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GLOBAL PERSPECTIVE ON ISLAMIC BANKING & INSURANCE

ISSUE NO. 174JANUARY–MARCH 2010

MUHARRAM–RABI AL AWWAL1431

ALLEVIATING POVERTY: IS THERE LIGHT?

SUKUK DEFAULT:QUESTIONS ABOUT SHARI’AH SUPERVISION

SOCIAL BUSINESS AND ISLAMIC PRINCIPLES

ANALYSIS: PROMISES IN ISLAMIC BANKING

IT FOCUS: KUWAIT INTERNATIONAL BANK

IIBI LAUNCHES DISCUSSION FORUM

PUBLISHED SINCE 1991

24 Zakat as sadaqah or sadaqah as zakat?

In the second of a two-part analysis, Dr Renat Bekkin continues the discussionon poverty alleviation, in the case of Russia.

28 It’s the niyya that counts

Warren Edwardes, a member of IIBI Banking advisory group, argues that theniyya (intention) of financial transactions in Islamic finance should come fromthe heart, rather than be sung out loud on paper.

35 ‘La Finance Islamique: Une solution a la crise?’

Professor Joseph E Connolly reviews this book, published in the French language and focused on Islamic finance potential in France.

40 Waqf and Jersey foundation: common grounds

NewHorizon looks at the similarities between the two structures and the benefits they offer.

42 Keeping clean

NewHorizon compares anti-money laundering in Islamic and conventional financial institutions and dispels the myths about Islamic banks’ lenient policy towards money laundering.

46 Book review

‘Islamic Money & Banking: Integrating Money in Capital Theory’, by Iraj Toutounchian;‘Keynes: The Return of the Master’, by Robert Skidelsky.

www.newhorizon-islamicbanking.com IIBI 3

NEWHORIZON Muharram–Rabi Al Awwal 1431

Features

Regulars

12 Promises, promises

How is the concept of promises used in Islamic bank-ing and finance? Dr Humayon Dar, CEO of BMB Islamic and member of the IIBI editorial advisorypanel, examines the issue.

16 Islamic perspective on social business

Does Islamic finance take a pro-active stance in the social business sector? Can the social business modelof Bangladesh-based Grameen Bank be appliedacross the world and how should it be done?

20 Kuwait International Bank: from conventional to Islamic

The challenging task of converting technology to Shari’ah-compliant operations.

22 Sukuk default: questions about Shari’ah supervision

The recent ‘collapse of the Dubai boom’ providesplenty of food for thought: do Shari’ah advisers really act as ‘moral filters’ or are they pressured bythe banks to concentrate on making maximumprofit?

CONTENTS

44 DIARYUpcoming Islamic finance events endorsed by the IIBI.

48 APPOINTMENTS

49 DIRECTORY

50 GLOSSARY

32 IIBI LECTURESOctober and November lectures reviewed.

36 RATINGS & INDICESDow Jones Islamic Market World Index.

38 ACADEMIC ARTICLEShari’ah-compliant finance: UK regulation.

05 NEWSA round-up of the important stories from the last quarter around the globe.

29 IIBI NEWSIIBI launches Discussion Forum.Hong Kong’s regulatory authority visits IIBI. More students complete IIBI’s Post Graduate Diploma course.

www.newhorizon-islamicbanking.com

NEWHORIZON January–March 2010

Executive Editor’s NoteOn behalf of the Institute and the NewHorizon editorial team, I offerthe warmest wishes for 2010 to all our readers, and students, mem-bers and supporters of the IIBI.

This issue of the magazine comes out against the backdrop of the ongoing financial crisis, currently fuelled by the financial unrest inthe Middle East. We all hope that the New Year will finally bring the much talked about recovery, and the IIBI believes that Shari’ah-compliant finance will play an important role to bring about moralreform to address the inequalities and excesses in the global financialsystem.

I encourage NewHorizon readers to share their views on these and other developments in the world of finance on the IIBI’s newwebsite. It now has a fully-functional Discussion Forum, open for the members and students of the Institute as well as of organisationsaffiliated with it.

In this issue of NewHorizon, a prominent Islamic finance practi-tioner focuses on promises in Islamic finance – a subject of heated debate among industry participants. Also, NewHorizon raises a point on social business and explores the possibility of the use of the institution of waqf for such a purpose. Waqf is one of the impor-tant legacies of the early Islamic period, designed for poverty allevia-tion and humanitarianism. Also discussed is the concept of socialbusiness, promoted by Muhammad Yunus, founder of the world-renowned Grameen Bank and a Nobel Peace Prize winner. A socialbusiness model, which has been successfully applied by Grameen inBangladesh, aims at solving social problems rather than makingmoney for investors and at the same time being self-sufficient.

And of course, NewHorizon could not pass by the recent sukuk defaults and Dubai World’s ‘standstill’ on debt payments. Among the vital questions these events raise is the issue of Shari’ah supervi-sion and the role of Shari’ah advisers. Do they really act as ‘moral filters’ or do they by and large facilitate the desire of banks to makemaximum profit?

Mohammad Ali QayyumDirector General IIBI

EDITORIAL

EXECUTIVE EDITORMohammad Ali Qayyum,Director General, IIBI

EDITORTanya Andreasyan

IIBI EDITORMohammad Shafique

NEWS EDITORLawrence Freeborn

IIBI EDITORIAL ADVISORY PANELMohammed AminAjmal BhattyStella CoxDr Humayon Dar Iqbal KhanDr Imran Ashraf Usmani

DESIGNEREmily Brown

PUBLISHED BY IBS Intelligence8 Stade StreetHythe, Kent, CT21 6BEUnited KingdomTel: +44 (0) 1303 262 636Fax: +44 (0) 1303 262 646Email: [email protected]: www.ibsintelligence.com

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SUBSCRIPTION IBS Intelligence8 Stade Street, Hythe, Kent, CT21 6BE, United KingdomTel: +44 (0) 1303 262 636Fax: +44 (0) 1303 262 646Email: [email protected]: newhorizon-islamicbanking.com

IBS Intelligence is a trading name of IBS Publishing Ltd

©Institute of Islamic Banking and InsuranceISSN 0955-095X

Cover photo: © Nael Nabil, iStockphoto.com

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

Surat Al Baqara, Holy Quran

This magazine is published to provide information on developments in Islamic finance, and not to provide professional advice. The views expressed in thearticles are those of the authors alone and should not be attributed to the organisations they are associated with or their management. Any errors andomissions are the sole responsibility of the authors. The Publishers, Editors and Contributors accept no responsibility to any person who acts, or refrainsfrom acting, based upon any material published in the magazine. The Editorial Advisory Panel exists to provide general advice to the editors regardingmatters that may be of interest to readers. All decisions regarding the published content of the magazine are the sole responsibility of the Editors, and theEditorial Advisory Panel accepts no responsibility for the content.

4 IIBI


NEWHORIZON Muharram–Rabi Al Awwal 1431 NEWS

A subsidiary of Saad Group, aSaudi Arabian conglomerate,has said it is unable to meet re-payments on a sukuk (Islamicbonds) issue worth $650 mil-lion, which matures in 2012.Saad Trading Contracting andFinancial Services informedthe market that it is ‘impossi-ble for the issuer to perform itspayment obligations under thesukuk’.

Saad Group has been troubledfor some time. Saudi Arabianauthorities froze its assets thissummer, while a court in theCayman Islands, where manyof the group’s subsidiaries areincorporated, froze an addi-tional $9.2 billion of assets this year. The recent statementconcerning the sukuk was, ac-cording to the group, precipi-

tated when a court in AbuDhabi placed its assets in theemirate under its protection,citing unpaid debts.

Meanwhile, in Pakistan, amajor cement company, MapleLeaf, has announced its inabil-ity to repay $95 million worthsukuk bonds and has askedthe creditors to restructure thefinancing. The repayment ofsukuk is due from June 2010in eight bi-annual instalments.The largest creditor of thissukuk is the Allied Bank ofPakistan, which has an expo-sure of around $37 million.

The problems at Saad Groupand Maple Leaf are thought tohave wider implications, as therights of creditors are tested inpractice.

Saad Group sukuk defaults on repayments

Dubai World, a government-owned investment company inDubai, triggered concerns inglobal markets in late Novemberwhen it asked for a ‘standstill’ onits debt payments. The companyhad run into trouble because ofits exposure to falling propertyprices, and the announcement fuelled concerns about the sol-vency of Dubai itself.

The Dubai authorities havestressed that Dubai World’s obli-gations are not guaranteed bythe government, meaning thatNakheel’s sukuk was to face alegal test if creditors have tofight for access to its assets.However, as NewHorizon wasgoing to press, Abu Dhabistepped in with a $10 billionbailout sum for its troubledneighbour, averting a default.

Nakheel made a statement on the Nasdaq Dubai website that ‘it will honour all obligationsrelated to the 2009 Nakheel De-velopment Limited Sukuk’. Its$3.52 billion Islamic bond wasto be repaid before the end of2009, in the course of a two-week grace period (the sukukwas due to mature on 14th December).

Over the last year or two ques-tions have hung over whethermany sukuk are even halal, fol-lowing comments from ShaikhMuhammad Taqi Usmani, headof Shari’ah committee of theBahrain-based Accounting and Auditing Organisation forIslamic Financial Institutions(AAOIFI) in November 2007(NewHorizon, October–December 2008).

Dubai World debt paymentstandstill

A UN Food Agency is co-oper-ating with Islamic DevelopmentBank (IDB) to help advanceagriculture in poor countries.The UN Food and AgricultureOrganisation (FAO) said it hadreached an agreement worth $1 billion with IDB to developthe agricultural sectors ofeconomies of countries whichbelong to both organisations.The FAO stated that ‘this agree-ment comes at a critical mo-ment, when the internationalcommunity recognises it hasneglected agriculture for manyyears. Today, sustained invest-

ment in agriculture – especiallysmall-holder agriculture – is ac-knowledged as the key to foodsecurity.’

The announcement was made at the recent Hunger Summit, ameeting held to discuss solutionsto world hunger. Around 60heads of state and agricultureministers attended the forum,whose generalised aim is tomove developing countries awayfrom a direct dependency onfood aid and towards a situa-tion where they can produce forthemselves.

IDB co-operates with UN for food aid

The move by IDB mirrors its efforts in 2008 when the globalfood crisis – which led to riotsin a number of Islamiccountries including Egypt,Pakistan and Yemen –spurred it to offer lowcost loans totalling $1.5billion tied to agriculturaldevelopment. Saudi finance minister and chair of the IDB’s govern-ing committee, ShaikhAhmed Bin MohammadAl Khalifa, stated at thetime that the five yearprogramme was intended

to ‘help the least developedmember states reach food security’.

Islamic Development Bank

The Society for World Inter-bank Payments (Swift) launcheda new pilot in December for Islamic finance. Although a relatively small beginning forthe Society, it is seen as a poten-tially interesting area for diver-sification.

The initial focus is on treasurymurabaha messages, with aLondon-centric pilot. This is ahighly manual area at present,says Swift’s managing director,UK, Ireland and Nordics, ArunAggarwal (right), so the aim isto replace the paper flows withISO 15022 message standards.‘We have done the messaging,there were only very smalltweaks needed, and it is reallynow about getting the commu-

nity together.’ There will quicklybe a push to gain acceptance inmajor Islamic centres such asDubai and Malaysia, he says.The fact that most of the Islamicbanks will already have Swiftconnectivity should help the up-take. The instrument coveragewill also be extended; he pointsout that the pilot is focused onone of the largest.

Aggarwal declines to name thebanks involved until the pilothas gone live. However, it seemsclear that they include users ofPath Solutions’ core bankingsystem, iMAL, as this supplierand Swift have announced apartnership to support the newmessaging standards. Path’s cus-tomers in the UK are Bank of

London and The Middle East,Europe Arab Bank, EuropeanFinance House and GatehouseBank. Partners will be impor-tant to facilitate the uptake,says Aggarwal. ‘The first livetrades should be in December,’he says. Patrik Neutjens, headof partner management, Swift,says: ‘Swift is pleased to wel-come Path Solutions into ourPartner Programme. Togetherwe can work towards standard-ising and automating processessuch as the treasury murabaha,thereby helping to reduce costand risk associated with man-ual processing’.

‘We are delighted to collaboratewith Swift on creating pioneer-ing messages that will serve the

Swift launches Islamic message standards

special nature of the Islamic finance community’, says NajiMoukadam, president of PathSolutions. Once the pilot phaseis achieved and its progressmonitored, Path will be amongthe first to implement the new Islamic messaging systemstandard.

6 IIBI www.newhorizon-islamicbanking.com

NEWHORIZON January–March 2010NEWS

Luxembourg’s central bank to join IFSB

Banque Central du Luxem-bourg (BCL), the country’scentral bank, has applied tobecome a member of the Islamic Financial ServicesBoard (IFSB), a global stan-

dard-setting body. The bank’sgovernor, Yves Mersch(below), has recently con-firmed this. Acceptance of this invitation is expected to be announced next time the

council of the Malaysia-based IFSB meets.

BCL’s move reflects Mer-sch’s increasing enthusiasmfor Islamic banking, havingrecently called on Europeanauthorities to get to knowShari’ah-compliant finance,and also emphasised thatthe financial services needsof Europe’s close to 40 mil-lion Muslims, and countlessother millions who wantmore ethical service, have

‘not yet been properly ad-dressed by the conventionalbanking offering’. Mersch madethe comments while addressingthe 5th Economic Forum of the Belgium-Luxembourg-ArabCountries in Brussels. He addedthat it is important that regula-tors ‘become more familiarwith the principles and prac-tices specific to Islamic financein order to make appropriatesupervisory and regulatoryjudgments’.

If accepted, Luxembourg willbecome the first EuropeanUnion country to become an associate member of the IFSB,and the BCL plans to secondstaff to the IFSB where they can

familiarise themselves with Islamic financial products and transactions, plus conceptssuch as liquidity and risk management.

Luxembourg has previouslyshown plenty of interest in Is-lamic finance. Three initiativeswere announced in May 2009,including an investment fundworking group to look into the opportunities of Islamicfunds, an Islamic finance training programme at theLuxembourg Banking TrainingInstitute, and also instructionby the government for the tax authorities to look into ensuring tax neutrality forShari’ah-compliant finance.


NEWHORIZON January–March 2010NEWS

New Islamic liquidity fund launched in the UK

Prime Rate Capital Manage-ment, a London-based independent provider of institutional liquidity and fixedincome products, has launchedan Islamic liquidity fund, whichis the first Shari’ah-compliantliquidity instrument targeting atriple-A rating for the Islamicwholesale investment markets.

Prime Rate’s chief executive officer, Chris Oulton (left), de-scribed this initiative as ‘an in-novative cash product for theIslamic markets’, which ‘aimsto enable capital stability andreturns on short term cash, while at the same time remain-ing consistent with Islamicprinciples’.

The fund will be available in sterling, US dollars andeuros and will offer cus-tomers a pooling mechanismthat can be used for invest-ment of overnight, call andshort term cash surpluses.The investments will be made in commoditymurabaha transactions.

The Malaysian government hasrecently made the announce-ment that it will introduce sev-eral key measures to support thespeedy development of Islamicfinance. The announcement hasbeen welcomed by the Islamic fi-nancial industry. MalaysianPrime Minister Najib AbdulRazak confirmed in his 2010budget speech that the govern-ment is to extend existing tax in-centives for Islamic finance foranother five years.

These incentives include a stampduty exemption of 20 per centon Islamic instruments, tax ex-emption on banking profits de-rived from foreign operations(including from takaful), and adouble deduction on expendi-ture promoting Malaysia as aninternational hub for Shari’ah-compliant finance. These meas-ures were due to expire in 2010,but will now be extended to2015. Razak stated that that thegovernment’s commitment to

forging an international Islamicfinancial hub is ongoing,through the Malaysia Interna-tional Islamic Financial Center(MIFC) initiative, which waslaunched in 2006.

Similarly, other provisions de-signed to encourage an Islamiccapital market will also be ex-tended. These cover a deduc-tion in expenditure incurred onthe issuance of Islamic securi-ties, a tax exemption on profitsmade from non-ringgit sukukoriginating from Malaysiabeing widened in scope, and adeduction on expenditure in-curred in the setting up of stockbroking companies.

Malaysia can already claim tobe a world leader in Islamic finance, with, for example, 62 per cent of sukuk outstanding at the end of 2008 coming fromMalaysia. Malaysia’s secondarysukuk market also averages$300 million a day.

Malaysia committed toIslamic finance

Scholars and scientists areanalysing the manuscripts, dis-covered in Timbuktu in Mali,which was once the locationof a distinguished Islamic uni-versity town. Because of its in-tellectual history Timbuktu issometimes referred to as theAfrican Oxford Universitytown. Thou-sands of man-uscripts havebeen un-earthed inTimbuktu inrecent years,on the sub-jects of as-tronomy,mathematics,medicine,music, poetry,commerce and Islamic law.

Most of the works stem fromthe late Middle Ages, whenTimbuktu was an importantcrossroads for caravans andhome to gold merchants andscholars.

The manuscripts, which cover all main aspects of socio-economic issues of the times,are hoped to shed some lighton how trade and commercialtransactions based on Islamicprinciples were conducted bythe Arab merchants. Writtenlargely in Arabic, these manu-

scripts could make a valuablecontribution to the develop-ment of Islamic finance. Theywould help academics and fi-nance practitioners working inthe Shari’ah-compliant financeindustry to understand theprogress and the achieved eco-nomic success in that region.

Islamic legacy of Timbuktu

Author: KaTeznik, Wikipedia Commons

Sankore Madrasah, Timbuktu


NEWHORIZON Muharram–Rabi Al Awwal 1431 NEWS

A recent analysis of the returns to depositors ofbanks reveals that cus-tomers of Islamic bankstend to get a better dealthan those of conventionalfinancial institutions.

