Islamic Finance Todady Oct Dec 2008

October - December 2008
Islamic Finance Today
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Islamic Finance Today October - December 2008
06 The Financial Meltdown
11
Ancient Values
16
Scope of Islamic Banking
21
Private Equity
23 Non-Muslims in IFIs
25 Ijarah Leasing
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The case for Islamic Finance stronger than ever

oday, at a time when we are witnessing the global financial system being shaken to its very core, it is heartening to learn that Islamic Finance has gained added respectability even in previously skeptical quarters. The built-in features of Islamic Finance that ban highly speculative investments such as seen in modern-day hedge funds and such practices as short selling has meant that it has taken the punch that has knocked out the powerhouse economies of the west very lightly and suffered only a little over a 2 percent dent over this period. For instance, the DJIM Financials Index lost only 2.74% when the crisis was at its peak while almost all other financial indexes globally lost more than a fifth of its value due to the banking meltdown at Wall Street. Grard Al-Fil in his Commentary on the Dow Jones Islamic Market Indexes in September When the night is at its darkest observes that in the wake of the takeovers it is becoming clear that the future of the financial world will take on a completely new shape. Observing that at the beginning of the 1970s former U.S. President Richard hailed the state controlled economic policy of famous economist John Meynard Keynes and declared We are all Keynesians now, he asks whether after banning short-selling, the next US President will announce that we are all Muslims now? . He adds that though this might be far-fetched, the future seems to be bright for a new way of ethical investments; something similar to Islamic Finance. The message of Islamic Finance is: yes, you can earn money, even if you deny short-selling and exclude options, swaps and hedge funds from your portfolio. This is certainly food for thought for the worlds capital markets. This brings us to another important topic, namely, the ideal economic system envisaged in Islam. It is evident that Islamic financial theory is based on the principle of economic
Asiff Hussein - Editor - Islamic Finance Today
development of the masses as a whole as against the benefits of such development accruing to a very privileged few. The imposition of Zakat or the Alms Tax and the prohibition against Riba or interest- based transactions and monopolistic practices are all meant to achieve just this - The circulation rather than the accumulation of wealth so that all members of society could benefit. Ideally, Islam does not know of a financial system that essentially bets on what is going to happen in the real economy as the conventional capital market does. Rather its economic system is based on the real economy. As Islamic scholars point out, the prohibition of Riba along with the imposition of Zakat means that one can invest only by placing ones wealth in the real economy since there is no other avenue to invest such monies. Such monies could either be invested directly in the real economy or through an intermediary in the form of an Islamic bank or financial institution. As saved wealth is subject to Zakat it will be more prudent to invest it, since although wealth invested is also subject to Zakat, it nevertheless brings in profit to the investor and also makes him or her a direct player in the economic life of the nation of which he or she is an integral part. There is another important dimension to it. Taxation in Islam is wealth- based rather then income-based since it is the wealth saved and invested that is liable to taxation, not the income one earns or derives from investments. As such there cannot be income taxes such as we come across in conventional economies. What this means is that individuals will have much more disposable income which can be spent or invested in the real economy. This in turn should create a multiplier effect as money will circulate freely leading to a vibrant and dynamic economic system where all concerned are beneficiaries. This is indeed a far cry from the conventional system where a few benefit at the expense of many. It is therefore high time the concept of Islamic economy and not just Islamic Finance is promoted amongst the rest of the world. Islam, after all, is meant for all mankind.
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Islamic Finance Today is a magazine exclusively dedicated to Islamic Banking & Finance published by Pioneer Publications (Pvt) Ltd. It contains a variety of interesting features on various aspects of Islamic banking and finance as well as other information of relevance to the Islamic finance industry. No part of this publication may be reproduced in any form without the prior written permission of the publisher. Views expressed in this magazine are not necessarily those of the publisher.
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REPORT
The financial meltdown

and its implications for Islamic banking
By Roshan Madawela - Research Intelligence Unit
The mentality of reckless greed and the resulting spread of toxic financial externalities into the real economy can be viewed as being diametrically at the opposite end of Islamic finance, in theory at least. This year has witnessed the most serious breakdown in the US financial system in some 70 years. However it is not only the US that has been affected. It has spread out across the globe touching Islamic finance as well.
hould we be surprised? Many commentators have been forecasting something of this nature for a number of years based on the underlying concerns regarding the US economy. The Research Intelligence Unit for example has been following the series of events that have led up to this years collapse and gave out warnings of such a shock for a number of years. Whilst no one could predict the precise moment of events as they unfolded, many were sounding the alarm that the rails were loose but the train kept on moving at full speed until its inevitable derailment. As economist James Galbraith says, a well-functioning financial system has rules and its when the rules are relaxed that shady practices and get rich quick schemes flourish. This is what happened in the [sub-prime] mortgage system in 2005 and 2006, triggering off a bigger collapse. This collapse has spread out to the entire globalized economy. The implications of the financial crunch and the subsequent bail-out on the US economy and its currency, the global commodity markets, on other major economies in Europe, India, China and the wider world are yet to be fully realized. There are of course developing nations like Sri Lanka, for instance, which is said to be somewhat insulated from the US led meltdown due to the lower
Financial meltdown....
REPORT
levels of financial integration with the global system. However, many people with foreign income are affected and this would have an impact on the demand for luxury goods like local condominiums and vehicles. For the average citizen, the impact of lower demand for the islands exports will have a significant impact on their economic well-being. The garment industry was perhaps the first to feel the pinch from declining US demand. Moreover the uncertainty regarding the availability of finance as well as the negative sentiments prevailing in most of Sri Lankas export markets has hit many exports. The negative impact on the Colombo tea auctions has been acute to the extent that the government had to intervene with a home-spun bail-out package.
accurate prediction was followed by 20 percent interest and 25 percent inflation. In another example, Business week, Feb. 20, 1984, stated, The worst market for traders is a stable one.... Investment banks now have a greater than ever vested interest in market instability. They can rack up enormous profits by guessing right about rapid, wide swings in profits, prices and interest rates. It is obvious that they can rack up enormous profits if they know in advance what the monetary decisions will be. Eustace Mullins in his book The World Order A Study in the Hegemony of Parasitism (1985) says: Anyone who seriously believes that no one knows in advance what Federal Reserve decisions will be is too naive to be allowed out on their own; anybody who believes that there is no one who can tell the Federal Reserve Board what its policies are to be is even more out of touch with reality. According to some sources, including Bloomberg, the bailout itself is likely to result in a skewed distribution of rescue funds. As the man in charge of the rescue package is a Wall Street veteran, the Wall Street bailout has the danger of being biased in favour of the special interests that have a greater influence on those holding the purse strings. Goldman Sachs and Morgan Stanley are amongst some of the names that are said to be in the list of institutions that will benefit disproportionately from the $700 tax-payer allocation. With some ten percent of the $700 billion going directly to those responsible for the mess in the form of due payments and incentives to top executives, the guilty dont seem to have done too badly this time around either.
Conspiratorial context
So how long will the global recession last? From a historical perspective, the series of events that have taken place of late are in keeping with the recent pattern that has been characterized by a shift in economic power from the West to the East, particularly in the direction of India and China. The markets in Europe have had severe slumps at various times during the past few decades and recession has always followed. The early nineties was a case in point for the UK whilst the US had a recession in 2001. Meanwhile, strong growth has characterized Asian economies during the same period with increasing trade volumes being a driving factor of the growth. The difference with the latest shock to the market is the sheer magnitude of the collapse that has touched all corners of the world economy. However, if we go back even further, to the 19th century, we could find some comfort in the knowledge that financial markets have always fluctuated, slumped and recovered. Conspiracy theorists have always asserted that shadowy and powerfully figures that lurk behind the scenes have always made a killing on depreciated stocks each and every time there was a recession or depression. The grey area between public and private finance is said to offer ample scope for taking advantage of such times for those on the sunny side of asymmetrical market information. A case in point, when Napoleon escaped from Elba in 1815, the London gold market hiked overnight by over 25 percent as the UK treasury gave orders to dispatch gold to the Duke of Wellington who was preparing to stop Napoleon with military force. Only following the decisive battle of Waterloo did gold prices ease. So those in the know made plenty of bucks in the meantime. Returning to this generation, Gary Allen wrote in 1979; Whatever the future holds, you can bet it will be unstable with wide swings in the value of the dollar and precious metals. As long as Volckers sponsors know in advance what his policies will be, they will make big money. This
Shariah consequences
Some observers have claimed that Islamic finance which has been on a spectacular growth path over the past seven years might actually benefit from the collapse in confidence in the conventional financial system. The financial consultant agency BDO Stoy Haywood for instance has claimed that increasing numbers of investors will now turn to the Shariah compliant financial sector as they have far less exposure to the toxic debt that characterizes the US finance institutions. There is information from the UK to suggest that this is already taking place, not just amongst the Muslim communities but also amongst nonMuslims who are vexed at whats going on. Statistics tell their own story. The Dow Jones Islamic Market (DJIM) index only lost 2.74 percent in September whilst almost all other indices around the world shed around 20 percent. The Sukuk (Islamic bond) index of City group was the best performer, loosing only 0.27 per cent and was the only index anywhere to remain positive for the year to date
REPORT
(October). However, the overall level of sukuk issues for the year thus far remains well down as compared to 2007. The Secretary-General of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) told a conference in Dubai recently that only $14 billion worth of sukuk had been issued so far this year, compared with $40-50 billion last year. Many jobs are also at stake as the current crisis is likely to shift the labour market supply curve to the right. With lots of moving and shaking going on in the conventional sector as everyone from the janitors to senior banking professionals feels the threat of retrenchment, Islamic banking could use this opportunity to do some head-hunting that can compensate for the gap in current demand for qualified Shariah compliant finance professionals. Failure on the part of vocational and academic institutions to keep pace with the demand for professionally qualified people in the Shariah compliant industry has resulted in a shortfall in professionals amidst growing demand. Other opportunities may also arise with more high-networth individuals switching to the safer bet Shariah compliant option. The operation of Wealth Management arms of conventional banks as well as independent financial agencies have witnessed strong growth in recent years especially in South Asia where there has been an increasing demand for wealth management services amongst a growing middle and upper class. However, anyone expecting a sea-saw effect on the Islamic finance sector would be out of touch with reality. The financial crunch has resulted in falling commodity prices, especially oil along with a marked drop in real estate prices which has started to hit the Shariah compliant sector. The direct impact comes from the fact that the
Shariah compliant sector relies on these real assets in order to support Shariah compliant finance deals. So to some extent, the current situation has demonstrated that Islamic finance is operating in a distinctly un-Islamic economic system whereby Shariah compliant windows get directly affected when the house catches fire.
Opportunities
So to some extent the current situation offers an optimal opportunity for Islamic economists and academics to put forward an alternative system. Adnan Khan notes a number of key points that we can build on to stress the fundamental difference between the two systems of finance and economics. Some of these differences are fundamental and too far reaching to deal with in the short term even though the glaring weaknesses in the conventional system have surfaced for all to see. Take for instance the paper currency system that is backed up by absolutely nothing tangible since 1972. Any system claiming to be Islamic has to be based on silver, gold or a similar commodity of value. Likewise Islamic economics cannot promote a so-called dual-economy separating the financial and real segments. Everything would be real. Much of the dealings that take place in the financial economy are anyway prohibited under Islam. Banks would be active in performing many of their functions as collectors of deposits in order to reinvest funds in to the real economy. Similarly, under an Islamic system taxation would be based on wealth and not income. Ownership rights too would be distinguished into state, public and private. Many resources would fall into the category of public property whereby their benefit would have to be open for enjoyment by all citizens. This is derived from the hadith
REPORT
of the Prophet: Muslims are partners in three things: in water, pastures and fire. The implications of this hadith is that water resources, forests, firewood, pastures for livestock, electricity and oil fields and refineries belong to the community. Thus, the privatization of water for example would not be permitted.
cut. These included the US and the UK which slashed their rates by 0.5 per cent whilst China, Canada, Sweden and Switzerland also cut their rates. The IMF supported the move that was aimed at mitigating the impact of the credit squeeze on the real economy. Offering some hope for the battered economies, the IMF report did claim that there is no risk of a Great Depression. However, subsequent information suggested otherwise as economies in Europe including the powerhouse Germany which claimed they were now officially in recession. A G20 meeting was hosted by G.W Bush in November where further attempts at facing the challenge in concert were made. This represents a style u-turn on the part of the most unilateral US leader as his last days in office seem to have witnessed a shift towards multilateralism. The coming year 2009 is likely to pose stiff challenges to the Islamic finance industry despite a steady and consistent increase in the demand forecast. Lower credit availability in 2009, slack demand from the developed world that will reduce commodity prices, and uncertainty regarding currency are all likely to pose serious challenges. In the final analysis, there will be few winners. Politically, the evolving scenario is likely to offer greater influence and sway to the larger developing nations on the world stage. This might also open more doors for Shariah compliant finance to be discussed and debated on the world stage. One can only hope for change that will lead to the emergence of a more ethical economic system for all concerned. Sources : Al Jazeera, BBC, Bloomberg, China Peoples Daily, Conway, Edmond, IMF, www.informaitonclearinghouse. com, Kettell, Brian, Pakin, Brian, Research Intelligence Unit, Trends Research, Eustace Mullins.
Outlook
The Shariah compliant sectors ability to draw in both Muslims and non-Muslims will depend on how well this alternative system is marketed as a more stable and ethical long-term option. The industry will also have to withstand opposition from anti-Shariah finance groups, mostly based in the US who spread myths about its dangers to Western civilization. Essentially, the message that the Islamic banking sector engages in lower risk profile investments should be in tune with current times. It also abstains from a number of unethical practices including short-selling which describes selling a stock which you do not own in order to benefit from its falling price. Even the US banned this practice for a limited time in the aftermath of the Lehman collapse but then reversed the ruling. The world economic outlook report of the IMF has claimed that the world economy is entering a major downturn in the face of the most dangerous shock in the mature financial markets since the 1930s. Whilst the global economy grew by 3.9 per cent in 2007, the forecast for 2008 has been revised down to 3.9 per cent and just three percent for 2009. This would make 2009 the worst year since 2002 according to the IMF. Since the report was released, the Central Banks of a number of powerhouse economies made a unison rate
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10 Islamic Finance Today October - December 2008
OVERVIEW
ANCIENT VALUES CREEPING BACK INTO THE EUROPEAN ECONOMY

