At present there is no global connectivity for the industry and this platform will be able to connect up players from across the globe so that Malaysian Islamic institutions can access what is going on in the GCC and Indonesian players will be able to communicate with events happening in the industry in Pakistan.

'Because of the improved access to information it will help to increase work flow in the industry with real time news across developments in all asset classes as well as provide data and analytical tools,' he said.

'It will also open up the Islamic financial markets to conventional financial players. At present the western financial system tends to be a bit wary of Islamic finance which it sees as lacking openness in reporting.

'The Islamic Finance Gateway will overcome this problem by robust, clear and crisp information about the global industry.'

'The feedback we have had so far has been very good, particularly because it is seen as getting everyone on the same page,' he added.

'Its further strength is that it offers third party input from global players like Standard & Poor's and PriceWaterhouseCoopers.

http://www.tradearabia.com/news/newsdetails.asp?Sn=MEDIA&artid=171930

Kerala plans 1st Islamic bond issue

Kerala, which relies on Middle East remittances for a quarter of its economy, plans to sell the nation’s first Islamic bonds next year to

help pay for infrastructure projects.

“The way we see it, it’s another form of venture capital,” finance minister Thomas Isaac said in an interview in Thiruvananthapuram, the southern state’s main city. “We need long-gestation funds to build airports, high-speed trains and expressways. Islamic finance

promises unexplored potential in that context.”

Kerala is helping start Al-Barakah Financial Services to sell the rupee-denominated bonds and create investment funds that comply with Shariah law’s ban on interest, Isaac said. The venture will tap Indian Muslims and money sent home by workers living in Gulf countries even as a debt crisis in Dubai threatens to shrink the remittances, he said.

Islamic bonds, also known as sukuk, are asset-based securities that pay a profit rate to investors to comply with Shariah’s prohibition of interest and speculation. Islamic finance may help India raise the $500 billion it needs to spend on infrastructure by 2014.

Islamic bond sales almost doubled to a record $31 billion in 2007 on Arab oil earnings before plunging last year as the collapse of Lehman Brothers Holdings shuttered credit markets, according to data compiled. Crude oil will climb to $82 a barrel in the first quarter of next year from about $71 now as demand from emerging markets increases, Goldman Sachs Group forecasts.

‘Big Prize’

Islamic bonds, also known as sukuk, are asset-based securities that pay a profit rate to investors to comply with Shariah’s prohibition of interest and speculation. “India, if opened up for Islamic banking, is the big prize,” Afaq Khan, Dubai-based chief executive officer of Standard Chartereds’ Islamic banking unit, said in a telephone interview.

“Its large Muslim population and strong growth promise excellent opportunities for releasing a lot of funds into the documented economy.” India’s economy expanded 7.9 per cent in the quarter ended Sept. 30, the second-fastest pace of expansion among major economies after China.

Muslims make up approximately a quarter of Kerala’s population and 13.4 per cent of India’s 1.1 billion people, according to government data. Only Indonesia and Pakistan have more inhabitants who adhere to the religion.

Indonesia Sukuk

Indonesia’s first sale of dollar sukuk in April drew bids for seven times the securities on offer, the head of the country’s debt management office said. Dubai, which said Dec. 14 that it got $10 billion from neighboring Abu Dhabi to help state-owned Dubai World meet its obligations, raised $1.93 billion from its first sovereign Islamic bonds in October.

Kerala will hold an 11 per cent stake in Al-Barakah, which aims to start business next year with 10 billion rupees ($214 million) of capital, according to T. Balakrishnan, principal secretary at the state’s industries department.

More capital will be raised from a group of investors led by Oman-based Indian businessman P. Mohammed Ali, and foreigners may be invited to buy stakes in the venture in the future, he said.



“Current rules don’t permit an Islamic bank yet but they do allow a non-banking firm. We will develop the company into a fully-fledged bank as and when regulations permit.”
Gulf Remittances

India is the world’s largest recipient of migrant worker remittances, and its 4.5 million citizens living in the Gulf send home more than $10 billion each year, according to the Ministry of External Affairs.

Almost 90 per cent of the 1.9 million people who migrated overseas from Kerala lived in the Gulf countries in 2007, sending home as much as $5 billion, according to the Thiruvananthapuram-based research institute Centre for Development Studies.