This conclusion is based ona comparison of the interestexpense earned by conven-tional customers comparedwith the profit rate earnedby Shari’ah-compliantbanks’ clients.

National Bank of Abu Dhabi’sinterest expenses for the firstthree quarters of 2008 consti-tuted 53 per cent of the bank’stotal conventional interest in-come, but this figure droppedto 35 per cent for the sameperiod in 2009. This com-pares with a number of Is-lamic banks which were moregenerous with their profits.Dubai Islamic Bank paid outaround $350 million of totalprofits of approximately $850million in 2008, but paid a

Depositors’ returns higher from Islamic institutions

Islamic outperforms conventional in UAE

Despite being more generous, a study has shown that Islamicbanks in the UAE are outper-forming their conventional rivals on a number of other important metrics. They havemoved ahead in terms of liq-uidity, profitability and earn-ings per share, according to arecent report, compiled by DrMohammed Naeem Shaker,professor at the finance depart-ment of the College of BusinessAdministration at Ajman Uni-versity of Science and Technol-ogy, and Dr Abdalla Salih,

assistant professor at the col-lege’s accounting department.

The report’s conclusions werebased on a comparison of threeconventional banks (NBD, Na-tional Bank of Abu Dhabi andAbu Dhabi Commercial Bank)with three Islamic banks (DubaiIslamic Bank, Sharjah IslamicBank and Abu Dhabi IslamicBank) for the period of 2006 to2009.

‘The study has proved that theperformance of the three Islamic

banks was good and theywere not basically affectedby the fallout from the cri-sis,’ said Dr Salih. ‘Theymaintained their profitabil-ity level and their liquiditylevel went up. Also, therewas an increase in the ratioof shareholders equity tototal liabilities and equity.The ratio of liabilities to

the value of assets remain-ed steady or varied onlyslightly, and there was aclear rise in earnings pershare.’ This was in starkcontrast to the conventionalbanks, whose liquidity andprofitability fell sharply asa consequence of the globalfinancial crisis.

Mohamed Albeltagi, head ofthe Shari’ah department at theEgyptian branch of Abu DhabiIslamic Bank, backed this up incomments to the Forum forAccounting and Auditing Bu-reaus and Companies in GCCcountries. He stated that Is-lamic banks in the UAE areamong the best in the world interms of performance and Is-lamic compliance. ‘The num-ber of Islamic banks isincreasing greatly around theworld and the rate of increaseduring the global financial cri-

sis reached some 28 per cent,’he said. ‘The assets of the 700Islamic banks went up to $822billion this year from $650 bil-lion in 2008. And the assets areexpected to rise to $1.3 trillionin 2010. The figure is based onan annual growth rate of 15per cent to 20 per cent. Islamicbanks have survived the globalfinancial crisis since no Islamicbank has announced bank-ruptcy, unlike banks that payinterest in America and else-where in the West where thenumber of bankrupt banks hasreached 100.’

similar amount in absoluteterms in 2009 despite itstotal profits dropping byabout $180 million. EmiratesIslamic Bank showed astronger tendency for gen-erosity, raising the amount of profit it distributed byabout $10 million, even astotal profit fell by around aquarter.

Indeed, Tamweel, an Islamicreal estate finance firm in theUAE, distributed so much to

its customers that it posted aloss over the period. This hasled some Shari’ah scholars toquestion whether distributingmore profits than can be af-forded is Shari’ah-compliant.

Dr Hussain Hamed Hassan,head of the Shari’ah board ofDubai Islamic Bank, com-mented that this should onlybe done in exceptional cir-cumstances, and only if it is in the best interests of the institution.


NEWS NEWHORIZON January–March 2010

Salaam Halal insurance,part of Principle InsuranceHoldings and the first inde-pendent takaful provider inthe UK, has stopped accept-ing new business, followinga failed rights issue. It isnow in a ‘solvent run-off’situation, whereby its exist-ing polices (there are about10,000 policyholders) willoperate until expiry, whenthey cannot be renewed.

Bradley Brandon Cross,CEO of Salaam Halal insur-ance, said that ‘regretfully, a recent rights issue did notproduce sufficient funds tosupport the company’s con-tinuation beyond the life ofcurrent customer policies’.Under Financial Services Authority guidelines,

Salaam Halal was required to hold enough funds to coverthe claims of its existing pol-icy holders, but the failedrights issue left it with a gap.Salaam Halal managed toraise £60 million, but hadbeen aiming at £80 million.The shortfall has been putdown to the effects of thecredit crunch and global recession.

Salaam Halal was profiled in New Horizon shortly after its launch in July 2008(NewHorizon, July–Septem-ber 2008). Its initial productswere for motor insurance butthe company had been confi-dent of moving into buildingand contents insurance, lifeinsurance and commercial insurance.

Salaam Halal insurance fails to attract interest

Al Hilal Bank, a government-owned Islamic bank in theUAE, which was launched in2008, has demonstrated its resolve to take seriously issuesrelating to compliance and fi-nancial crime by signing a dealwith Norkom Technologies, anIreland-based vendor. Al Hilalwill implement Norkom’s anti-money laundering (AML) andwatch list management solu-tions across its operations inAbu Dhabi, Al Ain and Dubai.

Al Hilal’s head of compliancesays that the bank take issues of money laundering and terror-ist financing very seriously. ‘Weare committed to improving our defences against these formsof financial crimes, as well as maintaining the highest standards of compliance withlocal and global regulations,’ he says.

The software is designed to helpits users monitor and analysetransactions and customer inter-action across its entire customerbase to identify and look intosuspicious patterns and criminalbehaviour. And Norkom’s watch-list solution will immediatelywarn the bank if any party on lists attempts a transaction. Thisshould help the bank avoid mis-takenly doing business with sus-pected terrorists and criminals.

‘To our surprise, the require-ments or necessary changes toadapt to local or Shari’ah lawsdo not impact our systems. It’smore the banking system itselfwhere those changes are re-quired,’ explains Norkom’s gen-eral manager for Europe, AlainTayenne. Al Hilal is Norkom’ssecond Islamic banking customer,the first being Dubai IslamicBank, which signed in 2008.

Al Hilal Bank tackles AML

International Shari’ah ResearchAcademy for Islamic Finance(ISRA) and Kuwait FinanceHouse (KFH) Malaysia havesigned a memorandum of under-standing (MoU) to translate thebank’s Shari’ah resolutions fromArabic into English. The projectcovers translation of the resolu-tions from the KFH’s Fatwa and Shari’ah Supervisory Boardmeetings over the three decades,starting from its inception in1977.

The work is expected to lastaround one year and the re-sults will be reviewed and endorsed by a dedicated com-mittee, consisting of Shari’ahscholars and practitioners. Itwill then be distributed to thebank’s customers, regulators,researchers and academics, and other relevant organisa-tions. The Arabic version ofthe rulings is already availablein Kuwait and the MiddleEast.

‘This joint project with KFHMalaysia provides us with the perfect tool to effectivelyshare developments in Islamicfinance over the years and enhance understanding of the Shari’ah among theUmmah,’ said Dr MohamadAkram Laldin, executive director at ISRA. ‘This mas-sive translation project cre-ates a need for specialists andinspires us to increase our effort to identify and source

ISRA and KFH Malaysia to translate Shari’ah rulings into English

for even more talent in Islamicfinance.’

Dr Mohammad Abdul RazaqAl-Tabtabae, chairman ofShari’ah committee, KFH Ma-laysia, added that this workwill contribute significantly tothe limited pool of reference on Shari’ah-compliant finan-cial cases, arising issues andrulings, which are currentlyavailable in the English lan-guage.



Promises have played an instrumental rolein the development of the Islamic financialservices industry. Criticised by many indus-try observers for bringing a number of (undesired) Western financial solutions to Islamic banking and finance, promiseshave, nevertheless, proven to be an effectivetool for structuring innovative Islamic fi-nancial products.

A promise (or what is known as wa’ad in Islamic law) is a unilateral undertaking by a party (promisor) to do something (like buy or sell an asset) for someone(promisee) for a known consideration dur-ing (or at) a certain time (period). Promisesare considered quasi-contracts in Islamiclaw, and are binding on just one party to anagreement, i.e. the promisor. This interest-ing characteristic of promises makes theman ideal underlying agreement for structur-ing Islamic options and other derivativecontracts. Indeed, this was the very featureof promises, which was employed by anumber of Western investment banks thatoffered a new range of Islamic structuredproducts. This aspect of promises couldalso be used to structure Islamic futures contracts.

It is important to consider that only unilat-eral promises are useful for structuringabove-mentioned products. Mutually given promises are binding on both partiesand, therefore, amount to a contract, offering no options to either promisee orpromisor. However, slight variations in the parameters of an agreement help con-struct unilateral promises that may be used in incentive-compatible structures for options, futures and derivative prod-ucts. Bilateral promises, although admissi-

Promises, promises

Dr Humayon Dar, CEO of BMB Islamic UK Ltd and member of the IIBI editorial advisory panel,examines the use of promises in Islamic banking and finance.

ble, are not considered as binding in mosttransactions involving either delay in pay-ment of price or deferment in delivery ofthe object of sale.

For example, if person A unilaterally prom-ises to buy a stock X from B at a futuredate T for a price P, and B unilaterallypromises to sell a stock X to A at a futuredate t for a price P, then the two promisestogether are, in effect, a bilateral promise.From Shari’ah viewpoint, they should bebinding on both parties, as they amount toa full contract. It must be noted that this bilateral promisory arrangement gives riseto a forward sale contract, which is forbid-den in the Islamic law of contracts.

However, if A unilaterally promises to buy a stock X from B at a future date T1 for a price P, and B unilaterally promises to sell a stock X to A at a future date T2 for a price P, then the two promises together do not amount to a bilateral promise be-cause they refer to different execution dates. Similarly, if all other parameters ofthe two promises are the same except thatthe promised prices are different, the twopromises will be considered unilateral and,therefore, binding on the promising partiesonly. This discussion is summarised inTable 1.

Two unilateral and one-way binding prom-ises can be put to use in structuring somesophisticated Islamic financial products.Some banks have developed Shari’ah-compliant swaps, options and similar prod-ucts based on unilateral promises. In fact,promises can play an even wider role in developing some cutting edge financialproducts, like fund-linked derivatives.

ANALYSIS

Dr Humayon Dar,BMB Islamic UK Ltd


NEWHORIZON Muharram–Rabi Al Awwal 1431 ANALYSIS

This article focuses on a possible structurefor Islamic options. There are a number ofother interesting applications of promisesin Islamic banking and finance. Those whoare involved in structuring such productsclaim their Shari’ah authenticity and arguefor even more sophisticated use of promisesin Islamic finance. There is a group of in-dustry observers who consider such devel-opments unhealthy.

Promises have some interesting implica-tions for structuring Shari’ah compliant fi-nancial options. However, there are somefundamental questions to be answered be-fore one may suggest using promises instructuring Islamic options. These include:

❏ Do the promises have an economic value?

❏ Can a promise be sold for a price?❏ What is the penalty for reneging on a

contract?

Promises have an economic value only ifthey are binding, in which case the renegingparty may be liable for a penalty equivalentto the actual monetary loss incurred to thepromisee. However, ‘unbundled’ promisescannot be sold for a price, as is the case inconventional options wherein the buyer ofan option (promisee) pays a premium for a right to buy/sell in future. Although somecontemporary Shari’ah scholars opine thatunbundled promises could be sold for aprice, this is a view held by only a handfulof Shari’ah scholars. Hence, this view mustbe employed with caution while structuringIslamic financial products. There are someWestern banks that are pushing the case forthe pricing of promises in Islamic finance,but resistance to the idea continues.

Keeping these restrictions in mind, prom-ises may be used in conjunction withmurabaha to structure Islamic options.Suppose party A wishes to protect itselfagainst downward risk of holding a stock(similar to purchasing a protective put).Given the Shari’ah limitations, a conven-tional put option is not available; and,thus, the party enters into the followingarrangement:

Promisor Promise ObjectExecution

DatePrice Condition Comments

Case IA (to buy)B (to sell)

BA

XX

TT

PxPx

UnconditionalUnconditional Bilateral

promise

Case IIA (to buy)B (to sell)

BA

XX

TT

Px1Px2

UnconditionalUnconditional Two unilateral

promises

Case IIIA (to buy)B (to sell)

BA

XX

T1T2

PP


promises

Case IVA (to buy)B (to sell)

BA

XY

TT

PP


promises

Case VA (to buy)

B X T0 < T < T1 P

If A defaults on the lease

contract during T0and T1

B (to buy) A X T< T1 P

If A fulfills all the obligations of the lease

agreement between A and B

Two unilateralpromises

Table 1 Bindingness of Promises

Parties When P> Pm When P < Pm

A 0 Pm – P > 0

B 0 (gets its stock back) P

Broker/Exchange 0 0

Table 2Payoffs when P = Pmur


NEWHORIZON January–March 2010ANALYSIS

A buys the stock from B on a murabaha-basis whereby stock is delivered to A by B at T0 for a price to be paid at T1. Themurabaha price, Pmur, is higher than the current market price of the stock andmay include a ‘premium’.

B then promises to buy the stock from abroker (or an exchange) for a specified

price, P, on a future date, T1 (European put).The agreed price, P, may be different fromthe murabaha price, Pmur. On receiving thePromise 1, the broker promises to buy thestock from A for the same specified price, P, on the future date T1.

The arrangement described above (and depicted in Figure 1) should replicate a

conventional put. An example should ex-plain it.

Scenario 1:

Suppose the promised price, P, is actuallyequal to the murabaha price, Pmur, and at T1, the market price of the stock,Pm, happens to be less than P. Given the

Pm < P < Pmur Pm > P > Pmur P < Pm < Pmur P < Pmur < Pm P > Pm > Pmur P > Pmur > Pm

A will make the Brokerhonour its promise and

buy the stock for P

A will not be interestedin the promise given bythe broker and would

prefer selling the stockin the market





A will make the Brokerhonour its promise and

buy the stock for P

A will make the brokerhonour its promise and

buy the stock for P

A’s payoff: P – Pmur < 0

(instead of losing Pm –

Pmur)

A’s payoff: Pm –

Pmur > 0


Pmur > 0


Pmur > 0


Pmur > 0

(instead of earning onlyP – Pm)


Pmur > 0

(instead of earning P –Pm it will be earning

less)

B’s payoff: Pmur –

P > 0 + stock

B’s payoff: Pmur> 0



B’s payoff: Pmur– P < 0 + stock

B’s payoff: Pmur– P < 0 + stock

Table 3Payoffs when P ≠ Pmur

Figure 1Promises in Islamic options


ANALYSISNEWHORIZON Muharram–Rabi Al Awwal 1431

positive differential between P (the price A pays to B for the stock) and Pm (theprice A may charge from the broker), P -Pm > 0, A would make the broker honourits promise and buy the stock from it. Thebroker would in turn make B honour itspromise to buy the stock from it. This will shift the broker’s loss on to B. If, how-ever, Pm > P, A will not be interested in thepromise given by the broker, as selling thestock to the broker will incur a loss to A.Similarly, the broker will not triggerPromise 2. The end result is given in Table2, which clearly shows that this arrange-ment offers Party A with downward pro-tection, which is a feature of aconventional protected put.

Scenario 2:

It may very well be the case that the promised price, P, is different from theMurabaha price, Pmur. Table 3 shows different cases in which the promised

price differs from the murabaha price,Pmur, and the future market price, Pm.The results indicate that although Islamicoptions may provide downward protection to the purchaser of a put, the extent ofprotection may actually decrease. Further-more, combining murabaha with promisesresults into a structure that allows risk and profit sharing between the transactingparties. Unlike a conventional put optionthat offers downward protection to itspurchaser, an Islamic option mitigates riskin such a way that the two parties end upsharing risk.

The above examples suggest that theworking of an Islamic put is somewhat different from a conventional put. While in a conventional put, the buyer of the put calls the shot by putting to sell afterhaving paid a ‘premium’, a buyer of an Islamic put calls the shot after actuallyhaving bought the stock from a seller(Party B in the above examples) on a

murabaha basis. In a conventional put, theunderlying stock ends up with the put-holderafter they have exercised their option. In theIslamic put, however, the underlying stockgoes back to the original seller (Party B) afterthe put-holder has exercised their option.Major differences between an Islamic andconventional put are summarised in Table 4.

It appears as if selling an Islamic put is not an attractive proposition. The seller of an Islamic put gets a premium, embeddedin the murabaha price, when the put-holderdoes not exercise their option; and benefitsfrom no premium when the Islamic put is ex-ercised and, indeed, is left with a devaluedstock. However, combining the sale of an Islamic put with the purchase of a conven-tional call has interesting implications for thepayoff of the selling party. Combining suchstructures is a recipe for success and it is thisarea that is expected to benefit players in theShari’ah-compliant finance industry in thenear future.

Premium Ownership of stock Winner/loser

If option isexercised

If option is not exercised

If option isexercised

If option is not exercised

Islamic put

No separate premiumbut bundled in

murabaha price; paid at the end

The stock goes back tothe murabaha seller(seller of the Islamic

put)

The stock ends up withthe put-holder

The Put-holder gainsthe difference betweenthe exercise (promised)

price and murabahaprice; the seller of the

put loses the equivalentamount

The Put-holder gainsthe difference between

market price andmurabaha price;

the seller of the put receives only themurabaha price

Conventional putUnbundled premium;

paid upfrontThe stock ends up with

the put-holer

The stock remains withthe seller of the put,who also receives a

premium upfront

The Put-holder gainsthe difference betweenmarket price and the exercise (strike) price

minus the premium; theseller of the put losesthe equivalent amount

The Put-holder losesthe premium; the seller

gains the equivalentamount

Table 4Conventional and Islamic put options compared



way capitalism has been implemented sofar. During the lecture, he stated that ‘noone is calling for it [capitalism] to be aban-doned in favour of some other system, such as socialism, because everybody isconvinced that, with all its faults, capital-ism is the best economic system known tohumanity.’