Islamic finance on the rise in Europe
Alberto Brugnoni, President, Associazione per lo Sviluppo di Strumeuti Alternativi e di Innovazione Finanziaria (ASSAIFI)
emand for finance based on Islamic religious principles has been skyrocketing across the globe for years originally driven by demand from HNWIs and institutions in the Middle East - typically a reallocation of oil-derived wealth into Islamic products. This is hardly surprising considering that approximately one person in four in the world is Muslim. This has also meant that both the need for halal investment opportunities has grown as well as the desire to finance them in accordance with Shariah principles. Most of this activity has focused on infrastructure and real estate projects and has been supported by the possibility of emulating more and more conventional products in a way that complies with Shariah through the use of modern techniques to structure relatively complicated financial transactions. In a nutshell: the growing sophistication of financial products means that HNWIs and institutional demands are now satisfactorily met The new aspect of this activity is the emergence of the demand of religious-based finance in non Muslim countries
and, in particular, in secularized Europe. But this should hardly come as a surprise as the interaction between economy and religious and ethical issues is an old story in Europe, a continent home to some of the fiercest religious wars that humanity has ever known. The Old Continents
economic history is a vivid example that the intertwining of economic and financial activity and religious beliefs and traditions are never carved in stone but are constantly evolving to provide insight and answers to contemporary questions. This has been true not only for the churchs Canon law but also for Islamic Shariah today. As we know one of the meanings of the word Shariah is path to the
Islamic Finance Today 11
European economy....
OVERVIEW
water source and this etymology alone proves that Shariah is not a finished, petrified work but is a constantly adapting framework of rules searching for responsible solutions for issues affecting Muslims daily lives The pent-up demand for banking and finance products that ultimately need to be assessed by an Islamic scholar is today on the rise and finally coming to light in Europe. These are finance products based on a number of guiding principles that have guided commerce in the Islamic world for well over fourteen centuries, such as the prohibition on usury; the prohibition of investments in gambling, pornography, tobacco, pig products and alcohol; the requirement that investments be focused on real trade rather than speculation and an endless securitization process. It is of interest to note that these principles are themselves steadily making inroads into the mainstream conventional banking scene and have been widely discussed during the last US-originated financial turmoil. This conventional banking scene has been exposed to a rib-free approach
to financing since the 1920s when the Eastern Bank the predecessor of Standard Chartered - and Nationale Handelsbank - the predecessor of ABN-Amro - were allowed to bank in Bahrain and Jeddah respectively on condition of avoiding all interest based transactions
Reasons
What are the reasons for the awakening of this demand? They are manifold: - Firstly is the fact that Islam is Europes fastest growing religion with many countries recording a rapid rise in their Muslim populations coupled with the steady growth of the Muslim affluent middle class in Europe. We know for a fact that Muslims in the developed world and Europe account for 50% of savings from middle-class Muslims worldwide. This, I suspect, will be the drive of the next stage in the growth of Islamic finance as the European Muslim customers preference for halal management of their financial affairs becomes more and more self asserting.
OVERVIEW
- Secondly, a growing interest in halal finance products has also been observed among non-Muslims. The conventional European banks and institutions investments in Sukuk has been mirrored by private investors who also wish to factor ethical and/or religious aspects into their investment decisions. By choosing Shariah-compliant products they can be sure that they are not investing in unethical areas. And devout Christians and Jews can be sure that the interest ban, which can also be valid for them, has been observed. In sum: the Islamic bankers and financiers initiatives and innovative approaches have attracted investors still on the look out for ethical or Sharia-compliant investments - Thirdly, the spate of licensing and permits that has allowed the start of consumer banking operations according to Shariah - particularly mortgages, insurance and loans - has been facilitated by governments policy shifts that have called for greater attention to the needs of Muslim communities in Europe. Authorities have started accommodating demands that, although made repeatedly over the years, had regularly been brushed aside: the fear of alienating a sizeable percentage of European society and security risk consideration have played a role in this change of official attitudes - Fourthly, government policy makers and the conventional banks have begun to view Islamic banking and finance as a lucrative business opportunity and not just a sop to the ethnic minorities. Also: there is also an increasing number of professional investors who want to include Islamic finance products in their portfolios for reasons of diversification. This is true despite the reservation that many Shariah-compliant finance products cannot yet fully compete with conventional products as far as the price-performance ratio is concerned due to their intrinsically complicated structure It is therefore safe to draw a first conclusion: Islamic financial products are moving, albeit very slowly, from niche products to the mainstream in continental Europe. The number of events, seminars, newspapers articles and university dissertations bear testimony of Islamic finance coming of age in the Old Continent!
new environment just depicted poses for the legislator, the regulator, the banking industry and for institutions wishing to provide Islamic financial services in Europe, lets see the two major hurdles The first one, a sort of philosophical or perhaps psychological barrier, revolves around the fact that the European banking system is, for the first time in its modern history (I would say since at least the XVII century but, on many accounts, well before) confronted with the emergence of models of credit brokerage based on principles that are religious in nature. This is sending shock waves throughout the system! Bankers are discovering that knowledge of fourteen hundred-year-old religious principles is as much an asset as the ability to write clever algorithms. This, in turn, has a practical consequence that poses the second major hurdle: the financial products and concepts behind Islamic finance are basically unfamiliar to the regulators and the business community and the lack of precedents raises very practical issues in accounting, fiscal and regulatory matters. Although Islamic financial products have equivalents in conventional banks, the theory behind them raises complex accounting issues on how to treat them. Just to name a few: whether products should appear on the balance sheet; whether a product should be classified as a financing product or a leasing product; whether an investment should be classified as an equity investment or a loan. All these issues are hampering the development of Islamic finance in Europe.
Challenges
Challenges to the legislator - the creation of a uniform level playing field or, in other words, the existence of a comparable legal and, in particular, tax law framework for conventional and halal finance products. One of the biggest issues is the tax treatment of Islamic customer deposits and whether the expenses paid out on these deposits should be tax deductible. The double stamp duty, or registration tax, is an issue shared in all continental Europe but swiftly resolved in the UK a few years ago. With regard to indirect taxation, that must conform with EU legislation, progress on the extra VAT (Value Added Tax) for murabahah transactions is still to be made. Another example is the issue of whether customer deposits under the mudarabah model should be on or off the balance sheet - which, in other words, is the issue of the difference in the level of risk that the depositor assumes in the Islamic versus the conventional system; this has clear implications for the deposits protection scheme. All these existing obstacles must be analysed and removed or mitigated
Hurdles
Lets now proceed further in our analysis. But before moving to the challenges that the
OVERVIEW
Challenges to the regulator - the banking supervisors must begin to figure out how to assess Islamic finance products, their risks and the amount of capital these institutions need to hold. The solution find by the FSA with regard to the Islamic Bank of Britain is only half satisfactory. As the turmoil on the markets for structured finance products has shown dramatically over the last few weeks a decisive factor for adequate risk assessment is that banking supervisors and, in particular, institutions be able to fully comprehend the structure of the products on offer. For this reason some European central banks have successfully pressed for the inclusion of provisions governing halal finance products in the Capital Requirements Directive, which transposes the Basel II framework into European law
homes or for investing their assets in a Shariah compliant way while at the same time productively. It can be said that a gap is wide open between the supply of and demand for Islamic finance products and that this sector will only take off if savings take off, and if Islamic products are available for it - but even for products aimed at institutional investors there is a shortage of liquidity. For example, banks have still to resort for the management of their liquidity to murabahah transactions as there is no tradable salam sukuk available - banks located in continental Europe face the challenge of using attractive Islam-compliant services in the retail banking area as well as target group-oriented marketing to tap the dormant capital of the Muslim population. The issue of advertising and proper communication remains unaddressed as, for example, the key fact that Islamic finance is neutral and accessible to all whatever conviction one might have - cost for faith: Islamic retail products available in the market have traditionally been expensive - lack of education. Consumers lack knowledge about products that comply with Shariah. The UK is a notable exception and something is also happening now in France and Italy The internal challenges can, on the other hand, be summarized as follows - rigid yet unclear religious rules: while institutions have no latitude in implementing the strictures of their religious advisors, the advice itself is not necessarily consistent between advisors. Shariah compliance itself remains a thorny issue as we have recently seen with the Sukuk saga. While the formation of the AAOIFI should help drive standardization, individual interpretation will always play a role - Islamic financial institutions will also face additional regulatory challenges, not only around Basel II, which I must say is probably dead, but also the capital requirements mandated by the Islamic Financial Services Board in Malaysia - the Islamic products are inherently complex, raising concerns about risk management - the growth in Islamic finance is driving staff salaries higher
- the necessity to have a Shariah Supervisory Board as a sole authoritative body to advise the Central Bank on Islamic banking and Takaful matters is still to be addressed. This body should exert a priori control on the Shariah advisory boards of Islamic institutions and a posteriori control to coordinate their activities. It shall be referred to by a court or an arbitrator in disputes involving Shariah issues in Islamic banking and finance
Some of these challenges relate to the market as a whole and some to the banking industrys own capabilities The market challenges can be summarized as follows - a shortage in the number of financial service providers offering solely halal finance products or offering these products via Islamic windows. There is also a lack of qualified specialists for the Islamic finance market segment - the supply of Shariah-compliant finance products is still largely geographically constrained as the bulk of Islamcompliant financial transactions take place in London. Consequently, it is difficult if not impossible for the large number of Muslims who live in continental Europe to access these services. There have been initiatives to establish halal finance products in other EU countries but so far these efforts have had rather limited success - the range of Shariah-compliant finance products is currently not sufficient to meet the substantial rise in demand. The bulk of Islam-compliant financial products that are available outside traditional Islamic states and the UK are primarily aimed at wealthy private and institutional investors. Hardly any service is aimed at the middle-class Muslim population of continental Europe who have almost no possibilities for financing
Challenges to the banking industry.
A look forward
Reduction of legal or fiscal irritants - legislators are called upon to follow the way of Hong Kong, Singapore, Malaysia and Japan and to lay the
OVERVIEW
foundations for a level playing field for Islamic finance in each European country. This will require minor changes in the law and in the administrative rules on the model of what has been done by the UK government in the past few years. This will contribute to the governments effort to combat the social exclusion of Muslims and should, of course, be backed up by courses and qualifications in Islamic finance - European banking supervisors have to rise to the challenge of adequately assessing the risks associated with Islam-compliant finance products - the banking industry is faced with the task of providing an adequate range of Shariah-compliant finance products to meet growing demand and to develop new customer bases Convincing the European public of the soundness of Islamic investments as an ethical, modern viable finance alternative - The current mayhem gives Islamic finance a keen opportunity to lead the way and move from focusing on expedited transactions and on a few narrow prohibitions and contractual concerns to a more comprehensive stakeholder approach. The Islamic faith creates an entire social order of which customer relations and the health of future generations are a vital part. Islamic finance is expected to follow suit by establishing a model by which conventional banking could be re-imbued with ethical norms. Let me give you two examples: - while private property is defended, individual rights are subject to the rights of others in the community to benefit from environmental resources such as water, forests, air and sunlight. These are held in common by all members of society. If you degrade a resource, you are accountable for its use and liable for its repair. Islams environmental and social concerns are echoed in the Equator Principles and the UN Principles for Responsible Investment, yet no Islamic financial institution has signed up to these instruments, leaving secular European institutions to lead the way. Adapting the Equator Principles for Islamic purposes might represent a way forward that does not stretch the already overburdened Shariah board system and could be a major marketing success - special care is taken in Islam to prioritise the interests of the weak and vulnerable. There is even a process in Islam akin to the assessment of impacts on stakeholders and the resolution of conflicts between them so as to maximise the overall public interest, known as maslahah mursalah. But this is pretty much the paradigm of Socially Responsible Investing (SRI)! For with its injunctions against investing in financial
products linked with alcohol or tobacco, and, more generally, with its use of criteria and rules at odds with standard western practices, Islamic finance bears a striking resemblance to SRI. What is more, the growth in Islamic finance in the west may in turn serve to break down more barriers for SRI advocates pushing for the greater use of non-financial investment criteria by western investors. This will also be of mutual benefit as special attention would be paid as to the compatibility with Islamic social concerns of private sector involvement in infrastructure development, an issue often disregarded by Islamic finance.
Conclusion
So, where do we go from here? While in the short term the GCCs and HNWIs are likely to continue to represent the largest share of Islamic finance in the EU and particular in London, the longer term prospects will be shaped by developments within Europe and by further EU enlargements I leave aside the problem of the negative perception by the European public opinion of Shariah as an imposition and not as a choice - the first issue is whether full retail Islamic banking services will be provided for continental Europes Muslim population. Although the EU functions as a single market, banking and financial regulation is devolved to member states. While the debate is still open on the compatibility of Islamic activities with each member states domestic banking regulatory system and on whether it is necessary to identify other norms that actually permit the legal regulation of the Islamic model, the use of the so called EU passporting - where an institution authorized in a EU country (in our case the UK) may offer products throughout the EU without the need to have separate authorization - offers a viable way for such an institution to start operations in any EU country. The second EU directive on banking (646/1989) with its two fundamental principles of mutual recognition and prudential vigilance also facilitate, at least in principle, the opening of such a bank
- the second issue is the EU enlargement to encompass countries and regions with long established Muslim populations in the Balkans and, of course, Turkey with its 70 plus million inhabitants is a critical country. Turkey, an aspiring EU member and an active member of the Organization of the Islamic Conference but also of NATO and other EU bodies, has been involved in Islamic banking since the 1980s, has more Islamic bank branches, or special finance houses, than any other European country. Turkey can serve as a bridge between the EU and the wider Muslim world!
FOCUS
Scope of Islamic Banking for the Indian Economy

