S P I N E

S P I N E
Module - I
The Institute of Islamic Banking and Finance
# 12-2-800/445, Dilshad Nagar, Mehdipatnam, Hyderabad - 500 028. A.P. INDIA.
Tel. : 91-40-23522847
E-mail : info@islamicbankinst.com Website : www.islamicbankinst.com
All Rights Reserved.
CAUTION : No part or parts of this material including title design should be transmitted, copied or reproduced in any form without written
permission of the Institute. Any unauthorised use by individuals/organisations will be liable for appropriate legal action.
Note: In the E-Learning CD of Study Material due to technical reasons the student
will note two page numbers one on the page of the text and the other
at the bottom scroll. Whever in the Assignments or study page number is
mentioned it is always the page number given at the bottom of the page
and NOT the number mentioned in the below scroll which is for printing
purpose only.
Module - I
The Institute of Islamic Banking and Finance
# 12-2-800/445, Dilshad Nagar, Mehdipatnam, Hyderabad - 500 028. A.P. INDIA.
Tel. : 91-40-23522847
E-mail : info@islamicbankinst.com Website : www.islamicbankinst.com
All Rights Reserved.
CAUTION : No part or parts of this material including title design should be transmitted, copied or reproduced in any form without written
permission of the Institute. Any unauthorised use by individuals/organisations will be liable for appropriate legal action.
Credits & Acknowledgement :
The Institute is indebted to and acknowledges the under noted organisations, individuals, publications and
journals the material from which has been used as valuable inputs in the study modules. Permission, where
ever required has been sought.
1. The Islamic Research & Training Institute, Islamic Development Bank, Jeddah, Saudi Arabia
2. Mr. David Williams, Editor, Islamic Banking and Finance magazine London, U.K. who is kind enough to
permit IIBF to use its material in its publications subject to certain conditions mentioned later.
3. Various news papers and other journals from which matter has been used in the Brain Storming Session.
4. Title cover courtesy : Al Baraka Islamic Bank, Baharain.
5. IFIS Islamic Finance Information Service and Islamic Finance News, IFS for various inputs in the Global
round up section
Due care and caution has been exercised in compiling and printing these study modules. Errors if any, noticed by the students may be brought to the attention of the
Institute with details for rectification in the next reprint.
First Edition 2003
Reprints 2005
2007
2009
Revised Edition 2010
Present Edition 2013
CONTENTS
From the Deans Desk.................................................................................. 1 - 14
Islamic Banking & Finance Global Round Up ................................ 15 - 133
Chapter - I ................................................................................................ 134 - 149
Global financial crisis
Chapter - II .............................................................................................. 140 - 163
Islamic Finance Sector: Education, Training and Human Resource
Chapter - IIII............................................................................................ 164 - 172
Religious Perspective - Background with socio-ethical aspects of
Islamic Economics, Banking and Finance
Chapter - IV............................................................................................. 173 - 187
Principles and Practice of Islamic Financing
E-SESSIONS
E-Session 1. Islamic Finance Product Evolution
E-Session 2. Islamic Finance Country Profile Bahrain, Dubai
E-Session 3. Miscellaneous
E-Session 4. News Makers
E-Session 5. Expert Opinion Islamic Philanthropy
E-Session 6. Additional Reading Material Global financial crisis
1 to 6 in this Module Page 133
Serenity and Peace Hallmark of Islam, lead you to a world
of knowledge and learning as you unfold page after page
Dean
1
From The Deans Desk
(Please read the complete text carefully)
Dear Student,
Welcome to the pioneer institution of learning - The Institute of Islamic Banking
and Finance. By registering for this course you have taken a valuable decision to acquaint
yourself with a system about which none had spoken to you earlier even though it was
in vogue for hundreds of years. The Islamic banking and financial system did not make
enough progress as compared to the western model because it was considered to be
an outdated, religious and dogmatic concept based on a religious ideology. This was not
the case. Western experts have now begun to realize that the interest based system
which is being practised around the world has many short comings and some say it is
the root cause of many economic debacles apart from the well known socio-ethical
evils. The current global economic crises, financial doom in Europe particularly in Grece,
Italy and Sapin are all attributed to the element of interest in the economic system.