According to him, capitalism is goingthrough a very serious crisis and social business might prove an efficient tool forcorrecting it.

In a social business, the goal is not to makeprofit, but to solve a social problem. Themethodology is simple:

1. Identify a social problem;2. Create a company to solve it.

Profits are not important because the goal is to solve the problem. If the companyreaches break even, this is enough. If thecompany does make some profits, nomoney should be taken out. Profits can beused to:

❏ Expand the business outreach;❏ Improve the product or service quality;❏ Design methods to bring down the

product or service cost.

Initial investors have the right to recouptheir investment capitals, but no dividendswill be taken. They will take back their ini-tial investments in the future, at nominalvalue.

A second type of social business is a busi-ness owned by the poor, like Grameen (95

One thing a student immediately learns ina business school is that the ultimate goalof a company is profit.

This is what business is all about, at leastin the capitalistic system we live in. But recently a new concept has arisen: socialbusiness. The concept does not refer to so-cial enterprise or corporate responsibility,whereby a company is involved in social,environmental or educational programs.Lecturing at the Glasgow University in2008, Muhammad Yunus described socialbusiness as ‘a business whose purpose is toaddress and solve social problems, not tomake money for investors. It is a non-lossnon-dividend company.’

This definition, as well as the whole concept, was coined by Yunus, who is regarded as the father of microcredit. Hefounded Grameen Bank in Bangladesh –the bank that pioneered a microcreditmodel that subsequently spread all overthe world. The bank and its founder re-ceived the Nobel Peace Prize 2006.

According to Yunus, most people retainfrom Adam Smith his most famous work,‘Wealth of Nations’, where he pointed outthe selfishness of the human being. But it is often forgotten that he also high-lighted the other side of the human nature,namely its selflessness, in his ‘Theory ofMoral Sentiments’. Smith took the viewthat people are born with a moral sense –our conscience tells us what is right orwrong.

Yunus wants to bring this selflessness partinto the business world, thus changing the

Islamic perspective on social business Mohamed El Mehdi Zidani, co-founder of Quantis, an Islamic finance consultancy firm, and MAstudent at EDHEC Business School, France, focuses on the relationship between the newsocial business concept and the old waqf system.

per cent is owned by the poor, receiving div-idends on profits). A committed professionalteam runs the bank, but does not participatein the ownership.

Partnerships

Grameen has launched several social busi-nesses to address problems faced by thepoor, like providing renewable energy, tech-nology or healthcare services at low cost.

It has also established partnerships with twoFrench multinational corporations. One iswith Danone to sell fortified yoghurts atvery low prices to poor children (to fightmalnutrition); and the second one is withVeolia to provide rural areas with cleanwater at low cost (to fight health issues).Neither Danone nor Veolia nor Grameenwill get any profit from these joint ventures.All profits, as mentioned, are to be rein-vested.

Grameen is also working with other multi-nationals as well, among which are BASF,Adidas and Volkswagen.

Yunus has also promoted social businessfunds (which will themselves be social busi-nesses) to fund this kind of activity. A socialbusiness fund is to be created in Monaco. Apartnership with the Islamic DevelopmentBank (IDB) to create the IDB Grameen So-cial Business Initiative has already beenagreed.

Delivering lectures in universities, Yunus en-courages young students to launch socialbusinesses. If they do business only to makemoney, that’s fine, but they should ensure

POINT OF VIEW


NEWHORIZON Muharram–Rabi Al Awwal 1431 POINT OF VIEW

that their businesses make a positive impacton people’s lives, or – at least – no negativeimpact. In his Glasgow lecture he added:‘Alternatively, you could use your talent tochange the world by harnessing the powerof creative social businesses to addresshuman and social needs. Of course, you can do both types of businesses. Makingmoney through responsible profit-maximis-ing business could be the means, while usingthat money for social businesses could bethe exciting end.’

Not-for-profit organisations

At a first glance, social business is very simi-lar to not-for-profit organisations, whichalso aim at solving social problems ratherthan making profits. But the latter relymainly on charities and external funds.

The social business, however, has as an objective to become financially self-suffi-cient. It usually takes several years, but ultimately a social business should not relyon external funds. Also, and it is related, asocial business does not provide products or services for free.

The idea is to use business principles, butfor a social goal. You keep the means, butchange the objective.

An Islamic perspective

On a theoretical level, one may not agreewith Yunus’ statement that ‘capitalism is thebest economic system known to humanity’.According to Muslims, Islam is a completecode of life and provides guidance in allspheres of life including economic activities.It does not mean that we have each and

every detail of economic policies, but Islamgives Muslims a necessary frameworkwithin which this creativity can be ex-pressed. Putting ethics in business has beendone for a long time by Muslim traders,but it is not really the idea of social busi-ness. When thinking about social business,the idea of waqf springs to mind. Waqf isan Islamic concept whereby an institutionis self-sufficient and aims at solving a socialproblem. This is what waqf is all about(plus the reward in the Hereafter).

Waqf

Waqf is a good given for Allah’s cause. It cannot be sold, or taken back. The waqif (the one who owned the good) is no more the owner.

All profits are to be spent for a specific purpose set at the beginning by the waqif.Lands and buildings are examples of awqaf(plural of waqf).

The waqf will generate income indefinitely.Income will be then divided into threeparts: one for management of the waqf (di-rector, employees etc), one to be reinvestedin goods (equipment, seeds etc) and the lastone to be devoted to the targeted project(mosque, school etc).

Waqf has historically played a huge role in Muslim societies, financing the construc-tion and maintenance of public entities, such as universities, libraries, hospitals andorphanages.

Let’s take an example: you own a house. You give it as a waqf. It can be used as thebuilding of a school, for instance, or it can

be rented and the income generated willbe used to pay teachers, electricity billsand so on. If used this way, it will be sim-ilar to a ‘social business fund’.

Some differences though

Without getting into juridical (fiqh) is-sues that may point out differences be-tween social business and waqf, it isworth noting that they are not exactlythe same.

To be clear, we have to distinguish be-tween the waqf itself and the project fi-nanced by the waqf.

The social business has as an objective tobecome self-sufficient. But in the case ofa project funded by a waqf, it is not thecase. A library funded by a waqf does not aim at being self-sufficient, since onecharacteristic of the waqf is that it gener-ates money without end, so there will al-ways be money to fund the library. Now,the waqf itself is indeed self-sufficient.Land will generate income by itself.

Also, there is a theoretical difference withthe social business concept: the socialpurpose is not fulfiled by the business ofthe waqf, but by the project financed bythe waqf.

In a social business, a business is started to solve a social problem. In the case of a waqf, a business is started to finance aproject to solve a social problem.

That being said, the waqf can also solvethe social problem by itself. In this case,the waqf is actually at a higher level thanthe social business concept.

For instance: unemployment in ruralareas is a social problem. To fight thisproblem, one might buy some land andgive it as a waqf: not only will it createemployment (solving the social problem),but the income generated can also beused to fund another project. The moneycan be used to establish, say, a clinic.This will provide more jobs (again fight-

Scheme 1. Waqf model (where the waqf is land)

This social business has two hospitals. Ittook seven years to reach self-sufficiency. It has different brackets of fees, according to patients’ means. It also provides free surgery for those who genuinely cannot afford it. To encourage people to pay, ahigher quality of service is provided forthem: they have, for instance, beds insteadof mattresses. Is this really a good thing:beds for the rich vs. on the floor for thepoor? Although this is, undoubtedly, aquestion to ponder, the point here is that it is possible to make a hospital self-sufficient.

But if this is possible with a hospital, it becomes harder for other projects, like an orphanage. How do you make an or-phanage self-sufficient? And do we want to see orphanages becoming businesses? Yet another question to ponder.

Conclusion

Unfortunately, new concepts are notbrought in (or are reluctantly brought in) by Islamic organisations. And when theyhave good ideas, they often remain ink onpaper. Then the industry waits for other organisations to come up with new con-cepts, and copies them and tries to adaptwhat needs be to the Shari’ah, even thoughit had everything from the beginning to be the one introducing systems to solve current problems. The world is deeply inneed of alternatives, particularly in the economic field.


NEWHORIZON January–March 2010POINT OF VIEW

ing the initial unemployment issue) andsolve another social problem – healthcare.

Another advantage of waqf is that it is self-sufficient by nature, from day one, while social businesses will often take years toreach their break even.

Schemes 1 (p17) and 2 (right) give examplesof waqf and social business models. Benefitscoming from the businesses themselves (e.g.developing agriculture with the land or ben-efits inherent of the business chosen as a so-cial business) have not been taken intoaccount here.

Therefore it goes faster with the waqf sys-tem – the business does not need time to become self-sufficient. The only wait is for the land to become profitable (and if itis a building there is no wait, since it startsgenerating income as soon as it is rented).

Combining the two?

In the waqf example, healthcare can be provided free of charge, if the income of the waqf is sufficient to cover the costs. In Grameen Bank philosophy, it is better to avoid giving charity to people since it does not encourage them to become independent. Therefore, except for rare exceptions, all services for the poor arecharged, at very low costs. Even during natural disasters, support is provided on a loan basis.

It makes sense to only assist people who actually need to be assisted, like the elderly,disabled, orphans etc. You can help peoplein some fields without having to assist themin every aspect of their lives. If they can goto the hospital for free, it does not meanthat they won’t make any effort to be inde-pendent in their lives. There is a balance tobe found here, and giving shelter on a loanbasis to people who lost their houses seemsa little extreme from an Islamic perspective.If the income generated by waqf is enough

to finance all expenses of hospitals, shouldpeople pay? Even for people who have themeans to pay, if their money is not reallyneeded for the hospital to run, wouldn’t itbetter to encourage them to invest theirmoney in other projects? We can even de-velop the model and make people whohave the means pay. Then, because thismoney is not needed, the hospital can useit to expand, or finance mobile clinics or amedical school.

One objection can be raised regarding the risk for an organisation (here the hos-pital) to rely exclusively on one source offunding. Let’s say the land or the buildingburns out. No more funding. The hospitalwould have to close.

Shouldn’t there be an attempt to make theproject funded by waqf self-sufficient? Inthis case, waqf and social business wouldbe combined.

The waqf funds a project (a social busi-ness), this project reaches self-sufficiency.Then the waqf can be used to develop another business, and another, and an-other… If these businesses are of the samekind (hospitals, for instance), then thewaqf management could use its experienceand the acquired expertise to establish eachsubsequent business more efficiently.

Now, how to become self-sufficient with ahospital serving the poor? This is whatGrameen Health Care Services is doing.

Scheme 2. Social business model

What do you think? IIBI is calling for the readers’ input and feedback on this subject, which can be discussed in more depth in the Institute’s newly-launched discussion forum at www.islamic-banking.com

Alternatively, email us at: [email protected] or [email protected]

as Hasawi points out, it had never beendone before in Kuwait. ‘It was new toeveryone in the bank, because none of ushad this experience before,’ Hasawi says.It meant ‘a new banking system, newproducts and a new culture, with a changein the mentality of the staff’. In terms ofsystems, a number were chosen to be in-stalled besides Phoenix. These includedTradewind, for trade finance, and Mosaic,Getronics’ branch system which ITS alsodistributes. The part of the system whichdeals with Islamic aspects is the tellermodule.

Working on the project was staff from ITS, led by Hany Ramadan, banking implementation and support manager at the vendor, the bank’s own resources andErnst & Young, which acted as the projectmanagement office. ITS provided aboutseven workers for the implementation.And as well as the system knowledge, ITScan also claim to be well-versed in Islamicfinance generally. ‘We already knew a lotabout the exact processes and workflowsrequired, and Islamic compliance. So we



Kuwait International Bank (KIB) joins a handful of banks in the region that have made a similar transition from conventional to Islamic mode of business inrecent years. Dubai Bank is one (NewHori-zon, January–March 2009). Sharjah IslamicBank (formerly National Bank of Sharjah)became the first Islamic bank in the emiratea few years ago. Bank of Kuwait and Mid-dle East (BKME), and Abu Dhabi IslamicBank in Egypt, to name but two, have bothtaken this route as well. How easy is it toachieve this behind the scenes?

Kuwait Real Estate Bank, as the name suggests, had specialised in real estate finance. But about five years ago the bankdecided to broaden its restrictive licence so it could compete better. Ziad Al Hasawi, IT development manager at KIB, explains that ‘Islamic banking companieswere really profitable, especially in thispart of the world. So we thought, if weneed to change our choice of business, why not just change the whole business altogether?’ It changed its name to KuwaitInternational Bank, and gained permissionfrom the Central Bank of Kuwait (CBK) to operate as an Islamic bank from 1st July2007. So KIB has been a fully Islamic bankand its new systems have been live sincethat time.

As part of the conversion, Kuwait Real Estate Bank broadcast a request for pro-posal (RFP) for a banking system with Islamic functionality. Previously in place

Kuwait International Bank:from conventional to IslamicKuwait International Bank was formed out of a conventional entity, Kuwait Real Estate Bank. In mid-2007, it commenced operations as a fully-fledged Islamic bank. This change affected all areas of the bank, including technology. The core banking system conversion was achallenging task. NewHorizon finds out the details.

was Globus, a core system from a Swissvendor Temenos, which ‘was doing okay’for Kuwait Real Estate Bank’s conventionalbanking needs. ‘We met with many ven-dors,’ Hasawi says. This list includedTemenos, but at the time of the selectionprocess it had not finalised its Islamic mod-ule. A couple of other vendors were alsoinvolved. ‘We had gap sessions for almost a month with three different vendors,’ Hasawi says. KPMG, as consultants, alsoadvised the bank on its choice. And in Sep-tember 2004, Kuwait Real Estate Bankchose Phoenix, from Kuwait-based Interna-tional Turnkey Systems (ITS), as its newsystem. The main reasons for its choicewere the position ITS enjoyed in theKuwaiti market, and, consequently, thisvendor’s experience: ‘ITS’s solutions are inthe majority of Islamic banks in Kuwait. So ITS has the know-how. And based onthe recommendation of KPMG, and whatwe saw in the gap sessions, we decided togo with ITS.’

Changing the core system was, however,only one part of the transformation. And

IT FOCUS

We are a lot smarter now, we know the system, we know Islamicbanking and how it works. You can’t really understand these if you are new, and you have to have that experience to understandwhat could go wrong because you can never plan for thesethings.

Ziad Al Hasawi, Kuwait International Bank


NEWHORIZON Muharram–Rabi Al Awwal 1431 IT FOCUS

could share it with the bank,’ says Ra-madan. However, he adds that ITS hadalso learnt a great deal from the KIB proj-ect, which it can carry forward to compa-rable implementations – including theprojects at Bank of Kuwait and MiddleEast (BKME) and Abu Dhabi IslamicBank in Egypt: ‘These processes which we built first time with KIB, now every-body is fully aware of.’ In general termsalso, Hasawi is positive about the experi-ence as a whole. ‘The whole conversionexperience was really good,’ he says. Ra-madan mirrors this, saying ‘I thought itwas an excellent achievement’. However,the transformation did face difficulties,not least from the regulators.

The transformation was split into a num-ber of different areas. ‘We had all theprojects we could think of for the conver-sion, and we were meeting on weeklybasis to get the status of how each wasgoing,’ Hasawi explains. There were dif-ferent projects not just by product, butalso for other areas, such as conversion of the administration. ‘Some would haveso many staff because all of the bank’s de-partments were involved in this particulararea, so the team would be huge,’ saysHasawi.

Ernst & Young had the role of keepingtrack of the different assignments. ‘Its taskhere was co-ordinating with everybody,and it would be really difficult to keep upwith all the different people, mentalitiesand departments,’ Hasawi says. The over-all process remained an IT-led one. ‘ITwas actively spearheading this project, because they’re involved with all the sys-tems, even though it’s a business kind ofthing.’ Similarly, a web of committeesoversaw all. ‘If I tell you the number ofcommittees we had, you’d be scared. Buteverybody had an input, at every step ofthe process. Everybody chipped in.’

‘The bank needed to convert a lot of sys-tems, processes, training and so on,’ saysRamadan. ‘But from the system point ofview we achieved our target to go livewithin seven months,’ he says, dating the

implementation project as from October2005 to May 2006. Hasawi agrees that KIBcould have gone live in 2006, although notwith the whole system. However, the extratime between then and July 2007 seems tohave been spent well. ‘We had about a yearand a half to two years doing a parallel runwith the conventional banking, and we hadsimulations each month of going Islamic,’Hasawi says. ‘It was done thoroughly, andour efforts really paid off.’

This process was done one product at atime, because each was new to the staff ofthe bank. ‘Because it was new to us, we did-n’t know exactly what’s going on,’ Hasawiadds. To mitigate this, ‘we had some experi-enced people from different Islamic banks,teaching us what to expect and how to goabout things’. These people were also hiredto design new products, since KIB was keento offer things which would differentiate itfrom Islamic competitors, though Hasawiadmits that ‘we just depended on those people. Maybe they were doing it wrongly,we don’t know’.

And throughout this time, the bank wasconversing with its customers, trying to con-

Kuwait International Bank

vince them to convert their accounts intoShari’ah-compliant ones. This process was treated as if each customer was new to KIB, such that each would be sent therelevant documentation to sign. Some re-fused (or failed to consent), leaving KIBwith a batch of ‘non-consented’ loans.KIB’s Shari’ah committee instructed thebank to sell these loans, which the bankduly did. However, it still manages them fora fee on behalf of the firm which purchasedthe loans, because this particular outfit‘doesn’t want the headache’, Hasawi says.The Shari’ah committee also complicatedthe project in other ways. ‘You don’t havethe liberty of conventional banking whereyou come out with a product, and no onewill stop you. Every single project, andevery little thing has to go through them.’