“It’s quite likely that Dubai will face a severe downturn in the real estate and financial sectors and that will affect jobs and remittances,” Isaac said. A panel headed by Raghuram Rajan, a former chief economist of the International Monetary Fund, recommended last year that India introduce interest-free banking to attract more capital into the mainstream financial services industry.

‘Untapped Potential’

“We are creating an avenue for a lot of people who aren’t comfortable with investment opportunities that don’t comply with Shariah,” Ali, the chairman of Al-Barakah’s investors and vice- chairman of Galfar Engineering & Contracting SAOG., said in a phone interview from Muscat, Oman. “We see a lot of untapped potential to raise capital for development projects.”

Kerala, where in 1957 a communist government was voted into power for the first time, takes a “very pragmatic” approach to free enterprise instead of allowing ideas to be stymied by politics, said Balakrishnan, citing examples of a state- sponsored lottery and a privately-owned airport.

“We have a large and affluent community of Muslims who may prefer banking that’s in accord with their faith,” he said in his government office. “Given that, at a time when the ways of traditional finance are being questioned globally, why not look at alternatives?”

Link: http://economictimes.indiatimes.com/Markets/Stocks/Market-News/Kerala-plans-1st-Islamic-bond-issue/articleshow/5345457.cms?curpg=2

AAOIFI - World Bank Annual Conference on Islamic Banking and Finance

Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), in cooperation with the World Bank, will convene the AAOIFI- World Bank Annual Conference on Islamic Banking and Finance on 14 and 15 December 2009 in Bahrain Conference Centre, Crowne Plaza Hotel, Manama, Kingdom of Bahrain. The Conference is held under the auspices of Central Bank of .

At the opening ceremony, conference introduction will be given by Dr Mohamad Nedal Alchaar, Secretary General of AAOIFI: welcome address by H. E. Shaikh Ebrahim Bin Khalifa Al Khalifa, Minister of Housing, Kingdom of Bahrain who is also Chairman of Board of Trustees of AAOIFI: address by H. E. Rasheed Mohammed Al Maraj, Governor, Central Bank of Bahrain: and keynote address by Mr James Adams, Vice President, the World Bank.

Discussions at the Conference will be led by eminent Shari'a scholars and members of Shari'a Board of the international organisation that formulates standards on accounting, auditing, ethics, governance, and Shari'a for the international Islamic finance industry. AAOIFI also offers professional development programs such as the Certified Shari'a Adviser and Auditor (CSAA) and Certified Islamic Professional Accountant (CIPA), and contract certification program that certifies financial contracts between Islamic financial institutions and their clients comply with Shari'a rules and principles.

"This Conference, which is a premier event for the international Islamic finance industry, brings together the leading Shari'a scholars and Islamic finance practitioners to discuss the challenges and opportunities for the industry especially in the current international financial environment." said Dr. Mohamad Nedal Alchaar, the Secretary - General of AAOIFI

The opening ceremony of the Conference will also see graduation certificates being handed over to candidates who have passed the recent CSAA and CIPA examinations.

The conference is supported by Albaraka Banking Group, Bahrain Islamic Bank, Elaf Bank, Emirates Islamic Bank, Ernst & Young, Gulf Finance House, Khaleeji Commercial Bank, Kuwait Finance House, International Turnkey Systems, Ithmaar Bank, Path Solutions, Qatar Islamic Bank, and Unicorn Investment Bank.

Link: http://www.zawya.com/Story.cfm/sidZAWYA20091212103800/AAOIFI%20-%20World%20Bank%20Annual%20Conference%20on%20Islamic%20Banking%20and%20Finance