Islamic Financial System is now understood to be the paacea for most of these evils.
About the Dean
The Institute of Islamic Banking and Finance is Indias first and only professional
Institute in this field conceived and founded by Mr.M.A.MAJEED, a professional Islamic
banker. Trained at the Islamic Foundation, Markfield Liecester UK in Islamic Economics,
Banking & Finance. Alumnus of the School of Business Administration, University of
Michigan, USA,. He is a former General Manager of Faisal Islamic Bank of Kibris, Turkish
Cyprus, Associate Member of the Indian Institute of Bankers, Bombay, India and a
former Member of Institute of Bankers, London. He has held various assignments in a
commercial bank in India for 17 years and later in an Islamic Financial Institution (NBFC)
in India where he handled a variety of assignments in operations, audit and administration.
He was invited as a special guest by the Central Bank of Islamic Republic of Iran
to study the Islamic banking system in operation in that country. He attended the Fifth
Orientation course on Islamic Economics Finance and Banking held at the Islamic
Foundation Liecester, United Kingdom. Attended the Silver Jubilee Celebrations of the
Islamic Development Bank, Jeddah, Kingdom of Saudi Arabia. Invited to attend the
Harvard Islamic Finance Information Program sponsored by Harvard University USA. He
was invited to attend the II International Conference on Islamic Financial Markets held
at Bahrain in June 2007. He is an approved external guide for students of leading Business
Schools for other MBA thesis. Leading Indian IT companies have approved him as the
Trainer for Corporate training programs in Islamic Banking & Finance domain.
Invited to various seminars on Islamic banking in different parts of the World. He
has presented papers on Islamic Banking and Finance which are published in leading
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journals. Travelled widely and studied the functioning of various Islamic banks and guided
a number of post graduate students of Management in Finance of various universities
for their thesis presentation. Countries visited USA, U.K., Saudi Arabia, Iran, Bahrain,
UAE, Turkey and Cyprus. He designs and conducts in house customized training programs
for IT companies and other institutions in Islamic Banking & Finance.
The Institute Profile
The Institute of Islamic Banking and Finance incorporated with the Government
of Andhra Pradesh at Hyderabad, India, is the countrys maiden attempt at
institutionalizing education at all levels in the field of Islamic Economics, Banking and
Finance.
The Institute is a registered non-profit, equal opportunity, educational research
and training institution totally independent, non affiliated to any University nor accredited
to retain complete academic autonomy and intellectual independence regarding course
content, methodology and orientation. It has now acquired global recognition and the
course in pursued by students from more than 20 countries worldwide.
The Dean has the sole discretionary authority to design and implement course
curriculum with suggestions and advice from an Academic Council constituted and
updated with experts in respective fields. The aims and objectives of the Institute are :
1. To impart education and training to students desirous of getting acquainted with the
laws of Islamic Banking, Economics and Finance through Distance Education and
contact program method.
2. To organize Executive Development Programs for working executives/ graduates
from India and abroad in the fields of Islamic banking and finance apart from
conventional management science subjects like strategic planning, marketing,
corporate management and human resource development.
3. To conduct lectures, conferences and seminars on subjects connected with Islamic
banking economics and finance.
4. To sponsor students for advanced training and professional education in the field of
Islamic banking and finance to various institutions in India and abroad.
5. To design tailor made course modules to suit specific requirements of individual
institutions as per their specifications. The Institute offers customized in house training
program for leading IT companies.
The Institute endeavours to offer you the best of select reading material on the
subject and expects active cooperation to develop good relations in the cause of learning.
While you progress in your study and go in depth into the subject you will be
surprised to know how could such a viable system not be put to use for so many
hundreds of years. As a student of Islamic banking and finance there are certain
dos and donts which have to be strictly followed to understand the subject.
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Do not compare the system with the conventional system and try to find out,
search or locate similarities or dissimilarities between the two. This is for the reason that
no two systems are alike altogether or unlike. There may be some similarities and
dissimilarities.
Do not think that every increase in monetary transaction is interest . There
are strict jurisprudential parameters that describe and define what is interest and
what is profit. The earlier being invalid, unjustified and the latter justified and valid.