CBK also delayed the project by around a year. Some of the reasons for this delaywere understandable, for example KIBlacked a general manager, who had re-signed, and had one or two other senior vacancies for a period. Replacing the gen-eral manager took over a year, not least because the candidate would have to be approved by CBK. However, Hasawistressed that regulating Islamic bankingwas new to CBK as well at the time. ‘Eventheir procedures were new,’ he explains.‘They did not really know what to lookfor.’

Despite these delays, it seems to have been the data conversion that caused themost problems. ‘The conversion was verysmooth, but we were still suffering from it for a long time,’ Hasawi admits. He givesthe example of a loan, which would nor-mally be paid in regular installments, having a higher amount paid off in onechunk. The ‘interest’ on the remainderwould be less than otherwise; but Hasawinotes that the bank’s systems had troublepicking this up. Re-amortised loans alsocreated difficulties. However, the bank and the vendor have been working hard toresolve these issues.

Looking back on the project, Hasawi saysthat ‘we learnt the hard way’, but he is


NEWHORIZON January–March 2010IT FOCUS/FOOD FOR THOUGHT

adamant that ‘I wouldn’t change a thing’.‘We are a lot smarter now, we know thesystem, we know Islamic banking andhow it works. You can’t really understandthese if you are new, and you have tohave that experience to understand whatcould go wrong because you can neverplan for these things,’ he says. The fol-lowing phase was a project to consolidateall the various systems in use at KIB, to make it easier for the end users. Theaim was that ‘the user will only see onesystem but actually through a web servicewould be talking to all the different systems’.

BKME and Abu Dhabi Islamic Bank inEgypt stand to learn from KIB’s experi-ence. BKME, for example, is set to keepits conventional core system (TCS Finan-cial Solutions’ Bancs), so ‘it won’t havethe problem of converting individualproducts’, Hasawi says. Ramadan’s ad-vice is that ‘you need a very mature sys-tem in terms of Islamic industry, so youdon’t reinvent the wheel. Try to choose an off-the-shelf product, and try to applyand adopt the current processes of thisready-made system’. Ramadan also flagsthe experience of the implementationteam as important. Both Hasawi and Ramadan agrees that converting gradu-ally is a viable option, as is simply open-ing an Islamic window. ‘This can be avery good move, as you don’t need toconvert your operations, and can keep the current business as it is,’ says Ra-madan. However, this path would alsodepend on regulatory approval.

Whichever implementation strategy is chosen, Ramadan is sure that the contin-ued appeal of Islamic finance suggests agrowing number of banks will bite thebullet and choose to convert, despite thepitfalls of a full migration. As Hasawisays, ‘it’s rewarding, the business has been boosted and the customer base hasgrown’. ITS, which has completed onesuch project and is involved in a furthertwo (BKME was at the testing stage bymid-2009), appears to be picking up valuable experience as well.

Sukuk default: questions about Shari’ah supervision

In the present gloomy economic conditionof the world, we are now faced with yetanother economic meltdown, the ‘col-lapse of Dubai boom’. The reasons forthe extraordinary collapse of the Dubaiproperty market are much too reminis-cent of what world leaders are now refer-ring to as unbridled greed of lendinginstitutions that led to the sub-primemortgage crisis. Lord Myners, the Minis-ter for the City of London, talked recentlyabout moral failures and, in calling formoral reform, he said that the financialcrisis had exposed a fundamental imbal-ance between the power and accountabil-ity of banks, and that the sector shouldfollow the values and ethics of wider society.

The real issue for me on the default of Islamically structured Dubai bonds iswhether there are failures on the part of the independent Shari’ah advisers in respect of the moral function that theyare required to observe. I was told by Islamic bankers that transactions struc-tured on profoundly moral and ethicalprinciples are the strength of Islamic fi-nance. While all markets have their up-turns and downturns, Shari’ah advisersappear to be increasingly driven by com-merce’s rising demands for them to showmore flexibility when they rule on the validity of large financial transactions.This downplays the seriousness of theShari’ah objective in the midst of worriesabout the credit crisis. Some Shari’ah ad-visers would say that it is not always easyto balance religion and business, andmany of them are now being trained to

Mian A. Saleem, retired banker:

understand modern funding structuresthat sometimes challenge Islam’s basic be-liefs. As a result, the Shari’ah prohibitionson excessive speculation and gambling,and dubious conventional practices suchas short-selling and derivatives are slowlyfinding a regular place in Islamic finance.

Indeed, Islamic banks are beginning tolook more like conventional banks. When Islamic banks need to establish a distinctidentity that separates them from conven-tional banking practices, this would require coming out of the clutches of managers with a conventional mindset.Due to their conventional banking experi-ence it seems that they are unable to seebeyond the simple exercise of makingprofit by whatever means. They appear tobe the forces driving the Shari’ah adviserswhen it should be the other way round. Itdoes not surprise me that it was reportedsometime ago that one Western bankerwho had moved to the Middle East regionto set up a Shari’ah-compliant teamshared tips about various ways to create‘structured investment products’ that forall practical purposes looked like conven-tional products, but were never calledthat.

A central difficulty for me is to under-stand the wider purpose of Shari’ah su-pervision and precisely the Shari’ahadvisers’ role in addressing the moralquestions that go beyond looking at thefinancial transaction itself. Are they sim-ply working with the intention of earninga fee for certifying that transactions arestructured in a Shari’ah-compliant man-ner? Do they also analyse the moral factsto ensure that the financial transactionsare capable of accomplishing the keyShari’ah objectives, in particular justiceand equity in society as a whole?

NEWHORIZON Muharram–Rabi Al Awwal 1431 FOOD FOR THOUGHT

Shari’ah advisers should only be allowed to offer their supervisory services to banks if they can be held responsible for puttingadequate moral reforms in place. It will notbe good enough if they are not subject to a regular audit in respect of the moral bal-ance sheet of the banks that employ them.Certifying projects that are luxury and ex-travagant is sheer wastage and contrary toIslamic values, as these do not contribute to the community at large and are unpro-ductive. It is shocking to read reports onhow millions of dollars were spent on one-night opening ceremonies of projects in theMiddle East while the salaries of the poorlabour work force employed for these proj-ects are known to be greatly disproportion-ate to the levels of the amounts earned bythe overseas consultants and investors.

While Shari’ah advisers must play a super-visory role in approving investments inShari’ah-compliant assets, in this role theymust also be held responsible for the fulfil-ment of the Shari’ah objectives. Shari’ahcompliance should not be seen by Shari’ah

advisers and Islamic banks as an end in it-self; instead it should be understood as a supervisory process which also provides amoral compass for Islamic banks to increasetheir benefit to society.

A senior contemporary Islamic economist,Dr Umer Chapra, commented on the failureby advisers of the Shari’ah boards of Islamicbanks to act as a moral filter and preventthe degeneration of the banks into what hedescribed as ‘jungle capitalism’. Morality,strictly speaking, is used to refer to what we would call moral conduct or standards.

The current state of Islamic banking has along way to go to realise the higher objec-tive of the Shari’ah. If we look at the Mus-lim majority countries around the world,there is evidence of great disparity betweenthe rich and the poor than in the Westerncountries which as far as I can see have embraced many of the Shari’ah objectiveswithin their society. Everyone would knowthat there is still a continuing perceptionheld among a large population of Muslims

that the religion of Islam is being exploitedfor the purpose of making money and Islamic products and services are just aconventional approach with an Islamicwrapper to appease people’s consciences.This may not be entirely correct but Shar-i’ah advisers must provide the highest de-gree of transparency of their supervisoryrole if they are to remove this mistrust inthe community.

What do you think? IIBI is calling forthe readers’ input and feedback on thissubject, which can be discussed in moredepth in the Institute’s newly-launched

discussion forum at www.islamic-banking.com

Alternatively, email us at: [email protected] or

[email protected]



It is not accidental that the Muslim Reli-gious Boards in Russia promote federal legislative amendments regarding waqf and almost ignore the issue of zakat whilethe latter could be a part of a federal reli-gious tax, like, for example, ‘church tax’ in Germany.

The lack of interest in zakat of Muslim clergymen is logical. As distinct from waqf,zakat is not a universal instrument designedto cover the expenses of religious organisa-tions. Most theologians, for example, areconvinced that the money received as a purifying tax should not be used to buildmosques in places where there are enoughof them. They believe that the state (obvi-ously, the Muslim state) should shoulderthese expenses. In a non-Muslim state, like-wise, it is undesirable to spend the largerpart of zakat on the same things. Zakat canbe used, however, to fund education, pub-lishing, and other activities designed to pro-mote religious knowledge among Muslims.

As for the culture of zakat in Russia, it waslost during Soviet rule, just like the cultureof waqf. However, during the first years ofSoviet power in Russia zakat was collectedin places with predominantly Muslim popu-lations (the Volga area, the North Caucasus,Central Asia) and was used to buy tools forcollective farms. Yet, during the followingyears zakat was not collected in the areas ofcompact settlement of Muslims. It was re-placed by irregular sadaqah paid by devoutMuslims on the days of religious holidays.

Sooner or later the Russian Muslims wouldinevitably come across the issue of zakatsince – unlike waqf – it is one of the five pil-lars of Islam. Since February 2005, two

Zakat as sadaqah or sadaqah as zakat?In the second of a two-part analysis, Dr Renat Bekkin, senior research fellow at MardjaniFoundation, Moscow, continues the discussion on poverty alleviation, in the case of Russia.

domestic banks, Ak Bars Bank and Tatfondbank, have been receiving zakat payments from the Muslims of the Republicof Tatarstan (a federal subject of Russia); itseems that they work as intermediaries be-tween the payers of zakat and the recipients.It should be said that the money received isunlikely to be used as effectively as in someof the Muslim states.

In some regions of Russia, the Islamic clergymen are trying to use other religioustaxes, although their original meaning is notalways certain in the Shari’ah. In some dis-tricts of Tatarstan, imams ask collective farm chairmen to donate potatoes for the students of Muslim religious establishments.This should be described as the collection ofsadaqah, a charitable donation paid once in awhile, not ushr in Tatarstan, which is a tithe.

It’s another matter if zakat paid by Muslimbusinessmen will be paid in the form of aninterest-free loan given to those collectivefarms or individual farmers under the condi-tion that they should provide the needy withfood instead of paying back the principal ofthe loan – in other words, to provide thosewho belong to at least one of eight categoriesof zakat recipients.

The zakat culture has been very slow tostrike root in Russia because the local Mus-lims know next to nothing about it. Theabove example shows that most of the faith-ful do not distinguish between zakat andother Islamic charities. So far, the clergy hasfailed to deal with this ignorance. Severalyears ago, a Russian anthropologist, AhmedYarlykapov, did some research in the NorthCaucasus. He described this situation: theimam of a mosque in Maykop (capital of the

ANALYSIS

Dr Renat Bekkin,Mardjani Foundation



Republic of Adygeya, Russia) set up twoboxes – one for zakat, the other for sadaqah– only to remove them after a while becausethe believers could not distinguish betweenthem.

However, confusion of zakat and sadaqah is half the trouble. In Moscow regular pay-ments of Muslims that cover administrativeexpenses of local communities are oftencalled zakat. It is obvious that the leaders of those communities deliberately seek tosacralise the membership dues collected forthe community’s needs and attach a ‘special’status to them. From the author’s point ofview, such tricks are rather improper. Thebelievers see that the money paid as ‘zakat’does not go to those categories that were indicated in the Quran, and consequentlythey lose trust in zakat as an institution thatcontributes to effective redistribution ofwealth in society for the benefit of its needymembers.

Abuses are inevitable while redistributingthe part of the purifying tax that is sup-posed to go to the collectors of zakat. Oftentheir share goes up to 30 per cent of the re-distributed zakat.

In recent years in Russia paying such Mus-lim tax as zakat al-fitr has been observed.Some Muslim peoples of Russia, for exam-ple, Adygs and Kabardin, distribute zakatal-fitr even before the end of fasting. At thesame time paying zakat al-fitr is regulatednot only by Shari’ah, but by local customsas well. Yarlykapov described a case, whenone of the women in aul (village) Hatukai in Adygeya while calculating zakat al-fitr included not just her children among thosefor whom she should pay the tax, but hercows as well, saying that they are also livingcreatures and she should pay alms for themto. In another aul in the region, Koshehabl,zakat al-fitr was distributed mostly amongrelatives and close friends of the payer.

Unfortunately, it is the local superstitionsand prejudices rather than conscious neces-sity to follow one of the five pillars of Islamthat form the basis of paying irregular almsby many Muslims in Russia. For example,

in the North Caucasus they pay sadaqah fordeceased relatives if the payer saw them indreams.

Given that there is no centralised zakat sys-tem in Russia, some regional Muslim reli-gious administration assumed the functionof collection and distribution of the purify-ing tax. At the same time, in most mosquesthe clergy and believers continue to confuse‘sadaqah’ and ‘zakat’.

The Republic of Karelia probably has themost positive record of collection and distri-bution of zakat in today’s Russia with directparticipation of the local Muslim religiousauthorities. There, the collection and distri-bution of zakat is the responsibility of theregional Muslim religious board, which hascommunities in major cities of Karelia.

The success of the Karelian community incollecting and distributing zakat is to a largeextent explained by its small population.The community members know each otheras well as those who can pay zakat andthose who are in need. Consequently, theMuslim Religious Board of Karelia fulfills arather technical task of collecting and dis-tributing the purifying tax. It is also impor-tant that the mufti of Karelia, Wisam AliBardwil, places emphasis on the necessity topay zakat in his sermons, publications andpublic speeches.

One can’t underestimate the personal au-thority of Bardwil (born Palestinian Arab,now a citizen of Russia) in development ofthe system of zakat in the region. His hon-esty seems to be the best guarantee forzakat-payers. They can be confident thattheir money would be used properly and according to Shari’ah rules. Unfortunately,there aren’t enough persons among Muslimspiritual leaders who enjoy the same confi-dence in the material issues among RussianMuslims as Bardwil. As to official Muslimorganisations on a federal level, the majorityof Muslims believe that their capacity tocollect and distribute zakat is much lesserthan of Muslim boards on a regional level.The lack of knowledge of zakat amongRussian imams also does not strengthen the

As distinct from waqf, zakat is not a universal instrumentdesigned to cover the expensesof religious organisations...Zakat can be used, however, to fund education, publishing,and other activities designed to promote religious knowledgeamong Muslims.

Dr Renat Bekkin,Mardjani Foundation

velopment of an Islamic charity based onsadaqah. The main condition here is thesame as in the case with zakat: the payersshould be provided with a transparent sys-tem of collecting and distributing of theirmoney. Sadaqah has several advantages overzakat in Russia; one being that it does notneed mediators in the form of bodies re-sponsible for the collection and distributionof collected funds. The only thing needed is technical support to ensure that thosewho lack the funds and those who can grant them, find each other. A good exam-ple is the Islamic charitable project namedSadaka.ru. The purpose of the project, according to its website, is to unite Muslimsto help brothers and sisters in faith who arein difficult life situations. There is a specialform on the website, which anyone in needof financial assistance can fill out. Thosewho want to help can directly contact theneedy through the information displayed onthe site. The website organisers themselvesdo not accept any funds to their accounts.

The disadvantages of such projects shouldinclude the fact that not all those in needhave access to the internet, and that in sucha situation the deception by the applicant in the section ‘need help’ is quite possible.So far, these projects have been effective in large cities with high levels of internetusers and with large numbers of wealthyMuslims.

Despite this, there is hope that the future of Islamic charity is for projects such asSadaka.ru, which enables benefactors andthose in need to find each other directly,without any difficulties. It is possible thatsuch innovation will be popular among

26 IIBI

ANALYSIS

confidence of Muslims to this purificatoryalms.

Today, it is too early to talk about establish-ment of a centralised all-Russia zakat collec-tion and distribution system under the aegisof the Russian Mufti Council or some otherMuslim co-ordination structures given theabsence of a Muslim religious board thatwould be common for all Muslims. The first step on this path should be improve-ment of the database of those who receivethe purifying tax. Moreover, it is necessaryto spread the use of modern technologies. For example, in 2005, a local website,Takafol.ru (the first Russian internet re-source on Islamic economics and finance),launched the country’s only zakat-calculatorin the Russian language.

Given the imperfect system of zakat collec-tion and distribution under the aegis of the Muslim religious boards in Russia, it is often misinterpreted by both the zakat officials collecting it and zakat payers. For example, instead of paying zakat to a dedicated fund or zakat officials, somepayers tend to give money (including in theform of non-interest loans) to small andmedium-size enterprises (SMEs), usually to those that are owned or run by business-men originating from the same ethnic community.

To collect and distribute zakat in Russia it is not necessary to amend the legislation.Yet it is necessary to provide tax remissionsfor regular payers of zakat. Otherwise zakatis bound to be irregular charity payments –in other words, it will merge with sadaqah.However, there is nothing wrong in the de-

To collect and distribute zakat in Russia it is not necessary to amend the legislation. Yet it is necessary to provide taxremissions for regular payers of zakat.

Dr Renat Bekkin, Mardjani Foundation

IIBI 27

ANALYSIS

payers of zakat, who do not trust the exist-ing structures responsible for the collectionand distribution of zakat: fortunately, thereis a technical opportunity to calculate taxpurification using online zakat-calculators.

As to compact Muslim communities in small towns and rural areas, the most ef-fective form of Islamic charity still remains traditional sadaqah – and sometimes zakat.The effectiveness of collection and distribu-tion of the latter will be directly dependenton the competence of the local spiritualleaders of the Muslim community in theissue of zakat, as well as his honesty insuch matters.

However, an independent entity in theform of a zakat-foundation is not the an-swer. Such independent foundations, notunder the wing of the official Muslimstructures, will attract increasing attentionfrom security services.

Conclusion

❏ At the moment, unco-ordinated Mus-lim religious boards in Russia, while im-perfect, are still the only workingstructures able to collect and distributezakat and sadaqah.

❏ In the majority of Muslim regions ofRussia notions of zakat and sadaqah areoften confused.