Syed Zahid Ahmad
he fall of many financial sector giants and insulation of Islamic Banking during the present crisis in the financial sector is drawing the attention of many Economists towards Islamic Banking. Relevent here are the recommendations by the Raguram Rajan Committee for Financial Sector Reforms in India: Another area that falls broadly in the ambit of financial infrastructure for inclusion is the provision of interest-free banking. Certain faiths prohibit the use of financial instruments that pay interest. The nonavailability of interest-free banking products (where the return to the investor is tied to the bearing of risk, in accordance with the principles of that faith) results in some Indians, including those in the economically disadvantaged strata of society, not being able to access banking products and services due to reasons of faith. This non-availability also denies India access to substantial sources of savings from other countries in the region.
Indian economy....
FOCUS
While interest-free banking is provided in a limited manner through NBFCs and cooperatives, the Committee recommends that measures be taken to permit the delivery of interest-free finance on a larger scale, including through the banking system. This is in consonance with the objectives of inclusion and growth through innovation. The Committee believes that it would be possible, through appropriate measures, to create a framework for such products without any adverse systemic risk impact. It would be interesting to see how the Indian Government reacts to these recommendations because the committee has proposed to set a working group for financial sector reforms. We feel that there is a need to understand the economics of Islamic banking for the Indian economy.
because it adheres to a strict credit rating system by disallowing indebted economic agents to avail more debt finance. The strict regulations for credit rating under Islamic banking could save our financial and economic enterprises from bankruptcy. The Islamic banking mechanism would certainly strengthen the credit rating system to provide security of funds for depositors and investors. Moreover since equity finance by Islamic banking allows the banks to recover the assets by right of ownerships, it would be fairer on the part of financial institutions to recover assets in case of bankruptcy or crisis by any individual or enterprise.
Islamic Banking for Inclusive Growth:
Prospects for Islamic Banking in India:
A few companies are already dealing big in Shariah Investment funds. Many financial sector players are eyeing the trillion dollar worth Islamic investment funds. Parsoli and Eastwind have launched their Islamic Indices; and Reliance Money and Religare have launched Shariah compliant PMS, and Indian Stock market is observing fair business in Shariah Compliant Stocks. If China is going for Islamic banking to attract Islamic Investment Funds, why should India hesitate developing Islamic banking with 150 millions Muslim who may help to pool around one trillion dollars Islamic investment funds from Gulf countries and that too on equity basis which may keep Indias national current account and fiscal deficit under control?
Islamic banking is more desirable for achieving Inclusive growth in India. It is interesting to evaluate the probable impact of Islamic banking in different segments of the Indian economy. Islamic Banking has the potential to tame the liquidity and inflation problems along with allowing inclusive growth. Structural changes in the Indian economy during the post-reform period are no barometer for equitable growth. For real inclusive growth, we have to ensure an increase in income and employment status of workers in all segments. Empirical evidence reveals that though India has registered a better growth rate in recent years, the number of poor living below the poverty line has increased. Indias household consumption which has declined in recent years is driven by household income; while corporate savings reflects income of the corporate sector which has increased over the years during the last decade and half. The fruits of growth seem to have favoured more the corporate sector than vast sections of population below the poverty line. Similarly the share of the financial sector in the GDP has increased in recent years. It is well known that the SCBs extend debt finance. The interest component ipso facto becomes part of GDP. Interest rate sensitivity to inflation is well known. However, equity finance if extended with far lower costs of credit has potential to restrict inflation and there is enough evidence from West Asia in this regards. Simultaneously the dividend shared by depositors on equity finance helps equitable distribution of income generated by the financial sector. Once the basic difference between the debt and equity credit is understood, it will be easy to appreciate its potential contribution to better economic growth. Low collateral strength of farmers and poor workers associated with unorganized sector manufacturing units and retail service outlets does not encourage SCBs to
No visualization document for Islamic banking in India:
So far Islamic banking has been considered as a religious matter for Indian Muslims and thus it was subjected to financial segregation, for fear of the threat of parallel banking system along with a hidden fear of SCBs loosing Muslim depositors. There has never been any public committee analyzing the impact of Islamic banking in India because Muslims of India were never so evocative about features of Islamic banking in India. Though the concept of Islamic banking is driven by the ethics of Islam, it has more economic rationality compared to its religious rigour which needs some genuine study by professionals having basic knowledge of Islamic banking with expertise on the Indian economy because Islamic banking carries more advantageous features to boost real sector economy compared to financial sector.
Islamic banking and bankruptcy :
Islamic banking also restrains the chances of bankruptcy
FOCUS
Indian economy....
extend more debt finance. With schemes of loan waiver, the debt markets are shrinking in the agricultural sector. Even the SHGs and JLG schemes of Micro Finance have failed to add livelihood stocks for the poor and vulnerable. Inequitable distribution of resources has led naturally to serious imbalances both across sectors and regions and need systemic corrections that are possible with the new instrumentality of Islamic Banking. It is time that the policy makers realise these options as imperative at this moment of economic history when youth unrest is being exploited by terrorism. A big price has been paid by the economy and it cannot afford this any longer. Insights into Islamic banking reveal its potential to build infrastructure for our agriculture sector where the economies of scale are hostile to adding new infrastructure to the farm worker households. Islamic banking could also help our unorganized sector due to its non-insistence on collateral as a precondition for lending even small sums of money. This would also alter the desperate labour-capital ratios in rural India, in particular, in States like Uttar Pradesh, Bihar, West Bengal and the seven sisters of the North East. Financial empowerment of the vulnerable sections of the population is a possibility with Islamic Banking. Islamic banking may also induce our political leaders to substitute grants and subsidies with equity finance schemes through specialized financial institutions because equity finance allows access to credit without adding debts to borrowers. Equity Finance helps achieve selfreliance. The stabilization funds for poor farmers / artisans may be utilized to experiment such finance. Islamic banking unlike what many think has less to do with religion than with economics.
Islamic Banking and Financial Inclusion:
Though we do not have any survey to compare community wise financial exclusion in India, the study of data available through the Sachar Committee report reflects Muslims are a most disadvantaged community in the financial sector. Muslims have over 80% financial exclusion due to interest based deposit and credit schemes available with financial institutions and SCBs. Due to restrictions on Islamic banking India, the financial sector could not attract even the rich Muslims to partake in the growth of India. Even lower worker participation in institutional growth is seen from the Muslims employed in the financial sector, if one were to go by the statistics put out in this regard: RBI and SCBs, have just 0.78% and 2.2% share of Muslims in employment with RBI and SCBs. Similarly the participation of Muslims in specialized financial institutions and corporations like SIDBI, NABARD and NMDFC is also desperate. it is hard to believe but true, that even Institutions like National Minority Development and Finance Corporation (NMDFC) have no Muslim managers.
Indian economy....
FOCUS
The Sachar Committee Report reflects that Indian Muslims have a share of 7.4% in saving deposits while they just get 4.7% in credit (in terms of PSAs). If we consider this as a standard proportion in national aggregate deposits at and credits by SCBs according to the annual report of the RBI for the year 2007-08, Indian Muslims annually loose around Rs. 63,700 crores because Muslims would have a credit deposit ratio of 47% against the national average of 74%. It shows that Indian Muslims annually lose around 27% of their deposits (by not availing of credit). After Islamic banking this deficit may be removed to curb financial loss to Indian Muslims. With 31% Muslims living below the poverty line, this big deficit of credit is apparently a serious economic disadvantage. Muslims avail just 4% and mere 0.48% credits from special financial institutions like NABARD and SIDBI respectively because there too the community has to indulge in interest which is strictly prohibited in Islam. Of course, although it is well understood that the credit worthiness does not get related to either caste or creed but on the related assets and repayment capabilities the underlying assets could generate, quicker and easy access to finance has the innate potential for asset creation and related product markets at least in the domestic environs as proved in the SHG group efforts in the southern States. The schemes launched by RBI, NABARD, SIDBI and the Ministry of Finance for financial inclusion focus on providing access to credit and other financial products. The fact is that interest-based banking system has a potential for exclusion of a great majority of Indian Muslims. On the other hand, introduction of Islamic banking will allow the Muslims to work with other community members in the banking sector. This would definitely help India build its economy. The introduction of Islamic banking in India apart from
pleasing 150 million Indian Muslims, the second largest community of India will also help the government gain diplomatic advantage to make financial dealings with Muslim dominated nations and especially to attract trillion dollars of equity finance from the gulf countries. With the fall of giants in the world financial sector like Lehman Brothers in the aftermath of the US sub-prime mortgage crisis, we need to be alert to the alternate sources from where FDIs could flow into the Indian economy and Islamic nations are the potential alternatives. Our opening the doors for Islamic Banking at this juncture would also accelerate the fund inflows and slight decoupling of the US Dollar to inviting the Euro. Since Islamic Banking encourages equity finance even the small players could enter the Equity Markets and the SME bourses likely to come into being shortly would have better access through Islamic Banking channels as the SMEs mostly have inadequate collaterals to offer for their expansion needs in their growth stage.
Islamic banking and nationalized banks:
It must be made clear, however, that Islamic banking is not a childrens game. It requires even better professional expertise compared to conventional banking because it deals more with commercial projects than mere monetary credit and debit transactions. Indian Muslims may feel privileged in terms of Islamic ethics required for Islamic banking but they certainly lack professional efficiency to manage modern commercial banking on Islamic ethics. The organic link between Islamic and nationalized banking emerges from the innate professional competencies developed by Institutions like the SBI, Bank of Baroda, Bank of India and Corporation Bank that has recently opened its representative office in Dubai with a view to raise itself to the status of a commercial bank. Under an Islamic banking mechanism the thrust would be on equity deposits and credits while interest charged would be replaced with profit margins on commercial credits and interest expended over deposits would be replaced by dividend on equity finance with deposits mobilized as equity deposits by banks. It is expected that with the introduction of Islamic banking in India, the first choice of depositors and investors would be nationalized banks as despite conflict of interest, Indian Muslims have a confidence in nationalized banks. To ensure the safety of deposits, the majority of Muslims depositors would prefer to join Islamic banking managed by nationalized banks.
FOCUS
Indian economy....
However it is expected that Foreign Investors looking to invest in India through Islamic banking, would prefer to have services of foreign banks. As far as Indian Muslims are concerned, they will have to make an effort to find their place in managing Islamic banking in India because they lack the required financial depth; infrastructure and more importantly they have poor credibility among the depositors and investors due to some past failures of financial institutions. Interest-free banking could also incorporate Muslims into the formal financial sector. Through this financial inclusion of Indian Muslims to formal sector Islamic Banks, it is expected that Indian nationalized banks may see additional savings and credit which may help banks to gain higher rate of profits compared to their SLR. After the successful operation of Islamic banks by the nationalized banks, private banks could also enter into the business of Islamic banking.
Islamic banking to counter Terrorism:
The experience of Islamic banks of Malaysia and Britain may be interesting; as in Malaysia, the Chinese businessmen are the biggest customers of Islamic banking; in Britain also, Islamic banks are not for Muslims alone. Stringent anti-money laundering measures are in place in these countries and have seen far less terrorist intrusions during the last decade. Shariah principles require transparency in monetary routes. Every extended credit under Islamic Banking will need supportive documentation with managerial control of the fund to monitor the use of credits, which may not be available with debt finance under interest-based banking. All we have to do is to place a fairer and stricter audit system to monitor the fund flows. The universal nature of banking through Islamic Banks prevents surreptitious routes for investments and mutual funds. The petro-dollars and SDRs have the potential for greater flows and these could also contribute to more dynamic commodity markets. With greater financial muscle, Muslim youth could look to a greater contribution to domestic GDP through better education and higher productivity.
Stock Market Capitalization
Since Islamic banking focuses on equity deposits and finance, it is expected that the Stock market will be the most preferred avenue for investments by future Islamic banks of India because currently it is our stock market which is attracting new investments under Shariah Finance schemes. Technological innovations would facilitate easier flow of equity-based deposits of Islamic Banks into the rising Indian Stock Markets. It is common sense that when equity based financing takes place through Islamic banking route, the number of D -mat accounts may surge in millions.
Present Crisis in Financial Sector and Islamic Banking:
Corporate Sector and Islamic Banks
Interestingly, Islamic banks are unaffected by the sub prime mortgage crisis; rather many non-Muslims are turning up to Islamic banking as the customers spooked by turmoil in the interest based banking system are feeling Islamic banks are a safer haven because they are immune against such crisis due to inherent business ethics within Islamic banking. There are mainly two important reasons for insulation of Islamic banks under this current credit crisis as compared to the interest based banks and financial institutions. The first is security from the liquidity problem due to inter banks lending in the money markets, merger and resales of debted companies. The second reason is rating of complete investment risks instead of mere credit risks. Islamic banking ethics thus help to tame the crisis in financial sectors. In conclusion, Islamic Banking should be seen as a powerful economic instrument capable of creating multisectoral impacts and contribute to greater stabilization, helping the real economy significantly, and reducing unemployment. Most importantly, it can act as a powerful antidote to poverty sans huge subsidies and grants that are making a big dent in the countrys fiscal framework. It would also open the doors for financial inclusion to all concerned.
Even the Corporate sector would be a gainer. All the companies listed in stock markets will get additional potential investors to genuinely subscribe their shares instead of speculator trading. Even the Bond Markets could stabilize. Long term resources for infrastructure sectors like irrigation, power, oil and communication projects could be expedited through the Islamic Banking route. New modes of public private partnerships for the execution of infrastructure projects could also emerge. Since Islamic banks may also have managerial control over commercial financing, the government could utilise Islamic banking units as a source for mobilizing tax revenues as well. With equity finance, the Government may also be able to convert grants, subsidies and stabilization funds into equity for Islamic Banks to lend equity finance to priority sector agents instead of highly subsidized lending which costs a lot to the exchequer.
Private Equity in MENA A Growing Asset Class