Do not give credence to the arguments of common people or self styled religious
scholars most of whom do not have sufficient knowledge either of the technicality of
the subject nor modern economics and banking. They argue mostly on logic and what
either they think is right or what they have been told by someone knowledgeable is
right. They cannot quote a single authentic source to justify their argument.
Do not believe that the entire Islamic economic and financial system is confined
to Baitulmaals Interest free Islamic credit societies or Zakath collecting and distribution
centres, there is a well defined, commercially viable financial system which was not
being explored for a number of socio-political reasons.
The Post Graduate Diploma in Islamic Economics, Banking and Finance is designed
to be offered under distance learning mode with flexible learning convenience. This
gateway program offers you all that is required to be learnt as a professional in the
subject. The course is now offered in more than 20 countries from US to Australia.
More than 10,000 enquiries are received from 30 countries around the world.
Mode and Method of this Course
This course is designed keeping in perfect view the socio economic and geographic
diversity of India particularly and other countries in general. The method of distance
learning is now being adopted by many universities and Institutes of repute because it
offers a variety of conveniences for a student to learn. While one can learn at his/her
own convenience at home without formally attending an institution during fixed hours
the method will motivate a student to learn more from sources other than the reading
material supplied to him/her to augment his/her knowledge of the subject.
The Institute believes in a particular ideology for offering this unique course:
Motivate - Support - Enrich and Evaluate. This system of education does not believe
in rushing through the entire material a month before the exams concentrating on
important topics, passing the examination and obtaining the diploma. On the other
hand it encourages the student to learn the subject in depth, understand, investigate
and master it in a reasonable time.
The course material supplied to the students may not be sufficient for many of
them to satiate their hunger or quench their thirst for more information and knowledge
on the subject Hence it is strongly recommended that they constantly browse the
internet and get information from a number of sites on Islamic banking and finance
apart from journals published abroad the addresses of which will be furnished on request
but the cost is prohibitive.
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For the sake of convenience and learning the entire course has been divided
into a number of modules and subdivided into Chapters. There may or may not be any
continuity between two modules / Chapters as such the student has to study every
module independently of the other. As part of its strategy to impart knowledge the
Institute may, on the condition of availability of sufficient number of candidates in an
area hold workshops, extension lectures contact programs to further enhance the
learning skills by additional inputs. As the entire course program is a participative venture
the candidates may themselves form a cohesive group and organise a session in their
area with technical support from the Institute.
At the International level the Institute has categorised countries on the basis of
their geographic locations like SAARC Countries, GCC Countries, Eurpoean, North
American and Canada, Far East and Australia. The course fee is based on the currencies
of these countries (not in equivalents) and convenience of remittance.
For the sake of administrative convenience and geographic status of the country
the Institute has earmarked four nodal zones as under ;
East and North Eastern Zones - Comprising of N.Eastern states including West
Bengal, Assam Manipur,Tripura, Orissa,Andaman
& Nicobar islands based at Kolkata.
North Zone - Delhi, U.P., Bihar, Jharkhand Chattisgarh,
Uttaranchal Himachal, Jammu & Kashmir, Punjab
etc based at Delhi.
Central & West Zone - Maharashtra, Rajasthan, Gujrat, Goa, Madhya
Pradesh based at Mumbai.
South Zone - A.P., Karnataka,Tamilnadu,Kerala, Pondicherry,
Lakshadweep based at Bangalore.
The candidates will be advised to submit periodic assignments on topics selected
by the Institute for evaluation and to ensure that the standard of level of understanding
and learning of the subject is satisfactory. If possible papers will be invited at short In-
house seminars conducted by the Institute.
Similarly, to acquaint the candidates with practical operations of the system as
taught by the Institute workshops may be held subject to availability of sufficient number
of candidates in an area or at the Institutes Head quarters at Hyderabad, India to offer
an opportunity to the candidates to obtain first hand information about the operational
aspects of the system, In this connection candidates may also find out in their area local
Islamic Interest free credit societies / Baitul Maals / Masjid committees collecting Qurbani
5
skins and Zakath for distribution among the poor and the needy and study their functioning
to acquire preliminary knowledge about the basic understanding of the subject by the
masses and compare that with the subject under study.