❏ Innovation technologies need to be developed in order to facilitate paymentand distribution of zakat.

❏ The future of the Muslim charity in the big cities will be largely determined by independent internet portals, in which benefactors will not need intermediaries to find each other.

❏ There is no need to amend legislation in order to form a system of collecting anddistributing zakat. However, to stimulatepayment of purifying tax on a mass and regular basis, it is necessary to provide taxbenefits for regular payers of zakat, at leaston the level of regional legislation.

Qolsarif mosqueTatarstan, Russia

© Dmitry Mordvintsev, iStockphoto.com



It’s the niyya that counts

FOOD FOR THOUGHT

I have just realised that I have been involvedwith Islamic banking for nearly a quarter of a century. Back in 1985, when I was headof treasury product development at a UKbank, everything non-standard landed onmy desk. And that included a proposal froma Switzerland-based Islamic bank. Well,they wanted to do something strange – itseemed strange to me at least.

The Swiss Islamic bank wanted to invest in British pounds at zero per cent. Thatsounded pretty good at that time of highUK interest rates but there was a catch. Itssource of funds was in US dollars and it

wanted to be hedged back into US dollars. Itsounded an interesting project… but herewas the real catch: the bank wanted a spe-cial tailor-made forward rate on the foreignexchange swap at a special adjusted rate. Itwanted its overall rate of return through thepackage to be the same as the normal mar-ket US dollar interest rate of eight per cent.

No problem. I just had to clear the dealwith The Bank of England (BoE) which pro-hibited foreign exchange transactions at off-market rates so that banks didn't help theircustomers defer losses or indeed profitsfrom one year to the next. The BoE had noobjections because overall the deal was atmarket rates so the transaction went aheadsmoothly.

Riba

The transaction was quite clever, I thought.The Islamic institution could not receive interest but it was allowed to trade.

The Quran states:

3:130 O you who have believed, do notconsume usury, doubled and multiplied, butfear Allah that you may be successful.

2:275 Allah has permitted trade and hasforbidden interest.

Prophet Mohammad said in his farewell ser-mon: ‘God has forbidden you to take riba,therefore all riba obligation shall henceforthbe waived. Your capital, however, is yoursto keep. You will neither inflict nor sufferinequity. God has judged that there shall beno riba and that all the riba due to ‘Abbasibn ‘Abd al Muttalib shall henceforth bewaived.’

The foreign exchange transactions that I or-ganised for my Swiss Islamic client could beregarded as trade, but such transactions in

currencies are no longer deemed to behalal (permissible).

But instead of ‘trading’ in currencies, ‘trad-ing’ is permitted in commodities. Andcommodity murabaha with a similar orperhaps a tripartite, four-part or circularpackage of ‘independent’ transactions isthe dominant Islamic financial structureproduct.

Niyya

Now let’s roll forward 25 years. A fewmonths ago I realised that as a non-Mus-lim it is somewhat odd working in Islamicfinance and writing articles and deliveringspeeches on the subject without at leasthaving a basic understanding of Islam. So I attended an intensive ‘UnderstandingIslam’ course in London.

Very early on the first day the concept of‘niyya’ was introduced. And in all myyears in Islamic finance I had never everheard the term niyya in connection with Islamic finance. And now when I speakwith Muslims they tell me that ‘niyya iseverything’ and ‘niyya is fundamental’. Soit is all the more surprising that I had notheard of niyya in connection with Islamicfinance.

According to ‘Understanding Islam’ byC.T.R. Hewer, there is a Hadith of theProphet Mohammed that ‘all actions arebut by intention’.

Hadith #1 in al-Nawawi’s Forty Hadithstates that ‘actions are according to intent’or ‘actions are what they are by virtue of intent’.

Niyya is intention. An inner act of theheart consisting in formulating one’s inten-tion to perform an outer act as the fulfil-ment of a particular duty rather than as

Warren Edwardes, CEO ofDelphi Risk Management anda member of IIBI Bankingadvisory group:


NEWHORIZON Muharram–Rabi Al Awwal 1431 IIBI NEWS

just a series of motions without religiousvalue.

Conclusion

Before entering into a financial transactionask yourself: ‘What is the niyya? What isthe objective of this transaction?’ Yes,clearly it’s the niyya that counts. And theniyya comes from the heart and is notsung out loud or on paper.

So if you simply create a packaged seriesof transactions that individually appearhalal but where your niyya is to replicateriba then that appears to be haram. Thatseems pretty clear-cut to me.

If the intention is to trade and not receive or pay riba then are you sure of the niyyabehind the package? What do you reallyknow about trading sugar or iron ore?What factors affect the demand and sup-ply of sugar or iron ore and where do youthink the market is going and why? Orhave you no idea about these markets and have entered into a synthetic ribatransaction that does not depend on theperformance of these markets and with the niyya or intention so to do?

That’s for you to decide. You are the Mus-lim investor who seeks a halal return oninvestment.

What do you think? IIBI is calling forthe readers’ input and feedback on thissubject, which can be discussed in moredepth in the Institute’s newly-launched

discussion forum at www.islamic-banking.com

Alternatively, email us at: [email protected] or

[email protected]

Cheng Yan Chee, deputy secretary for financial services and the treasury, of Finan-cial Services and the Treasury Bureau ofGovernment of the Hong Kong Special Administrative Region, called on the IIBI.He was accompanied by Andy Lam, deputydirector general, and Clara K. C. Chan, assistant secretary for financial services and the treasury.

The delegation was received by MohammadAli Qayyum, IIBI director general,

and Mohammed Shafique, programme development co-ordinator. Qayyumbriefed the visitors about the Institute’s activities and areas of mutual interest were discussed.

Hong Kong is aspiring to become a leadingcentre of Islamic finance and is making ef-forts to achieve this goal. The Hong Kongdelegation appreciated the role and effortsof the IIBI in raising awareness and pro-moting the education of Islamic finance.

Hong Kong Financial Services and the Treasury Bureau calls on IIBI

IIBI launches Discussion Forum

The IIBI has launched Discussion Forumfor its members and students which is partof its new website. The aim is to create afraternity of Islamic finance professionalsand interested individuals with a view tofostering closer co-operation among them.

The IIBI Discussion Forum is a uniqueplatform for students and members of theInstitute to exchange views on importantissues and developments in the Islamic fi-nancial services industry. The forum alsoprovides a study support network aimedat helping students and members, and fa-cilitates their progression along their cho-sen pathway in Islamic finance. Membersand students of other organisations who

have affiliation with the IIBI may also usethe forum and can take this opportunity tocontribute their thoughts and express theirviews on key issues and developments inthe world of Islamic finance.

To be able to use the forum, it is necessaryto register to obtain a user name and pass-word. All users of the forum are respectedmembers working in the Islamic financialsector, including banking and insuranceprofessionals, accountants, consultants,and, of course, students of the Institute.

For further information please visit theIIBI’s website: www.islamic-banking.com


IIBI NEWS

The IIBI’s Post Graduate Dip-loma (PGD) course in Islamicbanking and insurance, offeredsince 1994, is highly regardedworldwide. UK-based DurhamUniversity has accorded thiscourse recognition as an entryqualification for its postgraduatedegrees in Islamic finance, in-cluding the MA and MSc in Islamic finance and the ResearchMA. Applicants will also have to fulfil the specific entry qualifi-cations for each specialist degreeprogramme.

To date, students from nearly 80 countries have enrolled in thePGD course. In the period of Oc-tober 2009 to December 2009,the following students success-fully completed their studies:

❏ Muhammad Kashif Khurshid, Shari’ah compliance manager, Absa Islamic Banking (Absa Ltd), South Africa;

❏ Muhammad Tahir Chouhan, finance manager, Al-Khayarin Group Trading & Contracting, Qatar;

❏ Leman ul Haq Malik, credit and marketing manager, Al-Zamin Leasing Modaraba, Pakistan;

❏ Fidrus Sukor, strategic planning officer, Islamic Development Bank Group, Saudi Arabia;

❏ Fatima Azahra Hamid,

financial analyst, Financial Institution Consulting Corporation, US;

❏ Osman Ibrahim Belal, accountant, Efg-Hermes, Egypt;

❏ Anthony Watson, senior associate, Denton Wilde Sapte, Kuwait;

❏ Muhammad Tariq Soomro, accounts assistant, Supercover Insurance Plc, UK;

❏ James A King, UK;

❏ Zia Ahmed Khan, corporatefinance manager, Al Razzi Holding Company, Kuwait;

❏ Muhammad Tariq Gondal, head of operational risk management division, risk management group, MCB Bank Ltd, Pakistan;

❏ Bibi Husna Banon Dowlut, bank’s officer; Bramer Banking Corporation Ltd, Mauritius;

❏ Abbes Mehdi, section head, Central Bank of Tunisia, Tunisia;

❏ Sarfraz Aaron, IT development manager, Direct Energy, Canada;

❏ Azmat Ali Khan, Pakistan.


IIBI awards post graduate diplomas

As a beginner in this field, I found thecourse an interesting and enriching expe-rience. This course is excellent for bothbeginners and professionals. It is highlyrecommendable to bankers, accountants,insurers and lawyers. It has been an en-joyable experience for which I am grate-ful and thankful to my tutor and themanagement of the IIBI.

Bibi Husna Banon Dowlut, Bramer Banking Corporation Ltd,Mauritius

Excellent course – every time I read one chapter, I am eager to read the next one. It is full of knowledge. This course is well designed and very detailed. It clearly shows us the difference between the conventional and Islamic banking and insurance,and also how we can transform the conventional system into anIslamic one.

Fatima Azahra Hamid, Financial Institution Consulting Corporation, US

Overall this was a good experience forme. With the help of this course, I haveincreased and refined my knowledgeabout the practical experience of Islamicbanking during my work at Al-ZaminLeasing Modaraba.

Leman ul Haq Malik, Al-Zamin LeasingModaraba, Pakistan

It has been a very helpful course. It will bevery helpful for me in product structuringand Shari’ah compliance, which are partof my job profile.

Muhammad Kashif Khurshid, Absa Islamic Banking (Absa Ltd), South Africa

www.newhorizon-islamicbanking.com32 IIBI


Dr Mehmet Asutay discussed the dichotomybetween theory and practice of Islamic financeand sources of this divergence, and looked at ways and means to overcome it in future.Dr Asutay is a lecturer in Islamic and MiddleEast political economy at the School ofGovernment and International Affairs, DurhamUniversity. He teaches and supervisesresearch on various aspects of Islamiceconomics, banking and finance, economiesof the Middle East and the Muslim countries,and political economy and economic develop-ment related subjects. He is also co-directorof the Durham Islamic Finance Programme,director of the Durham Islamic FinanceSummer School, and the programme directorof the newly established MA/MSc in Islamicfinance.

The lecture was chaired by Warren Edwardes,CEO of Delphi Risk Management and memberof IIBI’s banking advisory group.

October: Considering thedichotomy between theideals and realities ofIslamic finance

Promoting Islamic finance

Dr Asutay started the lecture by statingthat during the initial days of the recentfinancial crisis, a number of commenta-tors including politicians talked about the‘reckless nature of financing’, ‘greed’ andthe ‘irresponsible attitude’ of the financialsector as being an important source of theproblem. Later, an archbishop of theChurch of England came out with strongstatements to criticise the current finan-cial practices by suggesting that ‘ethical’and ‘moral’ practices are necessary to es-tablish a responsible economy. For this,the Vatican praised Islamic banking andfinance (IBF) (NewHorizon,January–March 2009).

He pointed out that in providing academicinsight to the current financial crisis Rein-hart and Rogoff (2008) stated that ‘crisesfrequently emanate from the financial centres with transmission through interestrate shocks and commodity price collapses’.This also refers to the wisdom in Islam,which prohibits interest. IBF-related devel-opments, hence, are particularly importantin the current financial climate.

He mentioned that the criticisms of the financial system opened up a new discussionon the importance of morality in economicand financial life. Islamic moral economy(IME) provides a constructivist response tothis through integrating morals into IBF in a systematic and spiritual manner. However,a critical examination of the developmentsand trends in IBF since its globalisation inthe 1990s indicates that the convergence hasbeen from IBF to conventional finance interms of operations and functioning; andthat IBF, through its commercial bankingand finance nature, does not necessarily uphold the spirit of IME.

Dr Asutay emphasised that what distin-guishes IBF from conventional finance in essence is not the nature of contracts orbeing interest-free, but the philosophy thatlies behind. This aims at establishing amoral economy with social justice and so-cially acceptable growth in harmony witheconomy, business, society, natural environ-ment and values through a human-centredeconomic development strategy. It is basedon financial and economic efficiency and effectiveness but also social optimality inwhich the ‘due’ and the ‘share’ of the societymust be returned through various social institutions. He pointed out that this ‘moraleconomy’ nature is the strength of IBF, having a foundation in the form of IME,which further aims at productive economicactivity or real economy; and profit-and-losssharing (PLS) and hence risk-sharing; thuspartnership against the dominance of thestrong, namely the capital; serving humanity

IIBI LECTURES

and society for the sake of spiritual attain-ment and to perceive resources as trustfrom God, and hence directing all the re-sources to their perfection; spiritual ac-countability; and working for social goodand justice not as a voluntary exercise but also in some cases as compulsory acts. These are the values that go beyondthe mechanistic and limited nature of Shar-i’ah compliancy, as the current practice ofIBF aims at adhering.

Dr Asutay described that when it comes to the working of Islamic financial institu-tions (IFIs), we witness that they haveopted for a mechanistic understanding of Shari’ah compliance, namely interestprohibition, and have failed to endogenisethese values in the sense of IME. Thus, thedifference has been reduced to legal techni-cality, and the value system is no longermentioned beyond describing the prohibi-tion of riba. This has led to a new discus-sion on Shari’ah-compliant finance vs.Islam-based finance, the latter indicatingthe moral economy norms. He showed themarketing brochure for Zamzam towerswhere the image of Holy mosque appearedvery small in the background from one of the rooms in the building with worldclass facilities. He emphasised that financ-ing the infamous Zamzam towers in Meccathrough Shari’ah-compliant instruments ispossible with the former. However, Islam-

Dr Mehmet Asutay

IIBI 33www.newhorizon-islamicbanking.com


based financing or the moral economy can-not accept the construction of such a build-ing in such a holy place, as it underminesthe environment and historicity of the place,equality in worshipping and the spiritualityof the place.

He explained that the existence and preva-lence of developmental issues negates theentire discourse of IFIs in relation to socialjustice or maslahah. The financial crisisshould, therefore, encourage the IFIs toovercome this apparent divergence and thegrowing dichotomy between the ideals ofIME and the realities of IBF. He stressedthat these fiqh-based novel financing meth-ods away from values, assumptions andnorms of IME might bring us closer to financial and economic disaster that is beingexperienced with the current financial system. Consequently, the practice of IFIs is not beyond failures and challenges. Dueto the IFIs’ lending criteria, terms and costs of loans, financial exclusion, unfulfilled as-pirations, not having the capacity affectingstability and micro- and macroeconomicvariables, and developmental failures interms of touching the lives of individuals in the streets of the developing world, weare yet again in the beginning of the viciouscircle, despite the existence and promise ofIBF.

Dr Asutay noted that the important ques-tion is now, how social justice and good is to be served? What social-financial institu-tions can IBF offer to solve economic devel-opment issues in the developing Muslimworld and developing countries?

He mentioned that notwithstanding its limitations, IFIs have proved to offer a valuable service for both consumer and producer needs. The social justice and devel-opmental need, including PLS and long-termfinancing in line with the moral economy,can be structured in a more specialised Is-lamic institutional set up. In other words,correcting the failure of Islamic financeshould be in the form of introducing furtherbut robust social justice oriented principlesinto IBF by endogenising social justice intoits operational nature. Therefore, there is a

Farmida Bi discussed the developments in thesukuk market to date, the impact of thefinancial crisis and the likely nature of themarket going forward.

Bi is a partner at international legal practiceNorton Rose in London and specialises inIslamic finance and capital markets. She hasacted on many of the ground breaking Islamicfinance transactions which have originated from the Middle East where many of her clientsare based, including the $3.5 billion Dubai Port Sukuk and the Tamweel Shari’ah-compliant securitisation. A recognised expert in the Islamic capital markets field, Bi is theonly female named as a ‘leading individual’ for Islamic finance in the legal industry guide,Chambers UK 2009, which ranks solicitors and barristers in over 60 specialist areas of law.

The lecture was chaired by Gibril Faal, director,GK Partners – advisors to socially responsiblebusiness.

November: The challengefor the global sukukmarket

Sukuk (commonly referred to as Islamicbonds) are Islamic investment instrumentswhich represent their holders’ undividedownership interest in the underlying assetsand their entitlement to the revenue from

IIBI LECTURES

those assets. Sukuk differ from traditionalfixed income securities (bonds) in that, technically, they do not pay interest –something that’s prohibited in Islamic finance. Instead, investors are compensatedthrough a cash stream typically generatedfrom assets placed in special purpose vehicle. Also, conventional bonds, unlikesukuk, do not represent ownership of thebond holders in the assets/projects forwhich bonds are issued in commercial or industrial enterprises; these only repre-sent contractual debt obligations and doc-ument interest-bearing debt owed to theholders of the bonds. In addition, conven-tional bonds guarantee return of principal when redeemed at maturity, regardless ofwhether the enterprise was profitable; theinterest amount paid to bond holders is apercentage of the capital and not a per-centage of actual profits of projects. Sukukare unique financial instruments which

provide new and attractive investment opportunities, help the development of secondary market instruments in Islamic finance and facilitate liquidity managementto Islamic financial institutions, thus af-fecting the ability of Islamic banks to servethe communities in which they operate, despite the inherently just and ethical na-ture of Islamic finance.