Microfinance role vital to alleviate poverty: SBP

Governor, State Bank of Pakistan, Salim Raza on Saturday said that microfinance banks/institutions have a key role to play in creating economic opportunities for the poorest sections of the society by broadening their outreach.
Delivering a keynote address on “ Economic Empowerment for the Base of the Pyramid “ at the Acumen Community Gathering here, Mr. Raza said that the regulatory role develops infrastructure of service delivery, cross fertilizes from researching and encouraging use of successful global practices , and guides the provision of rules and oversight that would enable Microfinance Institutions (MFIs) build sources of public funding and deposits, said SBP release.
In developing economies, the symbiosis between the regulators and the operators will be a critical underpinning for this vital function to pull its weight as a major solution to poverty, SBP Chief said.
Referring to SBP role in supporting the development of microfinance in the country, he said the State Bank is facilitating setting up a microfinance-exclusive credit information bureau to reduce risks associated with microfinance operations and their clients.
SBP has encouraged mobile-banking by issuing branchless banking guidelines and funding a pilot to provide access to remote areas of Pakistan, he said and added that SBP is a pioneer in regulation in branchless banking in South Asia.
He said several initiatives have been taken by the State Bank to support low income financial development. These together form a strategy, which includes measures to address most common causes of banking exclusion; to facilitate and create an enabling environment for banks to address needs of under-served and un-banked segments through dedicated prudential regulations, and through guidelines for Microfinance, SME finance, Agricultural finance and other areas; and to provide alternative finance models such as Islamic Banking which can operate in parallel with conventional banking.
SBP Governor said MFI Ordinance-2001 has been instrumental in catalyzing growth , creating investor confidence and protecting depositors. State Bank has recently amended the Prudential Regulations for Microfinance Bank (MFBs) removing regulatory bottlenecks pointed out by the industry.
He said now MFBs have an increased ceiling on lending limits and relaxed borrower criteria to allow for client graduation. MFBs can now extend micro loans of up to Rs 150,000/- for general purpose and Rs 500,000/- for housing-loan.
Similarly, he pointed out that NGOs are encouraged to restructure into licensed banks, so that they can operate transparently with an adequate capital base, while providing comfort to depositors and borrowers.
To encourage transformation of NGOs into MFBs, the Federal Government in June 2007 allowed a five-year income tax holiday to such institutions and now some large NGOs are in process of transformation into Banks.
SBP Governor also talked about Central Bank’s partnership with the UK department for International Development for a Financial Inclusion Program, which promotes market development through well considered subsidies.
A Microfinance Credit Guarantee Facility (MFCG), worth GBP 10 million has already been launched, he said and added that facility is aimed at increasing wholesale funds for MFBs and MFIs.
Moreover, SBP has recently allowed the microfinance banks/institutions to raise foreign currency loans from international financial institutions and from other social and commercial investors, he added.
He stressed that developing strategic alliances is increasingly important for MFIs to partner with the wider private sector or public sector entities.
As these arrangements capitalize on the comparative advantages of vastly different institutions, they can take many different forms, he said and added that in this context SBP encouraged partnership between the post office (PO) network and MF providers.
Post offices already manage over 4 million savings accounts, mainly small accounts below Rs 10,000, through more than 12,000 branches. Syed Salim Raza pointed out that social entrepreneurs act as the agent of change for society, seizing opportunities others miss and improving systems, inventing new approaches, and creating solutions to change society for the better. While a business entrepreneur might create entirely new industries, a social entrepreneur comes up with new solutions to social problems and then implements them on a large scale, he said and added it is through these new, innovative solutions that we will be able to achieve economic empowerment for low-income populations.

He pointed out that one of the biggest obstacles to the growth of micro, small, and medium enterprises is lack of credit making this available to the poor has the ability for large scale impact.

Link: http://www.nation.com.pk/pakistan-news-newspaper-daily-english-online/Business/13-Dec-2009/Microfinance-role-vital-to-alleviate--poverty-SBP/1

Islamic Banking and Finance Education

Professional membership of an internationally recognized body

First Global Knowledge Centre (FGKC), the pioneer in Islamic Banking and Finance education in Sri Lanka has introduced another innovative programme of study in this rapidly expanding field.
Branded as iBanker, this is a unique diploma level course which covers not only Islamic Banking and Finance but also conventional banking, risk management, and investments.

The emerging industry of Islamic Finance needs qualified people who can contribute positively towards the success of the field. But unfortunately statistics show there is an acute shortage of such a knowledgeable workforce at present. One objective of the introduction of this course by FGKC is to assist the industry by filling this void. For those who wish to pursue higher studies in Islamic Banking or Finance the course will be a stepping stone; which is another objective of the course designers.

Another feature of this course is that it covers the syllabus of the popular world recognized Islamic Finance Qualification exam (IFQ) of the Chartered Institute for Securities & Investment, UK. Therefore, this can be considered as a two-in-one programme which allows a student to get a recognized diploma and also to sit the IFQ (UK) exam.

FGKC is the only accredited training provider in Sri Lanka for the prestigious Chartered Institute for Securities & Investment (CISI), UK which offers the Islamic Finance Qualifications (IFQ). It is also accredited to offer IFQ in the Maldives, Qatar, Bangladesh and Pakistan.