The candidates are also advised to subscribe to some journals in India and abroad
the list of which is appended herewith. This is not compulsory but optional only to
augment their knowledge.
FAQs and their Answers
Question
1) How will this course help or benefit me in my job prospects or employment
opportunities in India or abroad ?
2) Making me different from others
3) Improving my understanding of the religion better.
Answer : No matter how best one is academically qualified in a subject he/she will not
be successful unless the same is put to practical use by knowledge, skills and experiences.
If this holds good to cadre selection like IAS,IPS,IFS, IITians or IIMs the same holds
equally good for the course you have undertaken. A number of post graduates of
various Universities of India in MBA Finance have selected their project work on this
subject of Islamic banking and finance under the supervision of the Dean IIBF. During
viva voce the external examiners were highly impressed by their knowledge of this
New found subject and not only gave them very good marks but also requested them
to provide more information about the subject.
Moreover for too long the world has ignored the Islamic financial system and for
the last one decade without naming it as the Islamic financial system the banks and
other MNCs are adopting Islamic financial techniques in the form of mutual funds, unit
trusts both close ended and open ended and such instruments which are totally deviant
from interest based bank deposits. When a candidate equipped with a diploma in Islamic
banking and finance appears for an interview with any leading financial institution
anywhere in the gulf or elsewhere and he presents himself properly highlighting his
additional qualification in Islamic banking and finance he will be distinguished from
other candidates and treated preferentially. This is a fact well noted by experience subject
to the candidates personal presentation. A number of our alumini have been successful
in securing middle level jobs in Islamic Banks and Islamic Financial Institutions.
From the moral and ethical point of view if one is not aware of a very important
part of Islamic religion that is the economic and financial structure then ones life will be
deemed to be incomplete.
If, particularly as a Muslim, one is not aware of the Quranic injunctions on Riba,
the Hadith and Fiqh aspects then who is to be blamed for this ignorance. The Institute
through its courses offered at all levels gives an opportunity to the muslims, in particular,
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to learn, acquire knowledge and adopt a life style as permitted by the Shariah. The
courses offered by the Institute are not solely commercial nor job oriented to promise
placements but offer an indepth study of the system which can be socially, morally and
economically very rewarding. It is no surprise that about 11% of our students are non
muslim and some of them have surpassed the muslim students in their performance.
The Institute notes with considerable interest the enthusiasm exhibited by its
non-muslim students around the world, more particularly from premier Business Schools
in India and abroad who aspire to learn the subject in depth from an academic point of
view and seek answers to many questions on the subject.
4. How will this help the economic life in the country ? Comments.
After undertaking the PGDIBF as per the aspiration and desire of a cross section
of people across the country who have written to this Institute they can themselves
start small informal Islamic financial institutions in their area ensuring shariah compliance
obtained through professional learning and public confidence and faith. At the grass root
level an economic revolution can be brought about by mobilizing small savings and
chanelising the same from the haves to the have nots for economic activity offering
to the saver a reasonable reward as profit and charge to the utilizer a shariah permitted
rent or profit. The Institute will surely guide self help groups if they come forward with
proposals but will not be a part of them nor assure their credibility which will have to be
a localized affair. Micro finance is the order of the day and Islamic Financial System
encourages that in its microeconomic system. Our Alumni from Kerala state have already
taken the initiative and started Islamic Finance units in their native places.
Now coming to the subject proper
Economics, finance and banking are three important wings of any society as
legislature judiciary and the executive. They have been instrumental in changing the
destinies of nations since historical times and have been always undergoing a churning
process to suit human needs. All major religions of the world and their scriptures devoted
important chapters to directives regarding conduct of economic and financial matters of
the public and the state. These include the Artha Shastra, the Quranic injunctions and
Biblical teachings on usury. Keeping the historical perspective in the back ground let us
consider the prominent aspects of economics finance and banking in the modern ages.
Banking and Insurance are not older than 200 years. What started as petty market
lending by money lenders to facilitate trade gradually modified and developed itself into
todays modern hitec banking.