Bi began by discussing the Accounting andAuditing Organisation for Islamic Finan-cial Institutions’ (AAOIFI) definition ofsukuk which states that sukuk are ‘certifi-cates of equal value representing undividedshares in the ownership of tangible assets,usufructs and services or (in the ownership

need to go beyond the legal interpretationsand rational reading of the text. A value and objective oriented approach would helpto overcome the growing tension betweenthe performance of IBF and the utopia ofIME.

In concluding remarks, he stated that themoral economy with social justice andgrowth with spiritual purification remainsan important discourse of Islam and theprophetic tradition, the search for whichshould continue as part of trying to under-stand divine wisdom.

November lecture


NEWHORIZON January–March 2010IIBI LECTURES

of) the assets of particular projects or special investment activity’. However,AAOIFI does not differentiate betweenproject finance sukuk, asset finance sukukor other types of sukuk and classifies sukukwith regard to the underlying contractwhich governs the use of the funds receivedfrom the sukuk holders (istisna sukuk,mura-baha sukuk, sukuk of ownership ofusufructs of existing assets, etc). Sukuk areconsidered as debt securities – subject tocompliance with certain conditions, in theUK market their treatment as Collective Investment Schemes would have profoundimplications on taxation of sukuk deals.

Then she went on to discuss asset-backedsukuk where returns of sukuk holders aredependent upon the results and perform-ance of the underlying project. This is notthe case for asset-based sukuk. Most of thesukuk issued so far are asset-based. Shepointed out that growth in sukuk has beenthe biggest change in capital markets in the last four years and at present over $100billion worth of sukuk are outstanding.Rating of sukuk reflects the creditworthi-ness of the provider of the purchase under-taking in asset-based sukuk. In case ofinsolvency/default, recourse is usually to the purchase undertaking (unsecuredclaim) provider and not the assets in suchsukuk.

She mentioned that sukuk issuance grewenormously between 2004 and 2007, in-creasing by 49 per cent in 2005, 153 percent in 2006 and 79 per cent in 2007,worth $46.65 billion in 2007. The primaryreasons for this increased activity were easyaccess to credit, high oil prices and senti-ment in favour of Islamic financing. BecauseIslamic banks had not invested in toxic as-sets and instead held actual assets represent-ing their investments (often real estate andequity) and were not over-leveraged, thisshielded Islamic banks from losses at thestart of financial crisis in 2007. However,due to the fall in asset values, drying up ofcredit in the conventional markets and gen-eral economic conditions, 2008 was a worseyear for sukuk than 2006 and 2007 andglobal sukuk issuance in Q4 2008 was the

lowest since 2002. It is expected that nor-mal activity will resume in Q1 2010 in thesukuk market, albeit the global sukuk mar-ket continues to grow at a slower pace. Newissuance topped $9.3 billion in the firstseven months of 2009, which is a very posi-tive outcome as compared to total of $11.1billion sukuk issuance in the whole of 2008.Asia is taking the lead with Malaysia repre-senting 45 per cent of global sukuk is-suance, followed by Saudi Arabia whichstands at 22 per cent.

Bi highlighted that the market has witnessedsome sukuk defaults in the last 18 months,such as Investment Dar of Kuwait, SaadGroup of Saudi Arabia and East CameronGas Sukuk in the US. How these defaults

are dealt with will impact on investors’confidence and market sentiment for in-vestments and demand for sukuk in future.She mentioned that sovereign deals aredominating the sukuk market at presentand there is increased interest in the sectorfrom conventional industries as well asMuslim minority countries such as Franceand Singapore. There is also continuing in-terest in real estate from Islamic financialinstitutions as there are likely buying op-portunities. Increased activity in energy renewables as well as pharmaceuticals,food-stuffs and IT has been observed.These indicators suggest that there is stillenormous potential for the use of sukuk to meet the needs of the wide range of in-vestors and corporates who are looking toraise finance using such instruments. Whiledue to the financial crisis some major proj-ects have been delayed, regional infrastruc-ture projects will continue and equity willremain a preferred option indicating thepotential of sukuk issuance for financingsuch projects.

She concluded the session by stating that aseconomic recovery is likely in 2010, sukukdeals are expected to pick-up again nextyear after the bumpy ride of the previoustwo years.

The mission of the IIBI is to be a centre of excellence for professional education,training, research and related activities, to build a wider knowledge base and deeper

understanding of the world of finance promoting the Islamic principles of equity, socio-economic justice and inclusiveness. The Institute holds regular lectures on topical

issues, delivered by industry experts. Throughout 2010, the IIBI will also organise a number of training workshops to build the skill base and share ideas among

practitioners within the Islamic finance industry. The objective of the Institute’s training is to fill the human resource gap and to enhance the professional skills of personnelwho are either interested in building their careers or already involved in the Islamic

finance sector. Training programmes are delivered by experienced professionals; thenumber of participants is kept small to ensure an interactive environment and provide apractical learning experience for the participants with the help of suitable case studies.

For more information about upcoming lectures and training programmes, please visit: www.islamic-banking.com

November lecture


BOOK REVIEW

issues, participants and channels andmoves quickly and straightforwardly to a candid discussion of the hurdles Frenchproponents of such implementation facetoday. An overview of various Islamic financial instruments and structures suchas sukuk, mudarabah, murabaha, ijaraand takaful, is included.

Both professors tackle potential problemslike the legal code, tax regime and infra-structure requirements head-on, butbrush over the negative implications ofthe tradition of insularity in the Frenchbanking world. They quietly acknowl-edge Britain’s current pre-eminent position in Islamic finance among EUcountries, but point out that France has a Muslim population three times that of the UK. They address the issue of lan-guage but are, like many of their compa-triots, perhaps a bit optimistic in theirdetection of fluency in professional Eng-lish in Paris, though the trend toward embracing one global business languageis certainly heartening.

They exude a great and contagious opti-mism, a stance their evidence supportswell. History aside, there is today amongkey players a fledgling commitment to organise Islamic finance; regulation, supervision and examination of market-place participants is really already inplace, which the authors find healthy. Education of key constituencies is next,and marketing the concept abroad willensure this. Paris ought not to miss the

Elyes Jouini and Olivier Pastré are profes-sors at the University of Paris. This new, lit-tle book called ‘Islamic Finance: A Solutionto the Crisis?’ is written in straightforwardFrench. It contains three chapters and neatlyand succinctly defines a coherent plan forestablishing Paris as a key capital market in Islamic finance. It deftly identifies and assesses the opportunities, risks and hurdlesin attempting such a plan. In addition toproposing a framework for implementationof their ideas, which appear to complementcurrent finance minister, Christine La-garde’s, economic policies, the authors sug-gest too that solutions and mitigants to thecurrent crisis may well lie within the archi-tecture of a Shari’ah-compliant ancillarymarket. This they plausibly propose forParis.

Their measured and sober argument hasmuch merit, and is thoughtful, incisive andcompelling. It constitutes, in fact, part of afinancial blueprint presently evolving inParis which ought not to be summarily dis-missed by competing marketeers in London,Kuala Lumpur, Dubai, Bahrain, Kuwait,New York or Singapore. There is muchforesight demonstrated in their argument.Intellectual rigour synthesises neatly withpractical and realistic arguments throughoutthis book.

The book starts with an overview of theuniverse of global Islamic finance, whichdoes indeed serve valiantly as a solid intro-ductory text. It provides a thoroughoverview and description of products,

‘La Finance Islamique: Une solution a la crise?’by Elyes Jouini and Olivier Pastré

Professor Joseph E Connolly, visiting professor of global finance andmanagement at the Ecole Nationale des Ponts et Chausees, Paris, reviewsthis book, published in 2009 by Economica, Paris (ISBN 978-2-7178-5679-8). The book is 128 pages long including index and bibliography.

boat on this occasion. That is the argumentand that is the reason for this book’s exis-tence.

The two professors argue that because ofthe importance of the euro as a currency,Paris should enjoy supremacy over Londonand that substantial market participantswill find Paris attractive as a way of diver-sifying their risk profile in terms of geogra-phy and human resources. They suggestleveraging knowledge assets like the DJIM(Dow Jones Islamic Market) at NYSE Euronext.

In their examination of the ability, capacityand desire of NYSE Euronext (the productof a merger between the old Paris Bourseand New York Stock Exchange) to exploitthese opportunities, they also suggest thepossibility of collaboration with the US.That seems a very exciting proposition.Americans have yet to embrace Shari’ah-compliant finance in a truly substantialway. They could, and badly need to do so.

The book is priced at e18 (around $26) and at present is available only in French. It provides interesting insights about thegrowth potential as well as the positive atti-tude of regulators towards Islamic finance.So, too, one should be quite satisfied thatthe historic overview and general currentaggregate data are concise and clearly pre-sented, holding few surprises. This wouldbe a good read for those involved in policy-making, as well as students and academicsinterested in the Islamic finance sector.




Dow Jones Islamic Market World IndexBelow is a chart of the performance of Dow Jones Islamic Market World Index, provided by Dow Jones Indexes,the first index provider to launch Shari’ah-compliant indices in 1999. Over the course of 2009, the Dow JonesIslamic Market World Index was up 30.26%, slightly outperformed by its standard counterpart, the Dow JonesTotal Stock Market World Index, which was up 30.56% over the same time period. Also listed is the performance of the respective industry indices for both indices in 2009. More information can be found on www.djindexes.com

RATINGS & INDICES

RankDow Jones TotalStock Market WorldIndex

ICB

1 Exxon Mobil Corp 0537

2 Microsoft Corp 9537

3HSBC Holdings PLC(UK Reg)

8355

4 Procter & Gamble Co 3724

5 Apple Inc 9572

Top 5 components, as of November 30th 2009:

Industry IndexDow Jones Islamic Market

World IndexDow Jones Total Stock Market

Index

Oil & Gas 26.58% 30.77%

Basic Materials 66.38% 68.54%

Industrials 36.00% 30.32%

Consumer Goods 28.17% 28.98%

Health Care 14.00% 16.00%

Consumer Services 25.84% 26.93%

Telecommunications 5.19% 9.56%

Utilities 3.83% 4.35%

Financials 21.14% 32.12%

Technology 46.47% 51.38%

Industry performance in 2009:

Dow Jones Islamic Market World Index vs.

Dow Jones Total Stock Market World Index (31/12/08 – 30/11/09)

All rates are reviewed on a regular basisSource: Dow Jones Indexes

RankDow Jones Islamic Market World Index

ICB

1 Exxon Mobil Corp 0537

2 Microsoft Corp 9537

3 Procter & Gamble Co 3724

4 BP PLC 0537

5 Johnson & Johnson 4577



The UK government set out its strategicapproach in the December 2008 docu-ment, ‘The development of Islamic financein the UK: the Government’s perspective’(available to download from HM Trea-sury’s website). It states that ‘the UK authorities’ support for Islamic finance is characterised by an approach of equaltreatment for conventional and Islamic finance’. Despite devoting a whole of pageto regulation, the document adds littlemore to that. The author of this articlehas set out to ‘reverse engineer’ the regu-latory principles that the UK has been fol-lowing by looking at what it has done.The following key points emerged.

Neutrality regarding religion

Strictly speaking, the UK does not haveany special tax law for Islamic finance. In-stead, it defines certain types of transac-tions or instruments such as ‘alternativefinance investment bonds’ (AFIBs) andspecifies a tax treatment for them. Thedefinition of an AFIB is such that mostsukuk having the economic characteristicsof debt should qualify as AFIBs. However,the tax definition is self-contained anddoes not depend in any way on the Shar-i’ah status of the instrument.

The same approach of religious neutralityis followed when regulating companies offering Shari’ah-compliant financial serv-ices. In the UK, Islamic banks are licensed

Shari’ah-compliant finance: UK regulationThe UK is globally recognised as the leading Western country for Islamic finance. However,from time to time, proponents of the industry ask why the UK does not allow Islamic banks to offer ‘true’ profit-and-loss sharing investment accounts. In this article Mohammed Amin, tax partner at PricewaterhouseCoopers and member of the IIBI editorial advisory panel, gives a long answer to that short question.

as banks, and takaful operators are licensedas insurance companies. There is no specialregulatory regime for Islamic banks or fortakaful companies. This contrasts, for ex-ample, with Malaysia where takaful opera-tors are licensed under the Takaful Act1984 while other legislation governsMalaysian insurance companies.

A number of consequences appear to flowfrom this approach:

❏ The UK government and its agencieshave no interest in whether an Islamic bankconducts its affairs in accordance withShari’ah. However, this is qualified by thepoint that where a bank has held itself outas being Shari’ah-compliant, the contractsheld by its customers may entitle them toredress for failure to adhere to Shari’ah, orthe bank may acquire legal exposures if itsmarketing were held to be untruthful.

❏ Unlike Malaysia, there would appear tobe no realistic prospect of a UK govern-ment-sponsored Shari’ah board which laysdown mandatory Shari’ah standards. Itwould be entirely inconsistent with an ap-proach whose foundation is that the gov-ernment is not a religious regulator.

All depositors should be entitled to full repayment

The decisions taken regarding regulationimply a government view that all customers

ACADEMIC ARTICLE

Mohammed Amin,PricewaterhouseCoopers


NEWHORIZON Muharram–Rabi Al Awwal 1431 ACADEMIC ARTICLE

depositing money with UK licensed banksshould be entitled to be repaid in full unless the bank becomes insolvent. Thiscan be deduced from the fact that Islamicbanks are not allowed to offer profit-and-loss sharing (PLS) investment accounts.The nearest approximation they can offeris an account where the customer’s money is invested into a pool from which invest-ment returns are paid. However, if lossesarise in the pool, the bank is obligated (un-less it is insolvent) to provide funds fromits own resources to ensure that customersare repaid in full. Customers are given the right to elect, at that time, to take lessthan full repayment, and are also advisedthat if they elect to receive full repaymentthey will not be acting in accordance withShari’ah.

This approach maintains equality of cus-tomer protection between Islamic banks and conventional banks, while allowing customers of Islamic banks to comply withShari’ah principles if they so wish. In par-ticular, it avoids the mis-selling risk thatwould otherwise arise if customers, whenopening an account, were allowed to irrev-ocably expose themselves to the risk of notbeing repaid in full. The mis-selling riskarises from the fact that in reality manycustomers would fail to appreciate the fulleconomic impact to them of receiving lessthan full repayment, or may fail to prop-erly evaluate how likely that risk might beto materialise. That is why under the UK’sapproach, the customer is only called uponto decide whether to accept less than fullrepayment when the circumstances haveactually arisen, and is not asked to make aprospective election when the account isopened.

Equal risks should receive equal regulatorytreatment

Islamic banks sometimes complain thatShari’ah-compliant mortgages require alarger amount of capital to support themcompared with conventional mortgages.However, where that arises, the reason willbe a difference in the risks faced by thebank.

The customer documentation of one Shari’ah-compliant mortgage plan containsa table of key differences from a conven-tional mortgage:

If the leaflet is accurately describing the differences in risks, then in the case of theShari’ah-compliant mortgage the bank faces additional risks which a conventionallender does not face. If that is the case, ahigher capital charge would appear to bewarranted for its Islamic mortgages com-pared with conventional mortgages.

Legislative changes are sometimes necessary

As explained above, Islamic banks are licensed as banks and takaful operators (Islamic insurers) are licensed as insurancecompanies. Nevertheless sometimes exist-ing legislation cannot adequately cope with Islamic financial instruments. A specific example is sukuk. For some time there hasbeen doubt regarding whether sukuk mightfall within the legal definition of a collec-tive investment scheme. If they did, thenthe regulatory responsibilities of sukuk issuers would be significantly more oner-ous than the corresponding responsibilitiesof issuers of conventional debt.

To resolve this, secondary legislation isbeing introduced to define (for regulatorypurposes) an investment called an AFIB. At

the risk of causing confusion, the regulatorydefinition of an AFIB is similar to, but notidentical with, the tax legislation definition ofan AFIB. If an investment qualifies as an

AFIB for regulatory purposes, then it will be classified for regulatory purposes as equivalent to debt and excluded from the definition of a collective investmentscheme. This is explained in a document on the HM Treasury’s website, ‘Legislativeframework for the regulation of alternativefinance investment bonds (sukuk): summaryof responses’.

Consistent with the religion-neutral approachoutlined above, the regulatory definition of an AFIB does not depend in any way onwhether it is, or is not, Shari’ah-compliant.

Conclusion

The UK’s approach to the regulation of Islamic finance works, in the sense that Islamic financial institutions are able to operate within it. It does have the drawbackthat certain products offered overseas can-not be offered in the UK, such as profit and loss sharing investment accounts. However, this limitation is a small price to pay compared with the advantages of having a uniform regulatory regime that applies across the whole of the financial services sector, both conventional and Shari’ah-compliant.

Shari’ah-compliant finance Interest-based mortgage

Both the bank and the customer have responsibilities towards maintaining the property.

All maintenance responsibilities rest with the customer.

The bank as a partner in the property will be subject to the risks associated with ownership of a property.

The bank as a lender will not have exposure toany ownership risks.

Unlike Malaysia, there would appear to be no realistic prospect of a UK government-sponsored Shari’ah board which lays downmandatory Shari’ah standards.

The article was first published on Mohammed Amin’s Islamic finance blog, http://pwc.blogs.com/islamicfinance



Jersey foundations and awqaf (plural ofwaqf).

Legal personality

The nature of a foundation is that it has aseparate legal personality, it is able to con-tract with third parties, sue and be sued inits own name, and holds its own assetswhich can be traded.

Similarly, Shari’ah law provides that awaqf is an independent legal entity(thimmah) that may engage in tradingwith third parties, but a waqf may be restricted from trading in the original set-tled assets (see below).

Creation

As the incorporation of a Jersey founda-tion is regulated under the Financial Ser-vices (Jersey) Law 1998, only a personwho is appropriately licensed under thatlaw will be able to apply for the incorpo-ration of a foundation (a ‘qualified per-son’). The founder will be the person who instructs the qualified person to incorporate the Jersey foundation.