The Chartered Institute for Securities & Investment (UK) is the largest and most widely respected professional body for those who work in the securities and investment industry. Formed as the "Securities Institute" in 1992 by the members of the London Stock Exchange, the Institute got charter status in November 2009.

For those who are interested in obtaining professional membership of an internationally recognized body in the shortest possible time, IFQ is the ideal route. The IFQ course at FGKC is of 3 months' duration and at its conclusion, one can sit the exam which is conducted in collaboration with the British Council, Colombo.

The faculty of First Global comprises of practising and highly qualified experts and academics with a flair for teaching. The students immensely benefit by the lecturers' industry exposure as they gain an insight into the real life applications of theory learnt.

The facilities of the institution include comfortable AC classrooms, a comprehensive library, IT facilities with access to numerous valuable E-Materials related to Islamic banking, finance and related subjects.
Islamic Banking Finance is an ideal discipline for those who are interested in pursuing a career in a dynamic and vibrant environment.

A world of opportunities awaits those who have the vigour and passion to take up the challenge.
The financial and other career benefits that can accrue from one's involvement in the industry are tremendous.

Link: http://www.sundaytimes.lk/091213/Education/edu02.html

How Sharia-compliant is Islamic banking?

The Islamic finance industry has often battled with the question: How Islamic is Islamic banking?

The question's pertinence was raised in March last year, when Sheikh Muhammad Taqi Usmani, of the Accounting and Auditing Organization for Islamic Finance Institutions (AAOIFI), a Bahrain-based regulatory institution that sets standards for the global industry, said that 85% of Sukuk, or Islamic bonds, were un-Islamic.

Usmani is the granddaddy of modern-day Islamic finance, so having him make this statement is synonymous with Adam Smith saying that free-markets are inefficient.

Because Sukuk underpin the modern-day Islamic financial system, one of its pre-eminent proponents arguing that the epicentre of the system was flawed sent shockwaves through the industry.

It also gave ammunition to the many critics who see Islamic finance as an industry more driven by cultural identity than practical problem solving: as a hodgepodge of incoherent, incomplete, impractical and irrelevant ideas.

Recognisable products

The products that modern-day Islamic bankers have created are very similar to conventional products.

So similar, in fact, that to an outside observer they could be considered the same.

Islamic banks now offer Islamic mortgages, Islamic car loans, Islamic credit cards, Islamic time deposit and guaranteed return accounts, Islamic insurance and some even offer Islamic managed and hedge funds.

This point is conceded by Samir Alamad, Sharia, or Islamic law, compliance and product development manager of the Islamic Bank of Britain.

"The industry does not want to alienate its products," he says.

"They have to be recognisable, produce the same outcome as conventional products, but remain within the guidelines of Sharia."

Everything that is not forbidden in the Holy Qur'an is OK

Majid Dawood, chief executive, Yasaar

No interest

The core of Islamic economics is a prohibition on interest.

This immediately creates a problem for Islamic banks, as conventional banks charge borrowers an interest rate through which they can reward their depositors and make some profit for being the broker.

With interest ruled out it is harder to make money.

The modern Islamic banker has found a way around this prohibition, however.

As in many Islamic products, the bank enters a partnership with its depositors and invests his money in a Sharia compliant business.

The profit from this investment is then shared between the depositor and the bank after a set time.

In many cases this "profit rate" is competitive with the conventional banking system's interest rate for savers.

Lease agreements

Alternatively, an Islamic banker might enter into a lease agreement for a car or a house with an individual.

The bank would buy a vehicle outright and then lease it back to the person who wanted it, over a time period that would ensure that the capital was repaid and the bank made a profit.

Alternatively the bank would enter into a partnership with a person wanting to buy a house. The bank would buy 70% of the house, the individual 30%.

The bank then rents its share of the house back to the individual until the house is fully paid for.

The bank makes a profit on the rent, which would be higher than equivalent rents in the area, but on an annualised percentage basis, would look very much like a conventional mortgage interest rate.

To the casual observer, a spade is a spade.

Whether the product is dressed up in Arabic terminology, such as Mudarabah, or Ijarah, if it looks and feels like a mortgage, it is a mortgage and to say anything else is semantics.

Sophisticated finance

The potential wealth locked up in oil-rich Gulf states encouraged the conventional banks to enter Islamic finance.