During the later half of previous century particularly after the oil boom in middle
east the muslim community around the world found a new economic awakening and
awareness for banking and financial transactions. This acted as a prelude to the
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investigation of a system conducive to and in accordance with the permitted norms of
Islamic economic system. The Quran, the holy scripture of muslims and the last revealed
text expressly prohibits giving and taking of interest referred to as RIBA or usury and
directs that all financial transactions should be free of usury which should be eliminated
from the economic lives of people. This prohibition as revealed in four Surahs under
various contexts, alongwith the traditions of the Holy Prophet (PBUH) set forth guidelines
which were refined and elaborated by the Four schools of Islamic thought by which was
evolved the Islamic jurisprudence on the subject of economics banking and finance
which is a full fledged discipline of study.
The muslim community under the above directions and stipulation is averse to all
interest bearing transactions including conventional banking and its operations. This
necessitates evolving a financial and banking system which could cater not only to the
needs of this group but also offers to the world economic order a system which is
technically viable in the modern times fulfilling most of the present day requirements.
This exclusive system came to be known as Islamic banking, Interest free banking
or non interest / non conventional banking and is now operating in all major countries of
the world around the globe. Without delving too deep into the technicalities and
complexities of the whole Islamic financial and banking system let me confine this address
to a few important aspects of Islamic banking.
Unlike the conventional banking system the Islamic banking system does not
function on the sole premise of paying a fixed and predetermined rate of interest on
Deposits nor does it permit charging of a fixed rate of interest on monies advanced to
borrowers. The system does not treat money as a lendable commodity for the price of
interest. As many students of economics will appreciate the Keynesian theory of interest
that clearly defines interest as the reward for parting with the liquidity of money which
is not acceptable under Islamic tenets instead a participative theory is put forth. The
bank and the customer in conventional system are technically Debtors and Creditors
while in the Islamic system the bank is the Trustee/Attorney and the customer in the
entrustor. The major financial instruments used by the conventional banks around the
world are overdraft, cash credit, term loans, bill discounting and other subsidiary services
while the Islamic banks have a set of their own specially designed instruments the
major of which are :
- Ijara : Leasing
- Musharika : Venture financing
- Mudaraba : Trust financing
- Morabaha : Cost plus financing
- Mozareh : Forward purchase and some minor instruments
- Istisna
- Salam
The Islamic Development Bank based at Jeddah, Saudi Arabia is the muslim World
Bank with a membership of more than 50 nations. This bank works in conjunction with
more than 100 Islamic banks and Islamic financial institutions around the world including
Europe and America. The International Association of Islamic Banks, Islamic Research
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and Training Institute under the Islamic Development Bank, Governments of Countries,
leading universities around the world including Harvard University and training centres
are busy in research and development work to refine these financial instruments to suit
the modern day financial world.
After 9/11 most of the muslim worlds affluent society investors, both individual
and institutional, withdrew their funds from US based banks, stocks, multinational
companies and other financial institutions and are said to have invested these funds in
UK and Europe. It is reported that after London 7/7 bombing most of these funds are
shifting to far east, Malaysia and other eastern countries. India should have been a
favoured destination for these investments but because of lack of investment opportunities
in Islamic financial sector the country is deprived of these funds as the investors are not
interested to invest in the booming Indian economy. No doubt some India specific funds
have started attracting investors attention in Middle East and in some parts of the
country but unless legislation is passed to actively allow Islamic financial products in the
country no large scale investor interest can be expected in near future.
Some common misconceptions and technical aspects
Interest free banking is commonly misconstrued as a charitable venture or banking
without returns. This is not true. Interest is not the only way of earning an income or
making a profit. There are ways and means of earning an income and making a profit
other than interest and it is on this premise that the whole concept works. Lease rents,
Venture profits, Mark up, service charges etc all make up the earning and sources of
profits to Islamic banks. Just as the balance sheet of any conventional bank discloses
the Interest and Non Interest income of banks which consists of Bill discounts,
Commission, L/C Commission handling charges etc briefly it may be mentioned here
that the Islamic banks earn their income from Lease rents, Venture Profits, forward
purchases and investments in securities (not debt instruments).