In order to create a Jersey foundation afounder, qualified person, charter (whichwill contain the objects of the foundation)and regulations are required. There doesnot need to be an initial endowment (settlement) or beneficiaries (although a purpose must be identified) for the establishment of the foundation to bevalid.

The Foundations (Jersey) Law 2009 wasregistered by the Royal Court of Jersey on19 June 2009 and came into force on 17thJuly 2009.

In the past, a substantial amount has beenwritten about the use of Jersey-basedShari’ah-compliant trusts as a financialplanning tool for Muslims, and thesimilarities between the Jersey trust andwaqf. The introduction of the FoundationsLaw in Jersey has added another tool thatcan be utilised when designing Shari’ah-compliant structures. As with the trust,many similarities can be drawn betweenthe Jersey foundation and waqf, and eachhas its own benefits.

What is a Jersey foundation?

A Jersey foundation is designed to blendthe highly attractive features of both Jerseycorporations and Jersey trusts. It providesJersey with an alternative financial plan-ning vehicle to companies and trusts for wealth management and charitablepurposes.

A Jersey foundation is an entirely new type of Jersey legal entity and is not anexact equivalent or copy of any foundationestablished in any other jurisdiction, as ithas been modelled on the best featurespresent in the laws of other jurisdictions,while also including unique Jersey features.

The remainder of this article will focus onthe features of the Jersey foundations andsome similarities and differences between

Waqf and Jersey foundation: common groundsKate Anderson, an associate of the commercial team at law firm, Voisin, discusses thesimilarities between the Jersey foundation and waqf and the benefits these structures offer.

The creation of a valid waqf on the otherhand is more similar to that of a trust inthat it requires a settlor (waquef), a declara-tion (al-hugah), the property given as waqf (al-mawqufah) and a beneficiary (al-mawquf alayh). There has been debateamongst scholars as to the requirement forpious intent (niyya al-qurba) on the part ofthe settlor but most agree that the purposeof a waqf itself must simply not be sinful.

Objects

The objects of a foundation may be to benefit a person or a class of persons or to carry out a specified charitable or non-charitable purpose (or may indeed be amixture of these things). The foundationwill hold assets in its own name. It will use these assets in accordance with its con-stitutional documents (the charter and theregulations), either to benefit specified persons or for a specified purpose.

Waqf is commonly established for the provision of religious, charitable or socialservices or to support the family of the settlor. There are two basic types of waqf:

❏ waqf khairee, where the income of waqf property is dedicated in perpetuity for charitable or religious purposes;

❏ waqf ahlee where income of the waqf isdedicated in perpetuity to members of thesettlor’s family. It is possible to have waqfthat combines both religious and charitablepurposes with the maintenance of the sett-lor’s family.

ANALYSIS



It is therefore possible to structure a Jerseyfoundation in such a way as to have thesame objects as waqf would have.

Assets

A Jersey foundation will hold assets in its own name. It will use these assets in accordance with its constitutional docu-ments (the charter and the regulations), either to benefit specified persons or for aspecified purpose. The foundation shall invest these assets and either distributethem to beneficiaries or use them for thestated purposes.

In comparison, views differ as to the ownership of property which has been declared as waqf. Different Shari’ahschools have different views upon this. The Maliki school, for example, takes theview that the settlor remains the owner of waqf property but is prevented fromusing it; however, Hanafi and Shafi’ischools believe it is effectively ownerless.Shia scholars generally agree that the property ceases to be the settlor’s, but there is a division within Shia school as to whether it becomes ownerless or belongs to the beneficiaries, subject towhether the property is held within a public or private waqf.

The main difference between the Jerseyfoundation and waqf with regards to assetsis therefore in the application of capital assets. It is possible to structure a founda-tion in such a way as to apply income only to a purpose however some directionmust be given as to the application of the capital upon the winding up of thefoundation.

Constitutional documents and organisation

The constitutional documents of a Jerseyfoundation consist of the charter (a publicdocument, which will be filed with the Jer-sey Registrar of Companies and availablefor public inspection at the Registry) andthe regulations (which are private and thusmay be viewed by only those defined as‘persons appointed under the regulations

of the foundation’). The regulations are re-quired to establish a council to administerthe foundation’s assets and to carry out itsobjects. The regulations must also providefor the appointment of a guardian to ensurethe accountability of the council.

The council exercises the power of the foundation. Council members only have duties towards the foundation itself; theyhave no fiduciary duty to individuals whomay benefit from the foundation.

Waqf is established with a declaration, usingwords which clearly prove the settlor’s in-tention. It is not settled between Shari’ahschools as to whether waqf can be settled by actions. There is usually only one nazir

or mutawalli however there is nothing inprincipal to prevent the waquef or the mu-tawalli appointing a council.

For both waqf and a Jersey foundation it is important that the objects of the entityare established clearly at the outset and this is the main purpose of any charter andregulations or declaration.

Guardian

The principal role of the guardian is to ensure that the council carries out its func-

tions in order to achieve the objects of the foundation. The requirement for aguardian ensures the proper administrationof foundations and the protection of thebeneficiaries of the foundation. Theguardian may retain various executivepowers, such as a veto over certain deci-sions of the council.

This is an area where, although not directlyin line with the usual structure of waqf, theJersey foundation provides an interestingedge in terms of Islamic finance. Becausethe guardian can retain powers it maymake sense to appoint either the founder or (possibly a more interesting concept) aShari’ah scholar to oversee the foundationand council. Something that we often see in Jersey when setting up Shari’ah-compli-ant structures is an unease on the part ofthe settlor in handing their assets to atrustee. With a Jersey foundation, not onlycan the founder (settlor) legitimately be acouncil member but they can also appointfamily members to the council and eitherbecome guardian themselves or appoint an appropriate person. Whilst the trustconcept is flexible, the foundation clearlyoffers an attractive proposition to clientswho wish to retain a high level of continu-ing control over the assets settled into astructure.

Use of foundations

Foundations provide Jersey with an alter-native financial planning vehicle to compa-nies and trusts for wealth management and charitable giving. Many civil law jurisdic-tions do not recognise the concept of atrust, but are happy with the foundation. It is expected that Jersey foundations willbe used by those who require transparency,wish to control assets (rather than transfer-ring the assets outright to the trustee of a trust), or who prefer a structure withwhich they are familiar. In terms of Islamicfinance, each of the trust and the founda-tion provide a facility to clients to structuretheir affairs in compliance with Shari’ahlaw under regimes that can be said to have clear and identifiable similarities anddifferences to waqf.

Kate Anderson,Voisin



Money laundering is not a new trend. It is aprocess that takes illegal or ‘dirty’ moneygenerated from illegal activities and puts itthrough a cycle of transactions, so that itcomes out at the end as apparently legal or‘clean’ money. The process is driven bycriminal activities and conceals the truesource, ownership or use of funds.

No one can deny that money launderersmay use Islamic banks as a place to cleantheir dirty money through the use of vari-ous financial instruments. It is important toensure that Islamic banks are well-protectedfrom being unwittingly used by moneylaunderers and the public at large is able tomaintain confidence in the credibility of theIslamic financial system.

The beginning of money laundering

In medieval times, when the CatholicChurch banned usury as not only a crimebut also a mortal sin, merchants and moneylenders intent on collecting interest on loansengaged in a wide variety of hiding, movingand washing criminal money. The main ob-jective was to make interest charges disap-pear or disguise their nature, and this couldbe done in many ways. When merchants ne-gotiated payments over long distances, theywould artificially increase the exchangerates sufficiently to cover interest paymentsas well. They would claim that interest pay-ments were a special premium to compen-sate for risk. They would make interestappear to be a penalty for late payment,with lender and borrower agreeing in ad-vance that such a delay would take place.They would pretend that interest paymentswere really profits by using something simi-lar to today’s so-called ‘shell companies’

Keeping cleanHany Abou-El-Fotouh, board secretary and director of policy and corporate affairs at CI CapitalHolding, the investment banking arm of Egypt-based Commercial International Bank, discussesthe issue of fighting money laundering in Islamic banking.

(companies that have no real operationalrole). Capital would be lent to the companyand then taken back again, allegedly in theform of profits rather than interest on theloan, even though no profits had really beenmade. All of these tricks to deceive theChurch authorities have their rough equiva-lents today in the techniques used to laun-der criminal money.

The size of the problem

Today, money laundering represents an esti-mated two to five per cent of the world’sgross domestic product (GDP). The Interna-tional Monetary Fund (IMF) describes it asone of the most serious issues facing the in-ternational financial community. Estimatesof money laundering worldwide range from$800 billion to $1.6 trillion; 47 per cent ofthe launderers use banks to clean dirtymoney.

Three stages of money laundering

The money laundering process is comprisedof three main stages.

‘Placement’ is the first stage in money laun-dering where physical currency is made toenter into the financial system. The illegalprofits may derive from drug trafficking,prostitution rings, smuggling, illegal armssales, kidnapping for ransom, bribery, computer-fraud schemes and smuggling of human beings and organs. It is here thatthe illegal proceeds are most vulnerable todetection.

The second stage is ‘layering’, the separa-tion of the money from its illegal source byconducting a complex series of transactions.

AML FOCUS

Hany Abou-El-Fotouh,CI Capital Holding


NEWHORIZON Muharram–Rabi Al Awwal 1431 AML FOCUS

At each layer, the money looks more andmore like legitimate funds. Launderers try to make any tracing back to the dirty sourceimpossible. Examples include bank-to-banktransfers, wire transfers between differentaccounts in different names in differentcountries, often using shell companies andthe purchase of high-value items (boats,houses, cars, diamonds and securities) tochange the form of the money.

The last stage is ‘integration’, integrating the illegal proceeds back into the economyas legitimate funds through legitimate trans-actions such as business ventures, luxury assets, lending, financing and investing. This stage provides a money launderer withan apparently legitimate explanation forhis/her wealth.

Is terrorist financing similar to money laundering?

Terrorist financing is the process of reverselaundering, but tends to use smalleramounts than is the case with money laundering. This process uses funds raisedfrom legitimate sources, such as personaldonations and profits from businesses andcharitable organisations, as well as fromcriminal sources.

Terrorists may use the same money launder-ing techniques to evade authorities’ atten-tion and to protect the identity of theirsponsors and the ultimate beneficiaries ofthe funds. They may use conventional andIslamic banks, informal value-transfer sys-tems, hawala and physical transportation of cash, gold and other valuables throughsmuggling routes.

Money laundering from an Islamic perspective

Islam forbids involvement in economic ac-tivities which are not in line with the teach-ing of Islam, such as money laundering.Money laundering involves proceeds of un-lawful activities and Islam does not allowany property derived from such sources.

Islam obliges Muslims to do good thingsand forbids criminal activities. This duty

rests with individuals and corporate enti-ties. Islamic banks are responsible forpreventing or combating money launder-ing activities which are clearly not in linewith the teachings of Islam.

Are Islamic banks more vulnerable tomoney laundering?

Conventional and Islamic banks and other financial institutions are vulnera-ble to money laundering. Money laun-derers may target them because of thefast, safe services offered with the possi-bility of transferring enormous amountsof money electronically around theglobe.

Sadly, Shari’ah-compliant banks and financial institutions are often seen as the weak link in the West. There is afalse perception about inadequate anti-money laundering (AML) and internalcontrols.

The reality is that AML standards are thesame in Islamic financial institutions as in their conventional counterparts. How-ever, Islamic finance is a new industry, andwith all new industries, there is alwaysroom for improvement.

Five common myths about Islamic banks

Myth 1: Many Muslims send their zakat(alms giving) through Islamic banks. Thereis no assurance that they have funded a legitimate charity rather than a terroristgroup.

Reality: Islamic banks oversee payment of zakat to worthy charities and apply adequate due diligence so that no paymentsare made to doubtful charities.

Myth 2: The Islamic banking system operates under loose regulatory oversight. There are no proper accounting and audit-ing standards.

Stages of money laundering

Money laundering vulnerabilities and its similarities to conventional bankingscenario (marked in red)


NEWHORIZON January–March 2010AML FOCUS

Reality: Islamic banks are well-regulated and follow defined standards of institutionssuch as state regulators, the Accounting and Auditing Organisation for Islamic FinancialInstitutions (AAOIFI) and the InternationalFinancial Services Board (IFSB).

Myth 3: Terrorist groups are more likely tofind willing collaborators within the Islamicbanking system.

Reality: Shari’ah principles do not conflictwith international AML and counter-terror-ist financing standards. Islamic banks aresubject to the same laws and regulations astheir conventional counterparts.

Myth 4: Assets and commodities are used as degrees of separation in purely financialdealings, resembling the ‘layering’ methodsof criminal financiers.

Reality: Criminal activities are not in line with Shari’ah. Islamic banks cannot undertake activities which are harmful to society, such as gambling, casinos and theliquor trade. As Islamic financial institutionscannot lend money on interest, but financetrade, leasing and businesses on a partner-ship basis, they purchase/sell assets andcommodities as required by their clients.However, these will not be tools to disguiseillegal proceeds.

Myth 5: Islamic banks operate in countriesknown to have weak banking regulations.

Reality: A lot of conventional internationalbanks have Islamic windows, including Citigroup, HSBC, UBS and Standard Char-tered Bank. National financial regulatorsare strongly involved. For example, the Fi-nancial Services Authority (FSA) in the UK

with its ‘no obstacles, no special favours’approach is successfully regulating fivefully-fledged Islamic banks.

Fighting money laundering

Almost all countries in which Islamic banksoperate have made serious efforts to combatmoney laundering by introducing AML lawsand guidelines, such as know your customer(KYC). Islamic banks are obliged to reportsuspicious transactions to financial intelli-gence units. Furthermore, they should have AML policy approved by the board, a competent compliance officer, transactionmonitoring and watchlist screening systemsin place, as well as rules on record keepingand KYC guidelines. Indeed, Islamic banks have further duty to combat money launder-ing activities as mandated by religion ofIslam.

Diary of events endorsed by the IIBIJanuary

18–21: 18th Islamic Finance Forum, LondonForum to engage the key issues shaping thefuture of the European and global Islamic finance industry in today’s difficult economicenvironment and to focus on new ideas, newdirections, and new leadership. Tel: +971 4 335 2437Email: [email protected]

February

1–3: World Cards & Payments Summit,DubaiSummit to focus on creating a profitablecards business and payments environmentfor 2010, both for conventional and Islamicfinancial industries. Tel: +971 4 60 91 581Email: [email protected]

7–8: 6th Annual Middle East InsuranceForum (MEIF), BahrainForum to focus on unlocking new growth opportunities in the Islamic and conventionalmarkets of the Middle East, and assess keyregional industry trends.Contact: Naomi NjorogeTel: +971 4 343 1200Email: [email protected]

April

12–13: 5th Annual Middle East RetailBanking Forum, DubaiForum to discuss effective retail bankingstrategies for Islamic and conventional financial institutions in the Middle East.Tel: + 971 4 609 1576Email: [email protected]

11: Islamic Finance Seminar, LondonOrganised by the British Bankers’ Associa-tion (BBA), seminar to assess the currentactivity in the UK, opportunities forgrowth and how the credit will affect Islamic finance.Email: [email protected]

London

© Anna SevkovichDreamstime.com


BOOK REVIEW NEWHORIZON January–March 2010

The book examines how money, in the absence of interest (riba) and money mar-kets, can become a dependent variable of an economic system. It further tries to inte-grate money in capital theory and to makethe monetary sector part of the real sectoraiming at removing the problems that arisefrom separation of the two.

In the preface the author says that the per-formance of the stock market, evidenced bycrashes and lopsided distribution of incomeand wealth, has become the most suitablebarometer of the merits of capitalism. Suchare the catastrophic and all-embracing con-sequences of the current crisis that many ex-ponents of the system are now beginning todoubt whether it can, or should, survive.Such doubts are only logical if humanitarianconsiderations are to enter into the equa-

tion. In the zero-sum game of capitalism,someone’s gain is someone else’s loss. Theauthor seeks an answer by taking a differ-ent look at the present problem, and onewhich involves a much deeper understand-ing of the fundamentals of capitalism, suchas those that go back to the assumption ofnon-satiation, which in turn give rise tounchecked greed and self-interest.

The author goes on to argue that the com-plexities of human nature require guidelinesand restrictions set down by the Creator ofthe universe. But lessons to be learned fromthe Divine Laws go far beyond human na-ture. It is a matter of order and regularity;as it has been observed for centuries in theuniverse and the human body, so too shouldit be with socio-economic affairs. Ignoringthese rules and regulations has caused na-tions serious problems that could have beenavoided. A truly Islamic economic system is one that accommodates all positives. Itssustainability is guaranteed because it iscompatible with human instincts; positivespraised and negatives denounced. Greedcan be restricted either through legal meas-ures and/or obedience to the Divine teach-ings. Co-operation can moderate greed aswell as further guarantee the universality ofthe Islamic economic principles. A compari-son with capitalism only serves to highlightcapitalism’s many pitfalls and tendency toemphasise the negatives in human behav-iour. A viable economic system has to takecare of all human characteristics because,ultimately, this is what Nature demands.Muslims – and indeed many non-Muslims –have learned that love, empathy, altruism,co-operation, sacrifice, mutual concern, forgiveness, gratitude, virtue, benevolenceand honesty are as much a part of humanheritage as hatred, self-interest, apathy, revenge, vice, dishonesty or fraud.

Throughout history, there has always beenconflict between ‘good’ and ‘bad’ behav-iour, and the people who embody thesecharacteristics are either admired or de-nounced. At this point, the crucial ques-tion we should be examining is the rolecapitalism has played in this regard.

The book is divided into seven chapters,the first chapter discusses an evolution ofmoney from a new perspective; the secondchapter deals with a brief history of inter-est, interest on money and its scope; thethird chapter takes a legal perspective onIslamic finance; the fourth chapter goes on to discuss interest and the place of manin the economic system; chapters five andsix deal with conventional banking versusIslamic banking, looking at the structureand functions of banking, the philosophi-cal foundations of the place and ultimategoal of man and Islamic Modes of financealong with Islamic bank structure and con-tracts; the final chapter discusses the roleof central banks in Islamic banking andlearning from experience.