Faisal Hasan - Head of Research Global Investment House - Kuwait
rivate equity in the MENA region has witnessed substantial growth in 2007 on the fund raising front, as well as fund sizes, although a bit sedate in 2008 on the fund raising front. According to EMPEA data, the fundraising for private equity investment in the region has grown manifold over the past five years and has increased from a meager US$680mn raised in 2003 to over US$5bn in 2007. Average fund sizes also have grown from US$215mn in 2005 to US$265mn in 2007. There is no doubt that the recent surge in oil prices have provided the GCC countries with ample liquidity enabling them to rehabilitate and diversify their economies which have long been dependent on the oil sector. To that end, the GCC governments have embarked on a total make-over of their economies. Massive infrastructure projects throughout the GCC, enhancement of financial sectors, privatization efforts, and opening the markets to international competition, are only a few of the efforts undertaken by the GCC governments to capitalize on their growing cash balances.
The GCC countries have also realized the importance of involving the private sector in this restructuring, so privatization has played a pivotal part in the process. The private equity market is an important source of funds for startup and young firms, firms in financial distress and those seeking buyout financing. These recent trends in the GCC, had a positive spillover effects on the MENA regions. MENA countries have adopted openness to their economic and financial sectors, which gave cash rich private equity managers the incentive to seek investment opportunities within the region. To that end, private equity funds that invest in the MENA region have increased tremendously in numbers and sizes, whereby over US$13bn in private equity capital are currently under management in the region. What is noteworthy is until recently, many local and international private equity operators had looked at the MENA region only to raise cash. However, due to the rapid economic growth and fundamental strength of the MENA countries,
ANALYSIS
Private equity....
many of them are looking for investment opportunities as well. And while the real estate and construction sectors attracted a large share of these investments for the time being, opportunities in private-sector transportation, financial services, travel and tourism, energy, and other sectors are flourishing as never before. The results of the 2007 GVCA survey on the impact of private equity investments on private companies in the GCC region highlighted the financial as well as non financial contributions that a private equity infuses in the partner company. The survey results indicated average annual growth in sales in the years following the investment of 92%; in capital expenditure of 86%; in exports of 95%; and in research and development (R&D) expenditure of 32%. Exactly these high-growth companies financed by private equity and venture capital are central to GCC governments efforts to grow their non-oil economies. Besides the funding from private equity houses, the private equity executives also bring expertise and experience from other companies in their portfolios to these companies, including strategy and finance, and industry-specific knowledge. Many of these private equity investors are also instrumental in introducing international best practice and sound corporate governance. Recent downturns in the Western financial markets have sent ripples through most markets across the world, including the MENA region, despite having their strong fundamentals. The financial markets of the MENA region are largely self-contained and insulated from the main drivers of the Western financial markets. The regional stock markets always recovered sharply after a temporary price fall, triggered by a setback in the developed markets. We firmly believe that this temporary price fall in the MENA regional financial stocks will certainly rebound over a short period of time. The main reason for the expected rapid recovery is the strong fundamentals of the regional companies. The subprime crisis has had no fundamental impact on the macroeconomic performance of the MENA region. The lack of contagion is attributable to weaker integration of MENAs financial sector with those of the US and Europe; and improvements in MENAs fundamentals over the last decadeincluding better fiscal and monetary management; more open regimes with more flexible exchange rates, and better debt and financial management that has reduced exposure to international capital markets. However, the current financial turmoil and resultant slowing of economic growth worldwide have impacted
the private equity fund raising as well, which has slowed down in MENA during 2008. Private equity players in the MENA region as well are likely to feel the pinch of credit squeeze and may find it difficult to raise funds with the same ease as they had in the recent past. These are challenging times and for those raising funds, track history will become more important than ever, as will a defined plan for how the fund manager will adapt their focus to suit the current financial climate. However, big and established players like Global Investment House of Kuwait, Abraaj Capital of Dubai and Investcorp of Bahrain with a solid track record history have been and would be able to raise funds as and when the need would arise and would also be able to deliver the high returns they have in the past. Global Investment House have had an enviable record Gross IRR return of 61.1% on the four funds it is managing between the period 2003 till 1H-2008 and a Net IRR return of 55.0% for the same period. Number of deals happening is low with institutional investors getting highly cautious when presented with new investment opportunities. Consequently, the number of investments made till 1H-2008 is far fewer with only 13 reported as per zawya private equity monitor, down from 33 during the same period in 2007. Not only the number of transactions has come down significantly in 1H-2008 but so has the size with the largest deal closed being Intaj Capitals purchase of a majority stake at an announced $188m transaction size. However, deals will continue to be done with much lower levels of debt, and more equity. The silver lining of the current stock market correction is that sellers price expectations will now start to come into line with reality, opening the door for more deals which had been a major impediment for deals not happening as per the GVCA survey 2007. The drop in stock market value also means that company valuations are less inflated than they were one year ago and there is more value to be found. Company owners too would be more realistic about valuations and consequently would be more receptive to private equity alternatives. There also seems to be less resistance from local businesses to private equity, now that they can see cases where the cash injection has made a positive difference. The most profitable fund vintages to invest in have often been those where the in-going investments have been made in challenging times. 2008 may well be one of these. The most successful investors in private equity have been those with a consistent long-term strategy, investing over a long period. Fundamentally nothing has changed: private equity will continue to grow, and will continue to deliver net returns well in excess of those available in the public markets.
OPINION
The permissibility of non-Muslims working for an Islamic Financial institution

By Mohammed Robbani -INSIF The Institute of Islamic Finance London
frequently asked question nowadays is whether it is permissible for non-Muslims to work for an IFI? Yes, it certainly is. It is allowed for non-Muslims to be employed by Muslims for almost anything except for a few roles (e.g. Imam of a mosque). The Prophet himself once hired a man from Banu Ad-Deel who was a nonMuslim. Also, it is narrated that a Jewish valet who used to serve the Prophet was once taken ill, so the Prophet visited him (Sahih Bukhari). This indicates that not only is it permitted to hire a non-Muslim, but that we should respect them in the same manner as we would respect a fellow Muslim of equal stature.
There are however those who question the appointment of non-Muslims to positions where they would be able to exert authority over Muslims. Those who say so depend upon a saying of Umar Ibn alKhattab who is reported to have said No one of them (non-Muslims) should hold a position in which he can have power over a Muslim. Umars command was apparently based on the Quranic injunction 3:28 Let not the believers take those who deny the truth for their allies/guardians in preference to the believers - since he who does this, cuts himself off from God in everything - unless it is to protect
OPINION
The Permissibility....
yourselves against them in this way. But God warns you to beware of Him: for with God is all journeys end. The term allies/guardians does not mean that a Muslim should not have non-Muslim friends, employers or employees or that non-Muslims must not be given jobs with managerial authority over Muslims. What it simply means in essence is that it is not allowed for a Muslim to put a non-Muslim in a position (in any capacity) where the non-Muslim will have subjugative powers over other Muslims and in particular, where the non-Muslim can subvert the laws and spirit of Islam if he/she wishes to do so without having to answer to a higher Muslim authority. The fact however is that all Islamic banking and financial institutions today have Shariah Supervisory Boards which are regarded as the highest authority in any given IFI with regard to ensuring compliance with the Shariah and no board member or official including the management has the power to override the authority of the SSB in this regard. Thus even if non-Muslims are placed in positions of authority over certain levels of Muslims they would find it rather difficult to subvert the law or spirit of Islam. However, having said this it must be borne in mind that the Shariah Supervisory Boards are not responsible for the day-to-day running of the institution, which lies with the management team, which may not have any Shariah scholars within it. Furthermore, the SSBs certify only what is presented to them in documentary form and do not have control over the subsequent execution of that product or even how it is ultimately distributed (and under what non-documented terms). Thus, they may certify that a particular type of product is Shariah compliant on paper, but if the management team running the institutions do not have the same sense of compliance as the SSB, then the product may actually become non-compliant out in the field. We have seen a major case of this occurrence recently when Mufti Taqi Usmani declared that certain types of Sukuks that were originally certified as Shariah compliant by the SSBs, actually become partly non-compliant because of the way the transactions were executed. This means that although just like conventional financials systems (which have central banks, etc) there are regulatory systems in place within the Islamic financial system (which have Shariah Supervisory Boards, etc) to prevent noncompliance; these regulatory systems cannot prevent major non-compliance if the senior members of an IFIs management team do not feel strongly enough to remain within the bounds of compliance no matter what (i.e. if they put profit above principle).
It is desirable therefore (or as some may hold mandatory), that Muslims be appointed to positions of responsibility in IFIs in preference to non-Muslims subject to the provision that they are as equally or better qualified. Thus if all things are equal, then Muslims should be favoured over non-Muslims if there are no adverse consequences in doing so. So if a Muslim and a non-Muslim have the same qualifications, experience and ability the Muslim should be selected due to the ties of brotherhood that bind the Muslim community (Ummah). Besides, a Muslim will have the religious inner drive to follow the spirit of Islam which may be absent in a non-Muslim, though here too one cannot select a Muslim based on his name alone, but rather after a sound evaluation of his character. This brings us to another question: Are non-Muslims able to discharge the objectives of an IFI in its full spirit? It is obvious that a non-Muslim with sincere intentions can indeed discharge the Islamic objectives of an Islamic Bank in its full spirit if the bank is managed that way from the top-down. Consider a non-Muslim bank officer in charge of Islamic micro-finance. This person does not have to be a Muslim to fully comply with a function of Islamic law in letter as well as in spirit if, for example, he/she lends someone money and does not seek any interest or any benefits-in-kind in return whatsoever (i.e. gives a qard hasan) and writes-off the loan if the borrower cannot repay. This non-Muslim person is therefore, not only fulfilling the Islamic law relating to riba but also the spirit relating to sadaqah. However, this can only be achieved by this non-Muslim person if the organisation he/she works for operates within this Islamically ethical manner. It is at any rate preferable that sincere Muslims work alongside them to ensure that the team keeps to the law. Having said this, it must be stressed that there can be no negative discrimination towards non-Muslims by Muslims. This is totally against Islamic principles for God has stated in the Quran (5:8) O You who have attained to faith! Be ever steadfast in your devotion to God, bearing witness to the truth in all equity; and never let hatred of any-one lead you into the sin of deviating from justice. Be just: this is closest to being God-conscious. And remain conscious of God: verily, God is aware of all that you do. All people regardless of nationality, religion or race are equal as human beings Muslims are superior in faith only. The Muslim creed demands that all people (inc. nonMuslims) are respected and treated kindly, fairly and justly. Any kind of discrimination, racism, etc. is a form of hatred and thus forbidden (as per the above verse). Besides, taking non-Muslims to work in Islamic institutions could open up their hearts to Islam which would be a great accomplishment for the faith.
INSIGHT
IJARA
The nature of Ijara
A more compassionate form of Leasing
Suresh R. I. Perera LLB, Attorney at Law, ACMA Director Tax & Regulatory KPMG Sri Lanka
The literal meaning of Ijarah is to give something on rent. As per Islamic jurisprudence the term connotes two distinct situations. 1) The services of human beings for wages the Mustajir(employer) employing the services of an Ajir (employee) on wages or Ujrah in lieu of hired services. An Ajir for this purpose could be anyone rendering services including labourers, doctors and lawyers. 2) Usufructs of assets & properties for rent transferring the usufruct of an asset by Mujir (lessor) to Mustajir (lessee) in lieu of Ujrah (rent) payable by the latter. The form of Ijara referred to herein and the category that is relevant for investment purposes connotes this form. Ijara has proven to command a high demand among the Islamic financial instruments and perhaps is on the way to be the most popular instrument. This is the appropriate Islamic financial instrument for inter - mediate or long term financing of assets. Shariah Rules permits the levy of rental in lieu of granting the right to use real assets. As the financier undertakes the risk of the ownership he is entitled to receive a return by way of rental under the Shariah Rules. Normally the rent is so fixed, that the financial institution gets back its original investment plus a profit on it. Finance leases or Ijara Muntahia Bittamleek (IMB) embodies an option to purchase the asset at the end of the period.
time. According to IAS 17 a lease is classified as a finance lease if it transfers substantially the risks and rewards incidental to ownership. A lease is classified as an operating lease if it does not transfer substantially all risks and rewards incidental to ownership. Ijara is defined as ownership of the right to the benefit of using an asset in return for consideration. However AAOIFI definition embodies the additional condition that the benefit should be Shariah complaint. Thus Ijara & a conventional lease differ in this aspect regarding the requirement to comply with Shariah Rules. Shariah does not permit Ijara for use of an asset for payment of interest and involving merchandise considered as haram nor for unlawful transactions.
Comparison with the conventional lease
Financial Accounting Standard (FAS) 8 formulated by Accounting & Auditing Organization for Islamic Financial Institutions (AAOIFI) provides for accounting treatment for Ijara and IMB. This AAOIFI recommended Standard for Ijara and the Standard formulated by International Accounting Standard 17 (IAS 17) for conventional leasing differ in many aspects. A lease as per International Accounting Standard is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments, the right to use an asset for an agreed period of
INSIGHT
Ijarah leasing....
AAOIFI FAS 8 also embodies a classification of the instrument into two categories. If the contract refers to a promise to the effect that the legal title would ultimately pass on to the Mustajir (lessee) at the expiry, it is referred to as Ijara Muntahia Bittamleek. In I MB which is loosely considered as equivalent to the conventional finance lease, at the expiry of the term the passing of the legal title to Mustajir (lessee) could occur either : (a) on transfer on payment of balance rentals, (b) as a gift, (c) on payment of a token or for an amount specified in the contract or (d) on the gradual transfer of the title. As per AAOIFI Juristic Rules on fulfillment of the promise, for the transfer to be effective, a contract distinct from the Ijara contract should be executed. The Mustajir has an option, which he may or may not exercise. Thus IMB would have the characteristics or the substance of a conventional lease only if the Mustajir exercises the option. In the absence of such exercise IMB for all intents and purposes is an operating lease. Hence in legal form and in concept IMB and a conventional finance lease are not identical. Perhaps the key distinction between the Ijara Muntahia Bittamleek and the conventional finance lease is that in the Islamic version the lessor undertakes full ownership risks of the corpus of the leased asset. Whilst in Islamic version the risk remains with the lessor (Mujir), the passing of the risk to the lessee is a prerequisite for a lease to be classified as a finance lease under International Accounting Standards. It could be seen in Ijara the risk follows the legal title unless the damage is caused by the negligence or the misconduct of Mustajir. As IAS looks at substance over form for accounting purposes, on passing of the risks and rewards of the asset to the lessee, the asset is recorded in the books of the lessee coupled with the right to claim depreciation. Major repairs, maintenance and insurance remains to the account of Mujir (lessor) in a Ijara, whereas these costs are passed on to the lessee in a conventional lease.
The issue of delayed payments may be addressed in an Ijara contract by various means such as inclusion of a donation clause, by acceleration of installments or by the cancellation of the contract. The compassionate attitude towards charging Ujrah (rent) from the Mustajir (lessee) is manifested at the commencement of the charge itself. In a conventional lease the payment obligation may commence from the date of execution from contract for funding. But in the Islamic version the obligation for the payment commences only upon the delivery of the asset to Mustajir or upon enabling the use thereof by him.
Accounting under AAOIFI
The nature of Ijara rental or Ujrah is that it represents consideration for the right to use an asset. Ujrah does not consist of a capital component and an interest element. Hence the application of accounting methodology adopted for conventional lease rentals under International Accounting Standards of recording lease rentals receivable and interest in suspense in the books of the lessor would pose an issue in accounting for Ujrah. FAS 8 formulated by AAOIFI stipulates that both assets rented on the basis of Ijara & IMB to be recorded in the books of the Mujir (lessor). The two categories of assets should be shown in the Statement of Financial position under the heading investments in Ijara assets and Ijara Munthia Bitamleek Assets respectively on initial recognition at cost and at book value thereafter. The right for the depreciation claim follows the recording of the asset in the books of the lessor and unlike in a conventional finance lease under IAS, the depreciation entitlement for both forms are vested on the Lessor. Whilst depreciation of Ijara assets shall be on the basis of the depreciation policy of the lessor, in calculating the depreciation of Ijara Bitamleek Assets residual value shall be taken as zero, if the lessees acquisition of ownership at the end of the period is through gift. On the other hand if the transfer to the lessee is at a token or amount specified in contract, the said amount should be subtracted in determining the depreciable cost. Installments of both forms, i.e Ijara & IBM should be presented in the income statement of the lessor as Ijara Revenue on accrual basis allocated proportionately according to the term of the lease recognized in the period in which they are due. Where the lessee acquires title through gradual sale the revenue decreases progressively. The Ijara installment paid is presented in the lessees income statement as Ijara expense allocated over the lease period recognized when due under both forms of Islamic leases.
Compassion underlying Ijara