The Islamic financial instruments in vogue are not something new to the financial
world as they are already in existence in some form or the other. In India there are
more than 1000 Islamic Interest Free Credit Societies mostly run on charities extending
consumption loans to needy persons and registered as public societies charging a nominal
service charge to administer and manage the affairs. All mutual funds including sector
specific mutual funds operate on the principle of Modarabah or profit and loss sharing
where by the investor gets a dividend only if the Mutual Fund makes a profit and suffers
loss if the Net Asset Value depreciates. The investment portfolio of the Mutual Fund is
taken care of by the Trustees to ensure safe distribution of risk with a Footnote Warning
to investors not to be assured of returns which is the cardinal DOCTRINE of Islamic
banking system. The fate of US 64 is an indication and the steps taken to revamp the
same offers the solution to system short comings. With the globalization of world
economy and economic liberalization more and more multinationals resorting to the
Islamic financial system of banking and investments as evidenced by the fact that close
ended, Fixed Rate of Return interest based deposits system is being discouraged and
replaced by open ended, readily liquid, return based instruments as preferred by the
investors, indicating a dynamic shift in investor preference. Even lending on the basis of
fixed rate of interest is declining and under the free interest regime banks are permitted
9
to fix their own rates based on the demand and supply respectively of funds peculiar to
their context. This is exactly what the Islamic banking system suggests for a zero
interest based bonds and modaraba funds.
Emerging trends on the International scenario of Islamic banking
Growing at the rate of 15 percent every year Islamic banks are likely to account
for more than half of all deposits in the Islamic world by 2008 say banking and financial
experts. Islamic banking has been expanding at a steady clip. Despite problems with
accounting procedures, lack of recognition in certain countries and general restraints in
the muslim world itself. At present more than 150 Islamic banks and financial institutions
operate in more than 50 countries 40 of them in the Gulf Cooperation Council countries.
Islamic banking Industry currently manages assets worth 200 to 300 billion dollars
annually despite wide variations in the practices used by Islamic banks and also that the
financial statements of different institutions are incompatible as commented by the
Accounting and Auditing Organization for Islamic Financial Institutions. It is encouraging
to learn that Islamic banks manage assets above 200 billion dollars and they have
deposits estimated at 45 billion dollars and the sector finances were 31 percent in trade
30 in industry 13 in agricultural finance and 11 in services. According to one survey
Islamic banks in the world have 77 $ billion in deposits, 166 $ billion in assets and $ 6
billion in capital. Keenly observing the trend and prospects leading interest based banks
have started turning towards offering the Islamic alternative. Americas Citibank opened
a branch in Bahrain as Citi Islamic Investment Bank with a capital of 20 million US $.
Robert Fleming a British merchant bank has launched as $ 16 million Islamic Equity
Fund. A BN Amro is planning to open an Islamic banking department in Bahrain.
ANZ Investment Bank has ambitious plans to start Islamic finance operations in
the sub continent by providing First ANZ International Modaraba an Islamic Fund providing
access to cross border finance. The World Banks investment arm, the International
Finance Corporation is one of the principal investors in the fund. ANZ through its Global
Islamic Finance division based in London has already launched leasing modarabas in
various countries and now targeting Asian markets particularly Malaysia. According to
an IMF study interest free banking based on Islamic tenets adjusts more easily to
financial shocks and these prove to be more stable than their western counterparts
(staff papers Volume 33 No.1).
According to Mr Andrew Dixon, Managing Director of Saudi British Bank the Saudi
Banks are exploring ways and opportunities to gain more profits by changing the strategies
of depending totally on loans. They are now concentrating on creating avenues for
banks without depending much on interest.
According to London based Institute of Islamic Banking and Insurance there is a
growing demand for Islamic Investment products from middle income groups living in
the West. Global banks such as HSBC and several US fund management groups are
developing products for the potentially lucrative market. Islamic banking is practiced by
western banks through their Islamic units in Britain, Germany, Switzerland and Luxemburg.
Key players in the field include Commerzbank AG, Deutsche Bank AG, HSBC and Morgan
Stanley. Dean Witter Co Islamic Mutual funds represent one of the fastest growing
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sectors within the Islamic financial industry. There are estimated to be more than 90
Islamic Mutual Funds functioning in the world. Islamiq.Com is the first Internet portal
that offers online financial services based on Islamic tenets. In USA Freddie Mac the
leading financial corporate has entered into an agreement with LARIBA for commercial
cooperation in its transactions based on Islamic financial norms. Amalgamations,
acquisitions and mergers are taking place in order to consolidate the institutional
framework of the system.