HSBC established the Amanah Islamic Finance brand in 1998 and Deutsche Bank, Citi, UBS and Barclays quickly joined the fray, all offering interest-free products for wealthy Arabs.

However, this new generation of Islamic bankers had cut their teeth in the City and Wall Street, and were used to creating sophisticated financial products.

They often bumped heads with the Sharia scholars who authorised their products as Sharia compliant.

However, these bankers had a way of dealing with this, as one investment banker based in Dubai, working for a major Western financial organisation explains:

"We create the same type of products that we do for the conventional markets. We then phone up a Sharia scholar for a Fatwa [seal of approval, confirming the product is Shari'ah compliant].

"If he doesn't give it to us, we phone up another scholar, offer him a sum of money for his services and ask him for a Fatwa. We do this until we get Sharia compliance. Then we are free to distribute the product as Islamic."

No consensus

This "Fatwa shopping", which was carried out by some institutions, brings us back to the Sharia scholars.

Even these scholars do not agree all the time, which means that in some cases a product is deemed Sharia compliant in one market and not in another.

This is especially the case with Malaysian products, which are often deemed not Sharia complaint in the more austere Gulf.

"Often no rulings exist for modern day problems, such as use of narcotics," Alamad explains.

"In Islam intoxication by wine is forbidden, but at the time of the Prophet Mohammed there was no crack cocaine."

Modern scholars had to interpret the rules on intoxication, and the consensus was that crack should also be forbidden to Muslims, as it is a dangerous intoxicant.

"This is how we make rulings, whether in finance or societal," Alamad says. "The consensus rules, which usually will become mandatory for all Muslims to follow, but there are some opinions and sometimes scholars are not in the consensus."

	If he doesn't give it to us, we phone up another scholar, offer him a sum of money for his services and ask him for a Fatwa. We do this until we get Sharia compliance Investment banker in Dubai

Banking is banking

This makes it more important to be in the consensus, and so getting a favourable ruling from a leading Sharia scholar is important for a product manager.

That is why the top scholars can earn so much money - often six-figure sums for each ruling.

The most creative scholars are the ones in the most demand, says Tarek El Diwany, analyst at London-based Islamic financial consultancy Zest Advisory.

"To date, most Islamic financiers have been looking at examples of financing in Islamic history and figuring out how to apply them to today's financial products."

But banking is banking.

It is the taking of a deposit and then using it to finance a purchase or business.

The lender pays the depositor compensation for the opportunity cost of his money, and the person borrowing the money "rents" it off the bank.

The same symbiotic relationship occurs whether it is conventional banking, ethical banking, Islamic banking or Presbyterian banking.

As Majid Dawood, chief executive of Yasaar, a UK-based Islamic finance consultancy says: "Everything that is not forbidden in the Holy Qur'an is OK.

"Yes, the industry has to evolve, but it is only 40 years old and its competing with a conventional finance system that is over 800 years old."

Link; http://news.bbc.co.uk/2/hi/business/8401421.stm

Islamic Banking will benefit India more than Muslims: Mufti Abdul Kadir Barkatullah

Mufti Abdul Qadir Barkatullah (second from right) addressing mediapersons at India Islamic Cultural Centre on introduction of Islamic Banking system in India

The Islamic Banking and Finance system will benefit the development of India more than the Muslim community here, said Mufti Abdul Kadir Barkatullah, Islamic Shariah Advisor to several banks and financial institutions in Britain. He was interacting with mediapersons today at India Islamic Cultural Centre in New Delhi.

“The rank and file of the Indian bureaucracy has deep prejudice against Muslims. By allowing Islamic Banking they don’t want to give Muslims undue political capital although it will benefit the development of the country more than the Muslims,” said Mufti Barkatullah, Member, Shariah Supervisory Board at Islamic Bank of Britain, United National Bank, Lloyds TSB and Alburaq of ABC Bank International (UK).

A trained mufti from Darul Uloom Deoband where he also did Alim and Fazil courses before doing B.Sc. (Hons) in Economics in London and M.Phil. in Informatics from the University of Wales, Mufti Barkatullah is on a 30-day visit to India meeting individuals and groups and visiting institutions with an aim to pave the path for Islamic Banking in India.