The book is 409 pages long (including bibliography and index) and is priced at$85.00.

About the author

Dr Iraj Toutounchian is a professor of economics at Al-Zahra University, Tehran,Iran. Currently, he is also chief of aca-demic affairs, Bank of Industry and Mine,Iran, responsible for implementing Islamicbanking. He was formerly the deputy min-ister of economics and international affairsat the country’s Ministry of Economic Af-fairs and Finance, and also he has servedas a member of the Money and CreditCouncil at Central Bank of Iran.

Islamic Money & Banking: Integrating Money in Capital Theory

By Iraj ToutounchianPublisher: John Wiley & Sons (June 2009) ISBN-10: 0470823194 ISBN-13: 978-0470823194

IIBI 47www.newhorizon-islamicbanking.com

BOOK REVIEW

Keynes only saw wealth creation interms of the ‘good life’; ‘and a good lifewas not what made people better off: itwas what made them good. To make theworld ethically better was the only justi-fiable purpose of economic striving.’ Ofcourse, the author continues, except forreligious groups very few people wouldeven recognise this definition of the goodlife.

The definition of good life in Islamicteachings promotes human brotherhood,socio-economic justice and the well-being of all through an integrated role of moral values, the market mechanism,families, society, and good governance;Islamic economics does not seek to abolish private property, as was done by communism, nor does it prevent indi-viduals from serving their self-interest. It recognises the role of the market in theefficient allocation of resources, but doesnot find competition to be sufficient tosafeguard social interest. While conven-tional economics generally considers thebehaviour and tastes and preferences ofindividuals as given, Islamic economicsdoes not do so. It places great emphasison individual and social reform throughmoral uplift.

The book is divided into three parts. Thefirst looks at what went wrong and thepresent state of economics. The secondlooks at the success or failure of Keyne-sian economics, and the third at Keynesand the ethics of capitalism.

The book is 232 pages long (including bibliography and index) and is priced at£20.00 (around $33).

When unbridled capitalism falters, isthere an alternative? The current globalfinancial crisis has brought to a headwider issues concerning the explanationof human behaviour and the role ofmoral judgements in economics. Thesetouch on attitudes to economic growth,globalisation, justice, the environmentand so on. Keynes has important thingsto say about these matters. To take justone: if growth is a means to an end,what is the end, how much growth is‘enough’, and what other valuablehuman purposes may be pre-empted by a single-minded concentration on eco-nomic growth?

The book is unquestionably the most important contribution to economic debate since Lehman Brothers folded,and it should be read by policy makers,bankers, regulators, and the wider pub-lic. All will appreciate its embrace of history and ordinary language – Keyne-sian traits that subtly but powerfully re-duce economics to its rightful place, notas a branch of applied maths but ‘as amoral, not natural, science’. Keynes wasa moralist. There was always, at theback of his mind, the question: What iseconomics for? How does economic ac-tivity relate to the ‘good life’? How muchprosperity do we need to live ‘wisely,agreeably and well’?

Keynes’ reflection on ethics and econom-ics can be considered under four head-ings: the relationship between wealthand goodness; the psychology of wealthcreation, the role of justice in economics;and the place of religion in economic life.The author makes the broader point that

Keynes: The Return of the Master

About the author

Robert Skidelsky is Emeritus Professor of Political Economy at the University of Warwick. His three-volume biographyof the economist John Maynard Keynes(1983, 1992, 2000) received numerousprizes, including the Lionel Gelber Prizefor International Relations (founded in1989 by Canadian diplomat Lionel Gel-ber, the prize honours ‘the excellence ofthose who think and write about the local and global forces of change in international issues’) and the Council onForeign Relations Prize for InternationalRelations. He was elected Fellow of theBritish Academy in 1994.


By Robert Skidelsky Publisher: Allen Lane (September 2009) ISBN-10: 184614258X ISBN-13: 978-1846142581

IIBI regularly researches the market for books and publications on various aspects of Shari’ah-compliant banking and insurance that may help the IIBI community to advance their knowledge of Islamic finance. In this series of book reviews, the Institute’s specialists bring you concise and up-to-date

analysis of specialist literature. If you have any questions regarding the reviewed books or would like to suggest a book, please email [email protected] or [email protected]


APPOINTMENTS

HE Dr Sabir Mohamed Hassan, governor of the Central Bank of Sudan, has been appointed by the Islamic Financial Ser-vices Board (IFSB) as its chairman of thecouncil for the year 2010. His deputychairman, who was appointed at the sametime, is to be the governor of the CentralBank of Jordan, HE Dr Umayya Toukan.Dr Muhammad Sulaiman Al-Jasser, gover-nor of the Monetary Authority of SaudiArabia, has stepped down following hisyear’s tenure. The chairmanship of theIFSB rotates on an annual basis betweenthe members of the council.

Daud Vicary Abdullah has been an-nounced as Deloitte’s global leader of theIslamic finance industry group. He will be responsible for the overall strategy and development of Deloitte’s global Is-lamic finance division, and provide guid-ance to group members on governments,corporations and financial institutions.Abdullah has over 35 years of experiencein finance and consulting, having worked in Europe, Asia, Latin America and theMiddle East.

Jordan Dubai Islamic Bank hasannounced a newhire. This is DrHussain HamedHassan (left), whois now chairman ofthe bank’s Shari’ahand LegitimacyControl Council.

Two others, Dr Ali Al Swa and Dr AhmedMelham, have also been appointed to thecouncil as members. Hassan has plenty ofexperience to prepare him for this role. Heis already on the Shari’ah committees of anumber of Islamic financial institutions inthe UK, Pakistan, Algeria, Sudan, Bahrain,Saudi Arabia and the UAE.

Abu Dhabi Islamic Bank has appointedAmir Riad as global head of corporate fi-nance and investment banking. Riad movesfrom Standard Chartered Bank in the UAE,where he held the post of regional head ofcorporate finance and advisory for theMENA region. He also spent over twelveyears at Citigroup, during which time heheld managerial positions in the areas ofcorporate finance and private equity. Beforethat he was VP with Citigroup/SalomonSmith Barney’s investment team in London.

Bilal Ahmed has been promoted to seniormanager of Ernst & Young to lead its Islamic finance team in the Channel Islands,as part of a number of appointments at theprofessional services firm. Ahmed joinedErnst & Young in 1998. Before his currentappointment he worked for the firm inKarachi, Dubai, Johannesburg and London.He has worked in Jersey since 2006.

Saudi Hollandi Bank has appointed DrBernd van Linder as managing director bythe bank’s board of directors. Van Linderhas fulfiled this role in an acting capacitysince May 2009. He joined the bank in2006 as GM in the treasury department. Before this, he worked at ABN Amro.

The International Capital Market Associa-tion (ICMA), which has recently been actively engaged with the International Islamic Financial Market (IIFM) to developmarket practice and documentation for thesukuk market, has announced the appoint-ment of Robert H Mohamed as chairman of ICMA Middle East, Far East and Africa.Mohamed is co-head of investment banking in the corporate and investment banking division of National Bank of Abu Dhabi,and has previously worked for Arab Bank-ing Corporation, Deutsche Bank and Mer-rill Lynch.

Shaikh Dr MohamedEl Gari, Shaikh DrNizam Yaqoubi andShaikh Lahem AlNasirhave been named asthe three Shari’ahscholars who will siton the board of Khali-jia Invest, a newlylaunched Shari’ah-compliant investment company in Bahrain.The company is to specialise in corporate finance and asset management. The CEO ofthe firm is Muneer Al Shehri, and he will bejoined by Dhafer Salih Alqahtani (above) asdeputy CEO. Khalijia Invest plans to launchfour Shari’ah-compliant investment funds inthe first half of 2010.

Sudanese Egyptian Bank has chosen AmrBahaa as its new MD. Bahaa is a former assistant managing director and executiveboard member of Piraeus Bank Egypt. Bahaaalso restructured the dealing room, and de-veloped a number of innovative products forprivate banking clients, while he was generalmanager for treasury and product develop-ment at Piraeus Bank Egypt. Before joiningthat bank he held various managerial postswith Arab International Bank, Crédit Lyon-nais and Arab Banking Corporation.

Khaled M. Khaleif has been appointed finance manager of Takaful Re, a Dubai-based Islamic insurance provider. A Libyannational, he moves from Arab InsuranceGroup, where he has picked up twelve yearsof experience.

Sameh Al Awadhallah is the new head ofbranches at Abu Dhabi Islamic Bank. He haspreviously held industry posts such as headof branches, priority banking and SME bank-ing in various financial institutions. He has15 years of industry experience.

On the move



DIRECTORYNEWHORIZON Muharram–Rabi Al Awwal 1431

Directory

Volaw specialises in the formation of trusts, foundations, companies, limited partnershipsand other fiduciary vehicles, and in providing offshore management and administrationservices to such structures established for corporate, institutional and private clients.Volaw is regulated by the Jersey Financial Services Commission.

With over 25 years experience of working with leading Islamic finance institutions, Volaw has built a reputation for creating and managing innovative structures for Shari’ah-compliant and conventional funds and structured finance transactions, including Sukuk.

Trevor Norman, Director Tel: +44 (0) 153 4500 400 Fax: +44 (0) 153 4500 450 Email: [email protected] Templar House, Don Road, St Helier, Jersey, JE1 2TR

Volaw Trust & Corporate Services Limitedwww.volaw.com

ERI is a large international company, specialised in the conception, design and distributionof the banking software: OLYMPIC Banking System. Market leader in Luxembourg,Monaco and Switzerland, with 280 banking clients in over 45 countries and more than530 highly qualified staff, ERI is recognised as a key player internationally by providing aproven robust, real-time integrated solution, which clearly meets the needs of the market.This is proven by the solution being the system of choice of numerous significant interna-tional financial groups for their banking networks. ERI also offers a full range of develop-ment, implementation, support and maintenance services.

Nicholas HackingTel: +44 (0) 207 9874 859 Fax: +44 (0) 207 5385 547 Email: [email protected] Exchange Tower, Building 1 suite 6.01, Harbour Exchange Square, London, UK, E14 9GE

ERI Banking Software Ltdwww.eri.ch I www.olympic.ch

EIIB was incorporated in January 2005 and received authorisation by the FSA in March2006. In April 2006, EIIB opened for business, and in May 2006 completed its IPO andwas admitted to London’s AIM market. In November 2006, EIIB opened a representativeoffice in Bahrain. EIIB’s mission is to achieve excellence in the provision of Shari’ah-compliant investment banking products and services. Headquartered in London, EIIB'srange of products and services include the following Shari’ah compliant investment banking activities:

Louise Protain, PA to the Chief Executive OfficeTel: + 44 (0) 207 8479 924 Email: [email protected] Finsbury Pavement, London, UK, EC2A 1N

EIIBwww.eiib.co.uk

Path Solutions is a worldwide provider of Islamic and Investment software solutions forthe global finance industry and in specific the Islamic finance industry. It is the 1st andonly banking software firm to be recognised and certified by the Accounting and AuditingOrganisation for Islamic Financial Institutions. Path offers a wide range of Islamic,AAOIFI-certified and IAS-compliant integrated software covering Core Banking, Invest-ment and Private Equity, Treasury, Funds Management, etc. Path Solutions is headquar-tered in Kuwait, with offices in Beirut, Manama, Karachi, London, Kuala Lumpur andRiyadh.

Agnes Carrasco, Administration Manager Tel: +965 2482 4600 Email: [email protected] Kuwait Red Crescent bldg, 3rd floor, Al Jahra Street Shuwaikh. P.O.Box 592 Safat 13006

Path Solutionswww.path-solutions.com

ICS is dedicated to software development and integration for the banking industry since1978, one of the leading companies in the field of banking automation technologies and services. Its Integrated Banking Solution, BANKS® is a complete, integrated andmodular system that includes full delivery channels support, built on an open platform ina web-based browser environment and available on many environments. Handle IslamicBanking, Retail, Wholesale, Corporate, Investment and Commercial Activities with Business Process Management and Prebuilt Business Intelligence layers, CRM, RiskManagement and Basel II.

Wail Malkawi, VP Business Development Tel: +44 (0) 208 6815 421 Fax: +44 (0) 208 6881 673 Email: [email protected] Courtyard, 14a Sydenham Road, Croydon, Surrey, UK, CR0 2EE

International Computer Systems (ICS)www.banks-solutions.com To advertise here, please contact:

Paul MinisterIBS Intelligence8 Stade StreetHythe, Kent UK

CT21 6BETel: +44 (0) 1303 262 636Fax: +44 (0) 1303 262 646

Email: [email protected]

❏ Islamic Treasury and Capital Markets❏ Asset Management, including Private

Banking

❏ Structured Trade Finance ❏ Private Equity and Corporate Advisory❏ Shari’ah Advisory.


NEWHORIZON January–March 2010GLOSSARY

al-hugahDeclaration for waqf.

al-mawqufahProperty given as waqf.

al-wadiaResale of goods with a discount on the original statedcost.

arbounA non-refundable down payment for attaining the rightto buy goods at a certain time and certain price infuture; if the right is exercised, it becomes part of thepurchase price.

baiSale.

fatwaA ruling made by a competent Shari’ah scholar on aparticular issue, where fiqh (Islamic jurisprudence) isunclear. It is an opinion, and is not legally binding.

fiqhIslamic jurisprudence. The science of the Shari’ah. It isan important source of Islamic economics.

ghararLit: uncertainty, hazard, chance or risk. Technically, saleof a thing which is not present at hand; or the sale of athing whose consequence or outcome is not known; or a sale involving risk or hazard in which one does notknow whether it will come to be or not.

halalActivities which are permissible according to Shari’ah.

haramActivities which are prohibited according to Shari’ah.

ijaraA leasing contract under which a bank purchases andleases out a building or equipment or any other facilityrequired by its client for a rental fee. The duration of the lease and rental fees are agreed in advance.Ownership of the equipment remains in the hands ofthe bank.

ijara wa iqtinaThe same as ijara except the business owner iscommitted to buying the building or equipment orfacility at the end of the lease period. Fees previouslypaid constitute part of the purchase price. It iscommonly used for home and commercial equipmentfinancing.

istisnaA contract of acquisition of goods by specification ororder, where the price is fixed in advance, but the goods are manufactured and delivered at a later date.Normally, the price is paid progressively in accordancewith the progress of the job.

maalWealth, money, property; any valuable thing which canbe possessed.

maysirGambling – a prohibited activity, as it is a zero-sum

game just transferring the wealth not creating newwealth.

mudarabahA form of business contract in which one party bringscapital and the other personal effort. The proportionateshare in profit is determined by mutual agreement at thestart. But the loss, if any, is borne only by the owner ofthe capital, in which case the entrepreneur gets nothingfor his labour.

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

murabahaA contract of sale between the bank and its clientfor the sale of goods at a price plus an agreed profitmargin for the bank. The contract involves the purchaseof goods by the bank which then sells them to the clientat an agreed mark-up. Repayment is usually ininstalments.

musharakahAn agreement under which the Islamic bank providesfunds which are mingled with the funds of the businessenterprise and others. All providers of capital are entitledto participate in the management but not necessarilyrequired to do so. The profit is distributed among thepartners in predetermined ratios, while the loss is borneby each partner in proportion to his contribution.

nazirCaretaker/manager.

niyyaIntention.

qimarLit: gambling. Technically, an agreement in whichpossession of a property is contingent upon theoccurrence of an uncertain event. By implication itapplies to those agreements in which there is a definiteloss for one party and definite gain for the other without specifying which party will gain and which party will lose.

rab-al-maalIn a mudarabah contract, the person who invests thecapital.

ribaLit: increase or addition. Technically, it denotes anyincrease or addition to capital obtained by the lenderas a condition of the loan. Any risk-free or ‘guaranteed’rate of return on a loan or investment is riba. Riba, in allforms, is prohibited in Islam. Usually, riba and interestare used interchangeably.

sadaqahCharitable giving.

salamA contract in which advance payment is made forgoods delivered later on.

Shari’ahRefers to laws contained in or derived from the Quranand the Sunnah (practice and traditions of the ProphetMuhammad, PBUH).

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

SunnahIt refers to the sayings and actions attributed to ProphetMuhammad (PBUH).

sukukSimilar characteristics to that of a conventional bondwith the key difference being that they are asset backed;a sukuk represents proportionate beneficial ownershipin the underlying asset. The asset will be leased to theclient to yield the return on the sukuk.

takafulA form of Islamic insurance based on the Quranicprinciple of mutual assistance (ta’awuni). It providesmutual protection of assets and property and offersjoint risk sharing in the event of a loss by one of itsmembers.

taskeekThe process of issuing sukuk.

ta’widhCompensation.

thimmahIndependent legal entity.

wa’adA promise to buy or sell certain goods in a certainquantity at a certain time in future at a certain price.It is not a legally binding agreement.

wakalaA contract or agency in which one person appointssomeone else to perform a certain task on his behalf,usually against a certain fee. The agent (wakil) isallowed to generate an income for himself in excessof the minimum agreed upon returns as agreed withrab-al-maal (investor of the capital).

waqfAn appropriation or tying-up of a property inperpetuity so that no propriety rights can be exercisedover the usufruct. The waqf property can neither besold nor inherited nor donated to anyone.

wafq ahleeWhere income from waqf is dedicated in perpetuity tomembers of settlor’s family.

waqf khaireeWhere income of waqf property is dedicated inperpetuity for charitable or religious purposes.

waquefSettlor for waqf.

zakatA religious obligation on Muslims to pay a prescribedpercentage of their wealth to specified categories intheir society, when their wealth exceeds a certain limit.Zakat purifies wealth. The objective is to take away apart of the wealth of the well-to-do and to distribute itamong the poor and the needy.

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