The Indian Panorama
The Banking Regulation act does not permit Interest free banking in India. In
countries where full fledged Islamic banking is not permitted either partially or wholly
modified instruments are allowed and special legislations have been enacted to facilitate
such a system. The examples are Malaysia. Pakistan, Iran, Bahrain, UAE and Brunei
etc. Under the Indian law as a full fledged Islamic bank cannot operate in view of
existing provisions which have to be suitably amended with parliamentary approval
which is difficult to be obtained nevertheless the Reserve Bank of India had provided an
alternative in the form of Non Banking Financial Companies Directives 1977 under which
different categories of Non banking financial intermediaries like Finance and Investment
Companies, Loan Investment Companies, Mutual Benefit Fund Companies etc are
permitted under stringent regulatory mechanism of prudential norms and classification
of Non Performing Assets.
Problems faced in the Country
In order to start or run an Islamic bank or an Islamic financial institution in the
country registration with RBI is the first problem because the system is not recognized
as it is not properly understood and appreciated nor has it been adequately projected
by professionals in the field. Moreover the existence and disappearance of a large
number of fly by night operators better known as blade companies which played havoc
with the religious sentiment of gullible Muslims and vanished with their lifes savings have
diminished the faith of investors in such Ventures though such unscrupulous deals were
indulged in by other huge corporations like plantation companies and other ventures yet
the few credible Interest free enterprises bore the brunt. Apart from registration the
other requirement of SEBI (Securities and Exchange Board of India) for compulsory
rating by the stipulated agencies is difficult to fulfill because the conventional parameters
used for rating of Interest based institutions. The other problem is of adhering to the
International Accounting Standards. The balance sheets of Islamic financial institutions
cannot fit into the proforma of a company Balance Sheet because of its peculiarities.
The problem of disclosures and presentation has to be over come to facilitate the
Islamic Financial Institution to present an acceptable form of a balance sheet in compliance
with the International Accounting Standards.
Islamic Banking - What can be done
It must be emphasized that Islamic banking is not a religious system exclusive to
Muslims but an alternative to conventional banking and not restricted to any particular
community. Infact most foreign multinational banks have been operating an Islamic
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banking cell which structures deposit taking and financing transactions with in the
framework of Shariah. It must be appreciated that it is not the intention of the Islamic
banks to doctrinate traditional banks into following the Islamic banking system. It is
necessary for the conventional banks and the customers to understand and appreciate
the Islamic system. The moral and socio ethical aspects of the system have been over
emphasized and highlighted but the technical aspects have not been projected which
lead people to believe that this is an exclusive religious system meant for devout muslims
which is not the case.
The nationalized, state and private sector banks have in the recent times launched
subsidiaries for Housing Finance and leasing etc. alternative system parallel to mainline
banking but distinctly different from interest based instruments and profit and loss sharing
windows like western banks would be a good proposition. Funds collected through this
window can be invested under the supervision of experts in leasing, cost plus financing
forward purchase of bills etc which are permitted under the Islamic system. By this a
large section of population that is being left out and its preference to keep their savings
locked in non liquid assets like properly and gold will have an avenue to invest in short
and long term investment this will not only benefit individual investors but a large number
of institutional investors like charitable organizations societies and trusts etc. A dramatic
turnaround, in the banking sector cannot be expected nor total conversion from
conventional interest based functioning to Islamic system of banking even then a
transitional intermediary facility can be offered without resorting to legislative measures
but by an executive order of the RBI Like the NBFC directives. To make a good beginning
the multinational and foreign banks operating in India who have the required expertise
of having managed Islamic finance operations else where in the world may be allowed
to offer the alternative of Morabaha Funds / Modaraba Bonds on an experimental basis
which will attract a large number of NRI depositors from the gulf and west after which
instruments designed to suit the indigenous investors can be put into use attracting
local investors. Most countries with a very small proportion of muslim population do
not want to exclude them from the countrys economic mainstream and offer the
alternative where as India with the second largest muslim population in the world is
surprisingly unaware of this fact which forces the muslim community averse to bank
interest to keep their savings locked, as already said, in non liquid asset or lose them
with unscrupulous elements instead of participating in the countrys economic activity
and improving its dynamic performance by offering the investment output. Anyhow a
word of caution is always felt necessary and it has to be understood that the
implementation of this system requires an effective judicial administration system for
recovery of amounts advanced without unduly prolonged litigations and highest degree
of integrity and moral character on the part of promoters, beneficiaries of the system
and the institutions implementing the same.