Asked if Reserve Bank of India can introduce Islamic Banking or it can be done only by the government, Mufti Barkatullah said: Though lawyers have both opinions but the RBI can do it if it has a will to do. RBI can sympathetically interpret the current banking law of the country to introduce Islamic Banking. The British example is there. Fifteen years ago the Bank of England rejected introduction of Islamic Bnaking citing it will harm the current banking laws of the country but around 2000 they were able to find out a way to introduce Islamic Banking in the country without changing the law. They just sympathetically interpreted the law to accommodate Islamic Banking.

Mufti Barkatullah, who has also advised Indian financial institutions like Bajaj Allianz, Taurus Ethical and General Insurance, talked to TwoCircls.net on related issues:

What are the blockades in the way to the introduction of Islamic Banking system in India?

Three main blockades: First is the mindset of resistance to change. The financial world and banks are the last ones to change themselves in response to the needs of the society. Second hurdle is bureaucracy. Bureaucracy is overburdened with current regulatory task, and they don’t want to learn new things. Third is the political bickering. The government and the opposition will use Islamic Banking as a football. So they don’t want to bring this issue in the public and introduce legislative changes to allow Islamic Banking.

Britain introduced Islamic Banking about a decade ago. What important role did the British Muslim community played in this regard?

It is difficult to assess their role but the Muslim community has been very much participatory within the ranks of the ruling Labor Party. So lobbying for Islamic Banking was very much there. Besides, the Labor Party is thought to be traditionally very soft to immigrants. More importantly, the terror attacks in America and UK also gave the feeling that the Muslim community is uncomfortable with current situation, so the UK government designed inclusive financial policy to include every section of the society in the economy of the country. Muslims on religious ground were not participating in the financial system. Most importantly, as US, Europe and Far East were stealing the global economic importance of London, so the British Government wanted to reassert their financial position at international stage and they did it by opening up the Shariah complaint finance. Today there are one retail bank, two retail windows and five investment banks in the country.

Efforts have been made by individuals and groups in India also to impress the government to introduce Islamic Banking system. They have met Finance Minister Pranab Mukherjee and even Prime Minister but these two have shied from giving any clear indication about opening Islamic Banking system in the country. What do you think is lacking with the Muslim community in India?

I can guess that there is not enough pressure from the Muslim community as a united front on the current Congress government. Muslims and non-Muslims, financial world and politicians they all are in the same category as far as their getting convinced on the issue is concerned. I am not surprised that Muslims also need to be won over for the Islamic finance. That’s why Muslim community is not putting enough pressure on the government.

Link: http://twocircles.net/2009dec09/islamic_banking_will_benefit_india_more_muslims_mufti_abdul_kadir_barkatullah.html

Fatwa Shopping

Dubai’s latest moment of turmoil is being talked up as a test of ‘Islamic finance’. But is it really? The problem: in 2006 Nakheel Development Ltd issued bonds to the value of three and a half billion dollars, and can’t pay out when they mature next week. The issue in question is ‘sharia-compliant’. This kind of bond, known as a ‘sak’ (plural ‘sukuk’) has seen huge growth in the Islamic and non-Islamic world over the last ten years.

I’ve explained in the LRB how sukuk work, and how governments and corporations in the West wanting to borrow money are getting keen on them: The UK Treasury had been planning an issue but it went on hold after the banking meltdown; last month General Electric issued $500 million of sukuk with Middle Eastern investors in view. Very roughly, a bond is Islamic when there’s a tangible underlying asset on which the issue is based – for instance real estate – and when there are no guarantees saying the investor can’t lose: risk has to be shared between borrower and lender.

The rapid convergence of Islamic and conventional finance plus the high-level collaboration between intellectuals and product-engineers in both camps have done wonders for sharia-compliant instruments, but there are pitfalls. One is the preference of conventional investors for a guarantee on some kind of return. That’s not permissible in Islamic finance, though if you’re an investment banker or corporate fundraiser you might find a sharia expert who could see a way around the difficulty and put his imprimatur on your product to make it attractive. Looking for a friendly scholarly opinion on a product is known as ‘fatwa shopping’. Way back before the banking crisis, more than one expert cast doubt on the ‘Islamic’ nature of most of the sukuk in circulation and last year one of the two global Islamic finance overseers began trying to tighten up the rules.

Does the ‘repurchase undertaking’ given to the buyers of the Nakheel sukuk constitute a guarantee? If so, then you could argue the bond isn’t strictly Islamic. You could also say investors placed too much confidence in the Emirates food chain: Nakheel is part of the investment company Dubai World, and Dubai World is owned by the Dubai government, whose current level of debt makes it the temporary ward of its friendly UAE neighbour Abu Dhabi. The Dubai government has said this isn’t a state matter and it won’t rescue the issue; meanwhile, few signs that helpful cousins in Abu Dhabi are about to push a cheque across the table.