Perhaps the compassion of Ijara is manifested over its counter part when it concerns the asset being out of order for a period due to major defects. During the period the asset is out of order, Ijara rentals would be in suspension so that Mustajir (lessee), who cannot benefit from the use of the asset is provided relief. Shariah also prohibits the levy of penalty in an Ijara arrangement for delayed payments, unlike in a conventional lease.
Ijarah leasing....
INSIGHT
Tax issues involving Ijara
The cost of Ijara in comparison to a loan may be high due to the associated transactional taxes on additional steps involved. The legal / notary fees and stamp duty involved on the dual transfer of title (in Ijara Munthia Bittamleek) and the property transfer tax may increase the cost of the entire structure in many jurisdictions. The exposure of the Ijara rentals to VAT as opposed to the VAT exemption enjoyed by interest is another factor that may have an impact on the pricing. Though interest paid on a loan from a bank does not attract any withholding tax under most of the tax systems found in the world, Ijara rental would be exposed to withholding tax. In certain countries like Sri Lanka, though the local Tax Statute does not explicitly provide for the claiming of capital allowances by the lessor under operating as well as finance leases, under the presumption that the leased assets are deemed to be used in the lessors business of
leasing, the lessor enjoys the right for claiming capital allowances. In these countries the same status quo ought to prevail for Ijara and IMB regarding capital allowances. In a scenario involving a cross border Ijara, Mujir (lessor) should also be cautious on the possibility of creation of a permanent establishment in Mustajirs jurisdiction.
Structuring using Ijara
The apparently simple and straightforward Ijara contract could be adopted to achieve many ends. An Ijara could be the retail structure of a Sukuk Al Ijara, that permits the originator to raise funds as well as Sukuk holders to trade in the Sukuk certificates to enable the liquidity management. Ijara is also a means for unlocking and realizing the capital value of an asset to fulfill the working capital needs of an organization. An organization that already owns an asset may sell it to the financier for immediate funds and continue to use it under an Ijara agreement on payment of periodical rentals.
BOOK REVIEW
ISLAMIC FINANCE
The second section provides an analysis on Equity investment and Asset management comprising of three chapters. The first chapter by Imtiaz Shah gives an overview of Islamic Asset management, he gives the details of different Islamic investment instruments and he has also analyzed the Shariah screening criteria provided by different Shariah screening boards. The later part of this section by Judy Kawaf and Neil .D Miller tells us about the different provisions available for investments in Islamic Private Equity Funds and also the different types of funds and management of these funds available for Islamic and non Islamic investors. The third section consists of three chapters contributed by prominent Islamic experts, Rustum Shah, Mark Morris, Abdul Rahman Al Shaikh and Bilal Ahmed Khan. The first chapter highlights on the legal and structuring considerations of different Islamic financial instruments and this has been well presented with good diagrams and examples. For a long time, misconception existed that the Islamic funds could not be used in Project financing and this view has been proved wrong in the second chapter where Mark Morris and Neil D Miller has analyzed the various modes and ways through which Islamic finance can be applied in Project financing. The later chapter of this section analyses the various avenues available for trade finance where Islamic finance can be applied. The fourth and the fifth section hold the major importance in this book which discusses in detail about the Islamic Capital market and Islamic Insurance market (Takaful). The fourth section leads us to an important aspect of the Islamic Financial Industry i.e. Islamic
A Practical Guide By: Rahail Ali (Editor)

Capital Market and focuses on the understanding, development and innovation of Sukuk market. And also the legal considerations and corporate issuance attached with the above market. Section five contributed by Mohd Masum Billah gives us the introduction, nature, elements and the basic principles covering the Islamic Insurance market (Takaful). He has also very intelligently differentiated the same product, insurance in two dimensions, one Takaful market and the other conventional insurance market. And at the end of this section there is a case study presented by Omar Clark Fisher, on Islamic insurance market. Under this he has analyzed each and every aspect of Takaful market from the historical brief to growth of the industry till today. He has also by using different statistical techniques analyzed the growth and the comparison of conventional and Islamic insurance industry in different parts of the world. In the last section of this book Rafe Haneef, in his article A Reflection on contemporary Islamic Finance markets, has presented beautifully the different issues and reasons for splurge development of Islamic Finance markets and also helps the investors by providing various investment opportunities available before them. The book offers a fresh analysis of Islamic financial instruments and it would be highly useful and essential for those who are already engaged in Islamic Financing transactions or interested in understanding the Islamic finance market but it is not constrained to them alone, the language used by the scholars is so simple and lucid that the basic understanding of the common man towards Islamic finance and its different financial instruments is enriched.
Rahail Ali, Global Head of Islamic Finance at Lovells is one of the worlds leading Islamic finance lawyers acknowledged for his expertise in Islamic structuring. He has received accreditation for structuring some of the largest Islamic finance transactions. With his years of valuable experience in Islamic finance structuring he has brought this wonderful book which gives a practical insight to the diverse contemporary application of Islamic finance and Insurance. This book deals with the practical application of Islamic Finance and gives the basic understanding on how the Islamic Finance industry structures, implements and executes Shariah Compliant transactions and it also gives practical insight to the application of Islamic financial instruments. The book has been divided into six sections consisting of fourteen chapters, each contributed by leading practitioners in Islamic Finance. It analyses the market trends, developments and structures for each Islamic financial instrument from Sukuk, Takaful, Funds, Project financing and Islamic liquidity management. The first section gives a general introduction to Islamic Finance by Mustafa Hussain. In this section basic issues such as shariah, its sources and objectives and instruments of Islamic are discussed in a very simple language making the reader understand the issues and differences of Islamic finance. Mustafa has also analyzed how a western bank can apply the principles of Shariah to its product offerings in todays market.
By: Seema Mohammed Financial Analyst : TASIS India ISLAMIC FINANCE: A Practical Guide By: Rahail Ali (Editor) Published by : Globe Business Publishing Ltd, New Hibernia House, Winchester Walk, London Bridge, London SE1 9AG, U.K, 2008 pp. 174
IN-DEPTH
Riba-free Retail Banking

by A.L.M. Abdul Gafoor : Appropriate Technology Foundation Groningen, The Netherlands.
Retail banking has become an essential sector of the modern economy. Whilst in some countries it may be smaller than in others, rarely can a country do without its services completely. In the advanced economies, practically every government department, business organisation, institution and private individual needs, and has, a bank account. In the developing countries too the trend is in this direction. Muslims, who follow the religion of Islam, and who form nearly one fifth of the worlds population and live in all parts of the world, are no exception to this trend. However, the Muslim community has a problem with the banking system as it exists today and this essay aims to address their concerns. But before we do so, let us briefly examine the services banks provide and how they do it, so that we can determine exactly where the problems lie. Then we can devise solutions to address the specific issues that concern Muslims.
he main functions of modern conventional retail banks as they exist today include providing what is called current account facilities, money transfer services, accepting funds into savings accounts, granting loans and advances, facilitating import-export transactions, and buying and selling foreign currency. Current account facilities include accepting cash deposits into your account and allowing you to withdraw from it as when you require the whole of it or a portion. You can also use a cheque to instruct the bank to pay another person or entity a stated amount of money and debit the same from your deposit in the bank. Similarly, you can receive payments made by others into your account. This ability to pay and receive without having to personally carry notes and coins is a great boon to transacting business personal and institutional. Private individuals use the current account to receive their salaries and wages and to pay their bills. Businesses and institutions use the current account to make payments for the goods and services received and to receive payments for the goods/services supplied/ rendered. It saves time, and is safe and less expensive. The transactions through cheques can be made whether the payer and the receiver use the same bank or different banks, and whether the concerned banks are miles away in the same country or continents away in different countries.
Conventional Retail Banking
Money can also be transferred from one person to another, even without having a current account with a bank, through the banks money transfer arrangements money orders, pay orders, bank drafts, mail and telegraphic transfers, electronic transfers, etc. both within and outside the country. There are also other bank-guaranteed payment facilities, especially the letters of credit and bills of exchange, which greatly facilitate import-export trade. In fact such trade is practically impossible without this facility. Banks also accept funds from the public and institutions into savings accounts, keep them safe, and pay interest on such funds. In turn, they use these funds to grant loans and advances to borrowers, to whom the bank charges interest. This service provides the savers with a known income, while their capital remains intact. On the other side, it provides the borrowers access to funds, which they would otherwise not have. The borrowed funds may be used for setting up a new business, to expand existing business, to provide working capital for a running business, or for consumption purposes including buying consumer durables, to ride through a difficult period and to meet unexpected expenditure. They also provide many other services including agency services, business introductions and credit reports. Another important service is in the foreign currency field buying and selling foreign currency, issuing travellers cheques and credit cards.
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need modern banking facilities, and most of them have a common concern avoiding riba (interest) in their dealings. A banking system designed to address their concerns has to take into account this main concern as well as the other factors.
Inflation
In common with most developing countries, the Muslim countries also face extreme levels of inflation. Conventional banking deals with the inflation problem tacitly by incorporating it into the interest rate. Since that is not possible in a riba-free system, we have to address the problem explicitly.
The riba limitation
The main concern of the Muslim community is its desire to avoid dealing in riba, because riba is strictly prohibited in their religion Islam. As far as money is concerned, riba is loosely translated as interest. Whether this translation is accurate or not whether the Arabic word riba and the English word interest mean the same thing is the subject of a long-standing debate. This question needs to be satisfactorily resolved in order to find a proper solution to the problem. In the meantime, one comprehensive and commonly accepted definition of riba (in matters of money) is that when money is lent, if the lender demands more than his principal to be returned, the excess amount so demanded is riba. Islam strictly prohibits demanding and/or receiving riba, paying riba, witnessing or writing such a transaction. In the context of modern banking, the depositors receive interest, borrowers pay interest, and the bank both pays and receives interest, writes and perhaps also witnesses the transaction and keeps the accounts. It is on this account that modern banking is repugnant to the Muslims. Their dilemma is that it is difficult to be part of todays world without the medium of modern banking. Hence the search for a riba-free alternative. We can begin by asking whether all the operations of a retail bank are unacceptable to Muslims on account of the riba prohibition. Can they make use of some and seek alternatives for others? To do that, we need to look first at the working of a conventional bank in some detail.
Some of the above are paid services, others are not. Some involve paying or receiving interest, others not. But the retail banks (henceforth the banks) and their services have become an integral part of the presentday world.
The needs and concerns of Muslims
The nearly 1.2 billion Muslims in the world are scattered all over the planet. There are 56 member-countries in the Organisation of Islamic Conference, and there are Muslim minorities, large and small, in almost all countries. There are over 100 million Muslims in India, a number similar to that of all the Middle-eastern countries put together, though they are a minority in that country of over one billion people. The countries and people are also at various different stages of development and advancement. A major characteristic of the Muslim population distribution is that the majority are in the developing countries, with all the associated infrastructure deficiencies, including low levels of literacy. Many of them
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Retail banking....
The sources of funds available in a bank can be categorised by the type of deposit account in which it is held as well as by the purpose for which it is held. Similarly, the use of funds too can be categorised by type and purpose. A schematic representation is given in the table below. The first source is the current account deposit. They are held in the bank for the purposes of safety and ready availability and for transaction convenience, which has become almost a necessity in modern life. We have already seen the working of a current account. The second source is the ordinary savings deposit. Banks pay interest on savings deposits in order to attract more funds, but the primary concern of the depositor in an ordinary savings account is the safety of his/her savings and its easy availability when needed. It is usually a temporary holding and the paid interest is expected to cover the value loss due to inflation. In less developed countries, many people have no need or access to current accounts, for various reasons, and therefore they resort to ordinary savings accounts. Whatever the intentions of the depositors the banks use the funds to grant loans and advances to clients and borrowers. The third source of funds is the fixed deposits. Here the main consideration of the depositor is the fixed and assured interest (or return) he receives from the bank. Safety and compensation for inflation are also considerations but they are part of the package. The bank uses the funds from this source to grant long-term and large-size loans.
Some dissection and analysis
A suitable proposal has been made elsewhere. It is suggested that the funds from the third source be handled by an entirely separate institution operating under the rules of mudaraba. Therefore this essay will deal with only the first two sources of funds and their commercial use.
Charitable loans
The Islamic banking movement has introduced another category to the use of funds. This is called by various names such as qard hassan, (sometimes transliterated as gharz-al-hasaneh and qard-e-hasana). The important requirement here is that if the borrower is unable to repay the loan at the agreed time, further time should be allowed for repayment or the loan should be written off and regarded as charity. But it begs a reasonable question: does an entity that holds other peoples money in trust have any right to give charity out of it? Furthermore, it will undermine the promise to return the full amount to the depositors. How is the shortfall to be made up? Besides, imagine the branch manager of a chain of banks being given the authority to determine who of his borrowers is under dire circumstances and the power to write off his loan. It is an open invitation to corruption and fraud. Therefore we will leave the charitable loans to private individuals and charity organisations. Once the issues of charity and fixed deposits are dealt with as above, we will have a bank that is free of the encumbrances of the charitable loans, but it will also be without the benefit of a large source of funds the fixed deposits. Yet this bank will be able to provide all the services generally required of a retail bank. We will call the resulting bank the riba-free retail bank.
Investment and finance
The fixed deposits are investments from the point of view of the depositors, and the loans granted using this source of funds are finance from the point of view of the entrepreneur-borrowers. Since the fixed return paid to the depositor will fall under the category of riba, Muslim depositors cannot accept the paid return. The loans are also given on fixed-return basis. This too is riba and therefore Muslim entrepreneurs cannot make use of such finance. Hence a riba-free bank cannot provide such an account. Islamic bankers came up with the idea of converting this account into an investment account and using the funds to finance borrowers projects under a profit-and-loss-sharing scheme whereby the investment account holders too will receive a share, which will not be a pre-fixed amount and may well be a loss. But this scheme has not proved viable and has in fact created more difficulties. In order to deal with these difficulties, which are peculiar to Muslims and therefore have not been taken into consideration by the conventional banking system, Muslims will have to develop their own institutions.
The Riba-free Retail Bank
The bank under consideration is a commercial entity that provides services for a payment. It accepts deposits, guarantees their safety and full return, and provides all current account facilities such as cash receipts, cheque collection and payment, electronic and other types of fund transfers, etc currently provided by conventional retail banks. Depositors explicitly or implicitly agree to their funds being used to grant loans to borrowers, but the bank guarantees the full return of their deposits as and when required or as agreed. The depositors do not demand nor are they paid any financial returns on their deposits. As such the depositors deal in no riba. The borrowers are granted loans on condition that the capital, which belongs to the depositors, is returned in full, whatever their financial circumstances, and they pay the bank a fee for making the funds available to them. The fee includes all the costs incurred by the bank and a remuneration (or profit) for providing the service. This service can be likened to the services provided by a courier who carries the money from the depositor (the real owner-
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Retail banking....
lender of the money) to the borrower. At the end of term, the courier carries the money back to the owner. The courier is also responsible for the security of the money while in his possession. Since the owner-lender did not demand any extra amount (which would be riba), the borrower does not pay any extra amount (to the owner-lender) beyond the principal. Since no riba was demanded or paid, the courier does not carry, witness or keep account of any riba. Therefore the banks lending operation is free of riba. The bank makes sure that the borrower has the ability to repay the capital and the fees. At this point it is worthwhile to emphasize the two basic assumptions in the concept of this riba-free bank. One, riba is what is demanded and/ or received by the capital-owner (who is the real lender) over and above the capital he lends; and two, the payment made by the borrower to the courier for his services is not riba. It is necessary that these two crucial points are fully understood and accepted as correct under Islamic law before we proceed with further discussions. There is also another important aspect. The perception of a bank as a moneylender. True, banks originated from the moneylender who lent his own money on interest. But modern banks no longer do that (even though some of the shareholders money may also be used). It is mainly the depositors money that they lend to the borrowers. In this sense they are couriers of money as described above. They are also couriers of money when they carry payers money to the receivers (which is the main current account operation). Therefore we have to take account of present-day realities and change our traditional perception of banks as moneylenders to one of couriers of money. This changed perception will free Muslims of many difficulties, which arise as a consequence of equating banking with money lending, and the banks
with moneylenders. In any case, our riba-free retail bank is designed strictly as a courier of money it is a service provider in the field of banking and finance. Seen in this light, this banks operations are all riba-free and the fees it charges for its services have nothing to do with riba. Requiring the bank to write off the loans of persons, who are unable to repay it, and to consider them as charity, is also a consequence of equating a bank to a moneylender who lends his own money. One is free to do what he wants with his own money but a courier who carries someone elses money has no right to give it away in charity. As such, our bank, being a courier of other peoples money, does not get involved in charitable loans. Consequently, there is no leakage to its funds. Compatibility with conventional banking is one of the desired goals in devising this riba-free bank. As mentioned above, we have also eliminated the possibility of a leakage and that should find favour with the banking authorities. But the riba-free limitation has made it a smaller bank. Let us now examine the positive aspects of these features.
The smaller size and its implications
The retail bank envisaged here is a much smaller one than a standard conventional bank. This is a consequence of accommodating the ribaprohibition rule of Islam and hence a built-in feature. Therefore we need to examine the implications of this necessarily smaller size.
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Retail banking....
It came about because we spilt the deposit base of the conventional bank into two parts: demand deposits and ordinary savings deposits on the one hand and the fixed deposits on the other. The latter is generally much larger in size, and therefore what is leftover is at most only onehalf of the standard size of a conventional bank. On account of the smaller size and its composition, this bank cannot grant long-term and large-size loans; it is limited mostly to advancing short-term and small-size loans, although some medium-term and medium-size loans may be accommodated. On account of these term and size limitations, this bank is much less exposed to business-failure risks. That gives more stability to this bank and to the banking system as a whole. The smaller deposit-base and the larger reserve requirement on these deposits also result in much reduced bank-created credit. It does not negate the banks creditcreating ability, and thus deny the economy of the benefits of this facility, but it limits its size. Thus it reduces the risk of bank failures and adds to the stability of the banking system. Furthermore, it restrains money supply expansion and hence helps to hold down inflation. If the equity capital required to set up a bank is based on the size of the bank, this smaller-size bank, with much reduced failure-risk, will entail a smaller equity capital. This will enable the establishment of more retail banks, resulting in increased competition, which, in turn, should result in better service and efficiency. The reduced capital requirement will also help to take banking facilities to remoter areas. People residing in areas away from the main cities hold their monetary capital in the form of cash (notes and coins) for want of a bank in the neighbourhood. This is the case in many developing countries and hence a considerable portion of the available monetary capital remains outside the banking system. If this cash, both idle and active, could be brought into the banking system more funds from domestic sources will become available for business purposes.
bank qualifies to be registered as a deposit-taking bank with the central bank under conventional banking laws. This authorisation to set up and operate as a retail bank under conventional laws has several advantages. One, it will ensure proper auditing and monitoring, which will in turn inspire public confidence in the bank. This is vital. Two, it will enable riba-free retail banks to be set up in all countries of the world, Muslim and non-Muslim. This will greatly facilitate international export-import trade without the fear of being involved in any riba dealings. Three, since this bank can be set up in non-Muslim countries as well, and will offer all conventional retail banking services, its clientele need not be limited to the Muslims. Therefore it has as good a chance of survival as any other bank. Four, the considerable number of Muslims living in nonMuslim countries will have the possibility to bank with a riba-free bank which is competitive and offers all the generally-used facilities of a conventional bank. Five, since all religions prohibit interest earnings, and even where it is not explicitly prohibited people do look down upon those who lend on interest, some people will appreciate the chance to bank without interest provided the value erosion of their capital due to inflation is compensated and all other banking facilities are offered. There are also people who eschew interest for reasons other than religious belief. They too will appreciate the opportunity given by this bank. Six, this bank can hire officers who have already had training and experience in conventional banking, and they can get to work practically straightaway without having to undergo further training in an entirely new system. This is a very big advantage, and is cost-wise and time-wise efficient. It will minimise any gestation period and reduce teething troubles. Seven, the compatibility with conventional banking makes the conversion of a conventional bank into a riba-free one easy and quick. Eight, from the customers point of view too, it is easier to understand and follow the procedures since they are not very different from the ones the customers are already used to when dealing with conventional banks. Finally, these banks, being compatible with the conventional system, will be able to easily communicate and deal with other banks, within and outside their own country. The Islamic banks as they operate today do not offer these advantages, even within the few Muslim countries where they are permitted to operate on their own terms. As such
Compatibility with conventional banking
Our bank satisfies the basic requirements of a deposittaking bank. One, it guarantees the depositors capital; two, the bank contracts to pay a non-negative return; three, its assets are assessable; and four, its income is also assessable and sufficient to maintain the bank. The banking authorities, who are more concerned with the maintenance of capital certainty than with the rate at which interest is paid, should to this extent be satisfied. There are also no built-in leakages due to charitable loans. Other formal legal requirements are easily met. Thus our
it is worth giving some serious thought to the proposed riba-free retail bank.
Transparency
includes the costs of general services provided to the depositors and borrowers), banks profit, a premium to the loan default insurance, and compensation for the loss of value of capital due to inflation. From the borrowers point of view interest charged by the bank is the cost of borrowing, and it has now been shown to consist of six components, only one of which is real interest (identified with riba). The first component (interest) is present in conventional banking and absent in riba-free banking; the next three components cover the fee charged by the bank; the insurance premium goes to a separate fund; and, if inflation is taken into consideration, the last component (compensation for inflation) is recovered from the borrower and passed onto the depositor. Unlike in the computation of conventional interest, each one of these components is computed in a different way and posted to its own separate account. This may seem much additional work, but in this computer age it is not. The result, however, is a positive gain. Let us take a closer look. Compensation for inflation is the same for all loans in all the banks because it is computed using the same data and formula. The loan default insurance is expected to be run by a single body (or several bodies operating under the same rules) and therefore the premium should be the same for any given borrower in any bank. Within the fees charged by the bank, the first component is the cost of services incurred in the course of processing the loan application. This is specific to the particular loan
Transparency is absent in both the conventional and the Islamic forms of banking. But it is the foundation of the proposed riba-free retail banking. In the first place, transparency tells both the bank itself and the supervising authorities what the real costs are, how they are distributed, and what the profits are. Secondly, in dealing with inflation, it enables one to know exactly what the loss of value of capital due to inflation was and how it was compensated. Both the depositors and the borrowers too know what they are being charged or paid, and for what reason. This transparency comes about on account of the model we are using in computing the fees charged by the bank. In conventional banking this fee is a single item, called interest, and it is calculated as a percentage of the principal and depends on the duration of the deposit or loan. In Islamic banking as practised today, in most cases, it is also a single item called profit (or mark up) though it may or may not depend on the size and duration of the loan. In the model used here this single item is considered as consisting of six components: interest paid to the depositor (which is identified with riba), the cost of specific services provided to the borrower on account of the current loan, cost of overheads of the bank (which
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Retail banking....
This detailed transparency, which is not available under the current practices, is a major characteristic of the proposed system. Furthermore, since all the components (of the bank charges) are subject to market forces, and none to arbitrary fixation, and the results are transparent, it is a truly free-market system. Consequently it reaps the benefits of that system efficiency and lower costs.
Misconceptions about loss and gain when a bank is riba-free
under consideration, and often consists of charges paid to outside agencies (such as to a lawyer for title checking of the collateral, stamp duties to the government, etc) and is a one-time cost. The second is the cost of overheads. This is a generalised cost estimated using total annual average net overheads cost of the bank (consisting of staff salaries, buildings, supplies, maintenance, etc less income from paid services using the same facilities) divided by the total annual average loans granted by the bank during the same period. Thus it is the banks cost in obtaining and sustaining loanable funds. This is a per-dollar-per-day cost, equally applicable to all loans and advances. This cost, being expenses minus incomes of the bank, will depend on the efficiency of the bank. Hence it is subject to market forces. It is continuously monitored, and may vary from year to year, but is kept fixed during the year. The third component, banks profit, is a percentage of the first two components. This percentage may vary from bank to bank, but since this system is transparent, under normal circumstances market competition will determine its size. The fact that all of this information is routinely available to the borrowers gives them the necessary information to shop around to their advantage, creating competitive market conditions. This management information is also very useful to the bank supervising authorities, who will then have a good overview of general trends in the whole sector.
Frankly speaking, when one talks of Islamic banking there seem to be two expectations expressed and unexpressed in the minds of people. Those who expect to borrow seem to feel that they would get loans on which they need not pay any interest they need to repay only the capital. On the other side, those who have capital seem to feel that they would get a return on their capital that would be higher than if they used a fixed-deposit account in a conventional bank. And, the bankers are afraid that no one will deposit in a no-interest account, and that a no-interest loan is simply impossible. These are valid concerns and expectations. But, it should be pointed out and emphasised that, they relate to the savings accounts, especially the fixed deposit accounts; and our scaled-down retail bank does not deal with this type of deposit, neither with the medium- and longterm loans granted using such funds. As such they are beyond our scope here. Our bank deals only with current and ordinary savings account deposits, and with loans and advances granted using funds from these deposits. Yet it would be useful to examine the validity of these expectations and reservations in the case of our bank, vis--vis the conventional banks. First, the current (or demand deposit) accounts. Conventional banks do not pay any interest on current account deposits. Our bank also does not. So there is no difference between the two banks in this area. This leaves us with only the ordinary savings accounts and the shortand medium-term loans. An ordinary savings account in a conventional bank stands somewhere between a current account and a fixed-deposit (or time-fixed) savings account, both in terms of interest paid and facilities provided. An ordinary savings account holder has the advantage of withdrawing his deposit (fully or partially) practically at any time (or at very short notice). In this he is nearly akin to one having a demand deposit account, but without the other facilities of the latter (mainly transactions using cheques). A depositor holds his funds in such an account because he is not sure when he may need his funds back or how much at any given time. Here he has the advantage of taking out what he needs when he needs, but what is not withdrawn earns interest, albeit at a reduced rate compared to a fixed deposit but better than the zero interest of a current account deposit.
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Retail banking....
The main concern of such a depositor is the safety of his funds. In developing countries, for various reasons, some people are unable to have a current account and therefore they use a savings account instead. These latter are not concerned about the interest. Some others use this account to build up a certain amount for future use (such as to buy property, durable goods, or to invest in a business) by depositing their extra earnings as and when they receive it. These and such others consider any interest received as compensation for loss of value suffered by their capital due to inflation. But the interest on these deposits are computed on the minimum balance held during a calendar period, such as a quarter or month. When there is high inflation the lower rate paid on ordinary savings accounts hardly covers the capital loss due to inflation. Further, when the minimum balance and calendar period criteria are taken together, many depositors miss out on their interest. For example, if one deposited 5000 on 5 January and withdrew it on 27 June, given a minimum period of one quarter, he would have missed the first quarter by four days and the second quarter by three days and would receive no interest whatsoever, even though his money was available to the bank for a full five months and more. As another example, suppose a person deposits 5000 on 15 December, withdraws 4000 for an emergency on 20 March and deposits it back five days later on 25 March, and finally withdraws the whole amount on 15 April. he will receive interest only on the 1000 minimum balance held during the first quarter, on account of that withdrawal for five days. This happens all too often in practice, and therefore the perceived loss to ordinary savings depositors is in reality minimal. If compensation for inflation loss can be arranged, as is proposed in this system, then such fears will have no basis. The expectation of cost-free loans from a bank is simply wishful thinking. It is both unrealistic and impractical. Unfortunately it is the result of a narrow, out of context, interpretation of a Quranic verse. The verse is addressed to a lender who lends his own money to a known person, in a person-to-person context. The lender is asked not to demand anything more than his capital from the borrower. The additional amount is called riba and prohibited, but the capital is his due. Even here, if the borrower had to incur expenses in travelling to meet the lender, the lender is not expected to pay the travel expenses of the borrower, and the travel expense is obviously not riba. If he sent a courier instead and the courier asked for the same travel expenses, and his wages in addition, these will have to be paid by the borrower and not by the lender, and this expense is not riba.
Obviously it is ridiculous to expect the courier, who provides a tangible service to the borrower spending his own time and effort, to do it free and also to incur the travel expenses, without any benefit to himself. Yet this is exactly what some seem to expect when they demand interest-free loans from a bank. That a modern bank incurs a lot of expenses in collecting funds from depositors, keeping them safe, scrutinising the loan applications of the borrowers, disbursing the loans, re-collecting them and repaying the depositors, and in keeping accounts and records of all these is for all to see. Riba-free loans are possible, when the capital owners do not demand it, but cost-free loans are a fantasy, except when it is a person-toperson transaction in the same locality. What the proposed riba-free bank promises is exactly what it says banking facilities without involving in riba. The small reduction in the charges the borrower pays this bank (as compared with those paid to a conventional bank), because it does not include the riba component, is incidental. So is the minimal loss an ordinary savings account depositor may suffer. The yardstick of success here is whether the bank operates riba-free or not not whether the loss or gain is more or less when compared with a conventional bank. However, the transparency we discussed earlier will bring about reductions to the cost of borrowing, compared to a non-transparent conventional bank. Additionally, the compensation for inflation provided for in this system will safeguard the depositor from real loss to his capital without recourse to riba.
Operations of the bank
The compatibility of this bank with conventional banking procedures facilitates its integration into an existing banking system. For all the tried-and-trusted methods of the conventional banks can be readily used by this bank, except that the cost of borrowing as explained above will replace bank interest in all calculations, and the deposit interest rate will be set equal to zero. Where relevant, compensation for inflation will be computed as explained in Gafoor (1999) and will be collected from the borrowers and paid to the depositors, as appropriate. Now let us very briefly sketch the main operations of the bank.
Deposit accounts
This bank will have two kinds of deposit accounts: demand and savings. Demand deposits will earn neither riba nor any compensation for inflation. Savings deposits too will not earn any riba but they will be paid compensation for inflation on minimum balances held, say, for a minimum of three calendar months.
Loans
It will provide short-term advances, and short-term and medium-term loans, which can be for durations of less than a month, less than a year and less than three years,
IN-DEPTH
Retail banking....
respectively. Borrowers will pay the cost of borrowing on all loans and advances. However, one or more components of the cost of borrowing may become zero, depending on the type of loan. For example, compensation for inflation will be collected from all loans of three months or more duration but this component will be zero in shorter-term loans; short-term advances will not have the service cost component; and inter-bank loans will entail only the overheads charge, all others being zero. Islamic banks as they operate today find it difficult to provide needed services in many important areas. These include short-term advances to see through liquidity problems, medium-term loans to set up small businesses, short-term loans (or working capital) to running businesses, and consumer credit, on a viable commercial basis. But these are among the most important banking services required in any economy. Inter-bank credit is also another necessity in a conventional banking system, but Islamic banks are unable to provide it. Under the proposed ribafree bank these loans and advances can be provided very easily.
crediting it to the payee, paying cheques drawn by an account-holder, honouring standing orders for regular payments, electronic transfer of funds, cash dispensing from automatic teller machines, and so on. Most of these are offered free of charge, though the bank incurs a lot of expense in providing them. They are offered to the depositors free only because their money, while held in the bank, is used by it to lend to borrowers and thereby earn an income. These services are needed by the depositors, and they should pay for them in cash if obtained from any other source. But the bank provides them free in order to induce them to keep their money with the bank. This service in kind is offered and received only because the depositor has given (or lent) some money to the bank; otherwise it would require payment in cash. Seen in this light, is it riba? The Islamic banking literature seems to be largely silent on this question. But it is necessary to raise the question, even though we do not propose to answer it. It is for the Sharia experts to enlighten us on this. All that we can say here is that the bank as proposed above can accommodate both yes and no answers. If the answer is no, then nothing in the present state of affairs need to change. If yes, then the depositors will have to pay a fee for the services they receive and it will become an income to the bank, reducing its net overheads cost. Consequently the cost of borrowing will become cheaper.
Bills of exchange
Other important areas include treasury bills, bills of exchange, and any financing connected with letters of credit. These too present no problems, since they can be treated as short-term loans (of generally less than three months) and charged accordingly.
Government bonds
Another important area is government bonds. The suggested solution to this is to denominate these bonds in units of gold. Then they will be sold at the current price of gold and will be bought back at the price current at the time of maturity. Thus the government will not pay any riba and the bond-holders will not demand or receive any riba, but the real loss of value of their capital due to inflation will be automatically and very transparently compensated. This, however, will require new government legislation. Governments of high inflation countries should consider this course of action seriously. Banks come into the picture only after government action.
Discussion and conclusion
Other services
All other normal retail banking operations will take place as in a conventional bank.
In the foregoing paragraphs we have taken a conventional bank and divided it into two sectors, one that provides a banking service and the other that caters to investment and finance. Our essay here was concerned with the former and the latter has been dealt with in a companion article. The sector that is under consideration here plays an important and essential role in conducting the businesses of individuals, organisations, businesses and the government, and touches the lives of practically everyone. Most of the daily activities in a bank, including almost all the transactions, take place in this sector. Comparatively speaking, the number of people involved and the number of transactions taking place in the other sector are much smaller, even though each transaction may involve huge sums of money. In the history of banking, the origins of the first sector goes back to the goldsmiths and their receipts confirming the deposit of gold by a client and its availability to the bearer, and the second sector goes back to the moneylender who lent his own money on interest. Later on these two were combined to form the progenitors of the modern bank. The activities in the first sector provide the modern bank with the ability to create bank credit, and the second
Banks services to the depositors: is it riba?
Depositors, both current and savings account holders, receive several types of services from the bank. These include accepting deposits whenever they are brought in, keeping them safe, returning them fully or in part when requested, keeping account of all these, accepting cheques drawn in favour of an account-holder and presenting it to the drawers bank and collecting the proceeds and
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Retail banking....
as Iran and Pakistan where it has been compelled to accommodate it. There is a historical background for this situation. In the Middle-east, Islamic banks came into being consequent to the oil price hike of 1973 and the resultant flow of huge amounts of money into the oil producing countries. When the new money flowed in the only income-earning investment options available were those offered by the conventional banks, based on interest. This pricked the Muslim religious conscience, and they searched for interest-free alternatives. Dubai Islamic Bank, the DMI (Darul Maal Islami) group with banking subsidiaries such as Faisal Islamic Bank, the Dallah Al-Barakah group and the Kuwait Finance House, these are some of the first fruits of this search. They came into being beginning 1975. What was required here was an agent to find opportunities for the direct employment of new money. The ancient concept of mudaraba suited this situation best, and the investment accounts of these banks and the mark-up trade-financing model served the purpose well. Some of the new money began to be deposited in the investment accounts of these banks, and the banks used it to finance the imports required for public and private development projects and consumption needs. The size of both the deposits and the transactions were large, and the profits were good. There was also enough new money in private hands providing sufficient liquidity in the economy. The conventional banks continued to operate in these countries side by side with the new banks. Large Western banks provided all the conventional facilities, both nationally and internationally, and dominated the field. Since the current account operations of the conventional banks were considered riba-free, the need for a fully riba-free system was not acutely felt. When it was sought to establish Islamic banks in Western countries, based on this model, their conventional central bank regulatory authorities refused permission. Therefore financial institutions, which are governed by a different set of rules, were set up in these countries, and they targeted high net-worth individuals and large ticket trade items. They concentrated on short-term trade financing and generally avoided long-term commitments. Reputed Western banks joined in the bonanza, and Islamic banking came to be identified with this model. In Iran, Pakistan, and the Sudan Islamic banks were established (beginning 1981) for a different reason religion and politics. It was by government initiative and the aim was to completely rid the economy of riba, and they began with the banking system. The needs and circumstances of these countries are different. Unlike in the oil producing countries of the Middle-east, there is no (or very little) inflow of new
sector the bulk of the monetary basis for this credit creation (using depositors money). Thus this combination enables the modern bank to lend huge sums of money. In turn, this enables the debt-based financing of enterprises, large and small. This contributes to greatly accelerated economic activity, using a relatively small monetary base; but it also has its negative side. Business cycles are traced back to speculation and excessive bank credit. Beyond a certain limit, unstable banks, bank failures, and the consequent economic chaos are the results. By separating the two sectors, this chain of events can be eliminated at source without losing the benefits of either. The retail bank can still create credit and help cash flow and provide financing, but on a smaller scale and on shorter terms, using the funds in current and savings accounts. This would practically eliminate risks of bank failures. And, the funds that would otherwise go into time deposits will be used by investment companies and investment banks to equity-finance enterprises, giving stability to the economy. But both will have to go together to create a comprehensive banking and finance system. Unfortunately, Islamic banking has come to be associated with the investment and finance sector, and has practically ignored the other sector, except in a few countries such
The profit-and loss-sharing (PLS) concept of the Islamic banks seems to work when it comes to financing onetime trade contracts (even though such activity gives rise to questions of economic morality), but has proven itself difficult to implement in the financing of enterprises on a medium or long-term basis. We have dealt with this aspect and provided a viable solution in the companion article mentioned earlier. The PLS scheme is also unsuited to catering for the short-term liquidity needs of businesses, individuals and the government, nor can it provide shortand medium-term loans to set up new small enterprises and working capital for existing businesses. Furthermore, it is unsuitable for providing consumer loans on a commercially viable basis. Inter-bank credit is another difficult area. In this article we have tried to rectify this lacuna by establishing a riba-free retail bank that uses conventional banking methods and operates under conventional banking laws. This bank provides all current account services, and makes use of the riba-free demand and savings deposits to provide riba-free but not cost-free loans and advances. It can also create bank credit to meet the credit needs of its clients, and provide inter-bank loans. There is a need for riba-free banks in all countries where Muslims live. But most countries operate under conventional banking laws, and it is futile to expect the situation to change. Neither need it change. Given also the generally tight monetary situation in countries other than the oil producing ones, we have to look for a solution within the conventional model. The model presented above is designed to work within the conventional laws. Under this model converting an existing bank into a ribafree one, as well as setting up a new bank, is relatively easy. Now it is up to the Muslim bankers and others to take steps to establish such riba-free retail banks in all countries of the world, and pave the way for riba-free economies in Muslim countries.
No : 92/2, Main Street, Colombo-11, Sri Lanka Tel : 247 8980, 243 6578 No : L1/55, Realty Plaza, Negombo Road, Ja Ela, Sri Lanka. Tel : 222 8688 E mail : riteshu@sltnet.lk
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(oil-bonanza) money here. Most of the money comes from normal economic activities, except for any outside loans and aid. There are few high net-worth individuals. The deposits come mainly from a large number of small depositors. There are also few large ticket items of import. The economies of these countries are dominated by a large number of small and medium size businesses, which need temporary advances to tide over short-term liquidity problems, and loans to set up new enterprises and to expand existing ones. Inflation and liquidity are also acute problems. The situation is similar in most of the other Muslim countries too. The existing Islamic banking models do not suit this situation. Therefore their search for a riba-free alternative continues.
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IFT Feeling the pulse of ethical business and reaching hearts !