The Nakheel flop has much less to do with sharia-compliant finance than it does with the property bubble in Dubai. To see how the balance stands between realism and bright-eyed self-congratulation in the Nakheel culture, ‘where vision inspires humanity’, go to their website and then ask how Dubai might look in 2050, when the population of the planet hits nine billion. For minds on the money, that’s only a couple of investments away: a US Treasury long bond purchased in January 2010 matures in 2040; redeem it at term, then buy into some ten-year bonds and all of a sudden you’re there. Somewhere along the road, the little emirate, a long-term beneficiary of geography and geology, will have to find a new purpose in adversity. During the Second World War, Butlin’s holiday camps became quarters for the military.

Link; http://www.lrb.co.uk/blog/2009/12/08/jeremy-harding/fatwa-shopping/

Islamic Finance, The Future Of Banking

Bandar Seri Begawan - Islamic finance is relevant to the current global financial situation, and is the way of the future.

This was highlighted by Mr Mohd Hairul Azrin Hj Besar from University of Brunei Darussalam during a talk as part of the programme for the 16th AFA Conference 2009, which is currently taking place at the Rizqun International Hotel.

The talk was held to answer the question, Is Islamic finance an Alternative for a globalised economy?'

"I'm talking about Islamic Finance, and how it is relevant to the current financial crisis." he said during an interview. "Islamic finance is here to stay, and people should be prepared.

"I will be talking about how it can contribute in economic governance," he said. "It is the way of the future - it is not a fad nor is it a trend.

"I hope participants will come out of this knowing what Islamic finance is about, and look at it in a different way.

"At its current stage in Brunei, more exposure is needed so that we can educate the masses. We lack human resources, and need more laws and regulations for it.

"This is good exposure for Brunei. Hopefully it will show the world that Brunei can deliver in terms of holding conferences."

Also speaking at the session was Prof Ainun Na'im, Chairman of the Academics Compartment IAI, Indonesia.

He spoke about the Principles of Islamic Finance and Banking, which included "Syari'ah laws and values that comprehensively guide individuals in (ritual and non-ritual) life", and prohibition of "dealings with haram (unlawful) services and commodities such as gambling, liquor, etc."

He also said that in business and economy, "Syari'ah laws explicitly state that Allah allows trade (business) but prohibits riba (Ahallallahul Bai'a wa harramarriba)."

Another principle he spoke of was that "Zakat should be included in managing assets, as the obligation to contribute to social welfare," as well as "Segregation between syari'ah and non-syari'ah funds."

Present as moderator for the talk was Mr Makhtar Abdullah, Acting CEO, Centre of Islamic Banking, Finance and Management (CIBFM), Brunei Darussalam.

Day two of the I6th AFA Conference 2009 will be taking place today, as well as the closing ceremony.-- Courtesy of Borneo Bulletin

Link: http://www.brudirect.com/index.php/2009120912038/Local-News/islamic-finance-the-future-of-banking.html

PBR: Islamic finance boost

The Government has committed to create a level playing field on VAT for retail investors in Islamic finance products.

In his Pre-Budget Report statement today, the Chancellor, Alistair Darling, says he will also provide relief from tax on capital gains for alternative property refinance transactions to maintain the UK's position as a centre for Islamic finance.

In addition, guidance will be issued on VAT treatment of alternative finance investment bonds.

Mohammed Amin, head of Islamic finance PricewaterhouseCoopers, says it is a small but important step in keeping the UK ahead of other Western countries.
"I'm pleased they have taken this measure as other countries are competing to attract Islamic financing. It should lead to a little bit more activity in this area," he says.

"But what the industry would really like to see is the issuance of a sovereign sukuk. It would be a major international statement and not be any more expensive than existing funding."

Scott Dakers, head of strategic alliances at Swip, says: "Any changes that create a level playing field are to be welcomed, so long as the playing field is not of a lower level. Islamic finance is clearly a growth area and the way in which transactions can be structured makes a great deal of sense when the structure is about transparency and cost."

Link: http://www.ifaonline.co.uk/ifaonline/news/1565475/pbr-islamic-finance-boost