It was a little over two years ago today that IFT had its humble beginnings. That was when Ikram Thowfeek, the Founder of the First Global Group and an Islamic Banker of no mean repute came up with a brainwave to start a magazine which would be exclusively devoted to the Islamic banking and finance industry. Although there existed a few such magazines in the market there was nevertheless a need to have a magazine that would channel the thoughts and ideas of the experts in the field, Shariah scholars, banking practitioners, economists and other intellectuals to a general readership that was keen on carving a niche for themselves in the industry. This was not going to be a magazine that gave its readers the latest news updates on the industry or statistics and figures to allow them to make the right choices. Rather, it was to have a more broader appeal, catering to the experts, practitioners and hopeful new entrants to the industry including students. It was then that Ikram, in one of his visits to his native Sri Lanka, met Asiff Hussein a young Journalist, author and editor of an industry
Founder and MD - Pioneer Publications shares a few thoughts with the audience
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magazine and commissioned him to set up a magazine devoted exclusively to Islamic banking and finance which would cater to the needs of a global readership. Hussein who then had only a basic grounding in economics as part of his university degree in sociology and a still less knowledge of Islamic Economics and Banking took up the challenge and it was not long before he along with his team got geared for the new venture, demonstrating that a knowledge Islamic Finance can be acquired at whatever stage one is in and that all it takes is the will to learn. It was no easy task to set up a world class Islamic Finance magazine from scratch. For instance in convincing the leading scholars of the day to contribute to it. After all, would these prominent men want to contribute to a magazine that they had nt heard of or much less had not even as yet come into existence. It certainly called for great trust on their part. And so the contributions gradually started flowing in. An exclusive interview with Prof. Nejatullah Siddiqui, widely considered the father of Islamic banking and another with Prof.
The Chief Guest Nazirah Hussain - High Commisioner for Malaysia being welcomed by the editor Asiff Hussein and his family
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the days to come establish IFT as a benchmark in the world of Islamic Financial literature. In 2008, after having been published as a quarterly for four issues, IFT became a monthly, drawing upon the support of a good many intellectuals who were now increasingly coming to perceive the magazine as the ideal forum to express their ideas and get their views across to a larger readership. The magazines readership base also improved with much positive feedback flowing in a development that continues to this day. These developments have only vindicated IFTs objective to contribute to the world of Islamic Finance and Banking by passing on knowledge and information to all those who need it at a very reasonable price. This is because IFT is not so much a business venture as a service to the larger community. In this it prides itself.
Her excellency Nazirah Hussain addressing the gathering
Rodney Wilson and contributions by other leading scholars including Dr.Monzer Kahf, Dr. Muhammad Al-Bashir Muhammad Al-Amine, well known Journalist Latheef Farook and even a contribution by Ikram Thowfeek finally meant that IFT was on its way to reality. The new magazine aptly named Islamic Finance Today was launched as a quarterly at a simple ceremony at the BMICH Colombo on the 22nd September 2006 with the then High Commissioner for Malaysia, Nazirah Hussain as the
Chief Guest. Her Excellency who observed on the occasion that IFT was a noteworthy contribution to the Islamic Financial literature of the day pledged her unstinted support for it. She kept her word. IFT had by now the support of a country that had been among the first to introduce Islamic banking and finance and very successfully at that. With time, support was to come from other quarters as well, and particularly the Middle East, Europe and the US by way of learned articles that would in
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Islamic Finance Today (IFT) is a much sought after source of information on Islamic Banking & Finance because of its rich and varied content and reader - friendly style of presentation, layout & design. Todays Banking and Investment savvy readers want a fresh new approach. A source that is up-to-date, specific, resourceful, thought-sharing and thought-provoking, with an eye for useful and quality information where both theory and practice come together to speak to its audience in a unique way. The Magazine delivers a mix of scholarly articles, view points, news, tips & hints, industry trends and profiles relating to the Islamic Banking & Finance Industry. Our objective is to provide readers with the latest up-to-date information on the developments and growth potential of the industry.
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www.pioneer-publications.com Islamic Finance Today 43
Sukuk to recover in 2009 says BNP Paribas

The issuance of sukuk, or Islamic bonds, is expected to pick up in 2009 and could exceed levels from 2007 after a dip this year, BNP Paribas Head of Middle East Debt Capital Markets Mark Waters is reported to have said. Sukuk issues, which have fallen to around $14 billion this year, could pick up in the second quarter of 2009 and exceed last years $50 billion figure so long as market conditions stabilise, said Waters. I think youll see a number of states, in particular Saudi Arabia and Kuwait, that will lean more heavily on sukuk structures than perhaps they would conventional bonds so I think those numbers are achievable he said. Waters said that an increase in the number of new bond issues in the US and European markets over recent weeks would help spur activity in the Gulf Arab region. Bond sales have seen a severe decline of late as the global credit squeeze raised borrowing costs, leading many Gulf borrowers to shelve sukuk sales as banks have increasingly become more reluctant to lend.
Malaysia to lay down Shariah parameters for Islamic Finance

Bank Negara Malaysia is set to promote a more consistent application of Islamic financial contracts and greater standardisation of Islamic financial practices. Known as the Syariah Parameters project, it is expected to be issued in the first quarter of 2009. The project aims at determining the essential features of Islamic financial products derived from underlying Shariah
contracts such as Murabahah, Istisna, Mudarabah, Musharakah, Ijarah and Wadiah and will serve as a guide for the application of Shariah contracts for Islamic financial products, which can be applied when designing new products or in the enhancement of existing products. The Shariah Parameters, once promulgated, would be a standardised point of reference for the practices being adopted among Islamic financial institutions, Islamic finance professionals and practitioners in entering Islamic financial contracts.
Unicorn to set up Saudi operations

The Bahrain-based Unicorn Investment Bank will shortly be commencing banking operations in Saudi Arabia. This follows the announcement that it has been awarded a licence by Saudi Arabias Capital Markets Authority to set up operations in the conservative kingdom. Unicorn Capital Saudi Arabia plans to provide the market with a comprehensive range of Islamic investment banking products and services. Unicorn Chairman Sheikh Yousef Al-Shelash said that the approval for setting up operations in Saudi Arabia was an important milestone for Unicorn Investment Bank, Our presence in the kingdom will be instrumental in helping the bank to achieve its vision of building a leading global Islamic investment bank he observed. Although headquartered in Bahrain, Unicorn Investment Bank operates subsidiaries in several countries including Malaysia , Turkey , the UAE and the United States
New Bahrain investment bank eyes MENA deals

The Bahrain-based First Investment Bank which was launched recently is currently working on five private equity deals each worth $50 million to $1 billion. The bank intends to capitalise on the tightening of the regions money markets faced by established banks. The thing that works for us is, were fresh, we have our capital intact, we have no commitments, so we can really sit back and look at the market and choose the right opportunities, said its CEO Jamal al-Hazeem. Al-Hazeem noted that the bank is looking at three deals in its main focus region of Middle East and North Africa , and two deals outside the region. He revealed that each of the deals ranged from $50 million to $1 billion, without elaborating further. He however expected Egypt to top the regions private equity market in the near future and noted that the creation of Nilex, a stock exchange on which Egyptian small and medium-sized companies can list, has increased the countrys attractiveness for the industry. First Investment Bank was recently launched with a paid-up capital of $120 million from eight Gulf financial institutions, including Gulf Investment House, Boubyan Bank and Noor Capital. October - December 2008
Islamic banking in Kenya catches on

Islamic banking is catching on in Kenya as Kenyans look for a safer alternative to the conventional banking system. As a result, banks, including many conventional banks are gradually turning their attention to Islamic banking to prevent their customers from switching loyalties, it is reliably learnt. The First Community Bank, the first fully Shariah-compliant institution to be registered by the Central Bank of Kenya (CBK) and to offer Islamic banking products in the country recently confirmed the current windfall being enjoyed by players in this fast growing sector. The bank has seen its deposits crossing the one billion mark while its capital base has grown from Sh510 million to Sh1 billion. In fact the banks CEO Nathif Adam is on record to have said that he intends to introduce more Shariah compliant products into the Kenyan market and expand their branch network to ten by the end of January 2009. The future of Islamic banking in the country looks even brighter now and to demonstrate this future growth potential, we can use the fact that as one of the youngest banks in the country, we have been able to grow our deposit by 100 per cent in the last four months alone, he said. Adam attributed the banks rapid growth to its extensive product base which includes Islamic asset financing. One of its more recent products involve buying off interest based loans from Muslims who might have contracted them as part of their transactions with conventional banks in exchange for its Shariah compliant products.
Path Solutions gets official certification

For the first time in history, the AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) certified a universal banking solutions firm when it awarded the certification to leading Islamic Finance Solutions provider Path Solutions. The certification ceremony took place at the AAOIFI and World Bank Annual Conference on Islamic Banking and Finance, in held in Bahrain recently. The certificate was handed to Path Solutions by Ebrahim Bin Khalifa Al Khalifa, The Chairman of the Board of Trustees of AAOIFI and Minister of Housing and Dr. Mohamad Nedal Al Chaar, the Secretary General of AAOIFI.
Standard Chartered launches Islamic Banking outfit in Malaysia

Standard Chartered Bank Malaysia recently launched its full-fledged Islamic banking outfit named Standard Chartered Saadiq Berhad. The unit which will offer Shariah-compliant products and services in Malaysia is poised to play an important role in leading this multinational banking groups global thrust into the fast-growing Islamic finance sector. Besides Saadiq, Standard Chartered also set up its first financial centre in Taman Tun Dr Ismail (TTDI). The banks managing director and CEO Julian Wynter said Standard Chartered was the first in recent years to offer innovative variable rate financing and to launch over nine first-to-market Islamic financial products such as the Islamic Profit Rate Swap, the Islamic Cross Currency Swap and the Islamic Rate Agreement. He noted that the Saadiq financial centre in TTDI has several smart branch features for the convenience of customers. The features include e-brochures, e-charges, Internet stations for online banking, e-kiosk, web telebanking, e-statements and e-reward redemption.
AAOIFI ascertained Path Solutions and its iMAL flagship software to be fully compliant with its standards and Shariah rules and principles. Naji Moukadam, President of Path Solutions said: Becoming the first banking software solutions provider to be certified by AAOIFI is a quantum leap for both the information technology industry and Path Solutions. As the pioneer in automating Islamic finance, Path in line with its corporate strategy, is fully committed to providing the Islamic finance institutions with true Islamic software solutions developed in compliance with the Sharia rules with no work around. Our partners using iMAL software now have the assurance of having licensed a true Islamic finance solution.
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