Recent Developments in Islamic Banking in India and abroad
Reserve Bank of India has set up a special committee under one of its Chief
General Managers to study and submit a report on the feasibility of introducing Islamic
financial products in Indian money market. The Committee, it is reliably learnt, has
already submitted its report. India cannot remain an Island excluded from outside world
where Islamic Banking in spreading very fast and with the establishment of Islamic Bank
12
of Britain as the first stand alone bank permitted by the Financial Services Authority of
UK has given a boost to Islamic Banking in Europe.
In the following pages the student will read interesting developments around the
world in Islamic Banking and articles on the subject. At a recently held seminar on
Islamic Banking - Problems and prospects in India sponsored by this Institute valuable
information was provided to the participants. The Dean was intereviewed by Times of
India and Economic Times exclusively and the excerpts are enclosed for the students
study. He has contributed articles to various news papers and journals excerpts of
which are included in the What the Press Says section of this Module. The Reserve
Bank of India has recommended to the government to amend Banking Regulation Act
to facilitate Islamic Banking in India latest development indicates positive movements in
very near future.
Important advice to students :
The students, in their own interest are advised to send the assignments promptly
in proper order through soft / hard copies as prescribed for local and overseas students
and they are encouraged to send their doubts and questions on mail to seek answers. A
list of websites is given in this section apart from which the student should endeavour to
explore knowledge avenues of the subject through various means.
The course curriculum study material has been revised with addition of latest
subjects and developments in the Islamic finance world. To make the material more
interesting and motivating and to overcome the monotony a separate CD / Multimedia
has been added to the material even for B-Learning students. This covers some exclusive
topics of considerable interest.
This revised version of the course material also includes CDs (Text / Audio-Visual)
on select topics. Care should be taken not to copy or allow copying of the material
which is copyright with the Institute.
Some students in the Exit interviews after completing the course have given the
opinion that there is too much of theory in the course. To this our answer is; this is a
professional course and not a degree examination, hence the student must have a firm
and sound foundation of the subject both from career studies point of view. The
operational Islamic banking chapter gives an insight into how the system works. In
view of the vastness of the subject only a few important aspects have been covered
so as to avoid heavy workload to students. This has to be kept in mind.
The Islamic Finance sector is very fast changing, dynamic and progressive and
the students have to keep pace with this by keep browsing various internet sites on the
subject. They should subscribe to some well known Islamic Finance magazines and
journals or atleast read some of their material on their webistes.
* Mr. David William has prescribed that on all the copies it must be made clear as to the source of the copy (Copy
right NMP, publisher of Islamic Banking and Finance) and was kind enough to give the following Discount
Offer exclusively to students of IIBF provided they mention in the subscription form that they are bonafide
students of this institute. The Annual Discounted Subscription will be only 20 instead of 30.
13
Recommended Websites :
1. www.citiislamic.com
2. www.bashisl.com.bh
3. www.alislamic.co.ac/arabic
4. www.jordan.islamic.com
5. www.iifm.net
6. www.islamic-world.net
7. www.islamicconferences.com
8. www.albaraka.com
9. www.aaoifi.org
10. www.islamic-fiance.com
11. www.bi.go.id
12. www.islamicfinancenews.com
13. www.batelco.com.bh
14. www.ncb.com.sa
15. www.nbk.com
16. www.anb.com.sa
17. www.arib.com.sa
Recommended Journals, some books and Websites :
Journals
1. Islamic Banking & Finance* - NMP Ltd., #26, Victory Mews, The Strand, Brighton
Marina Village, Brighton, East Sussex, BN2, 5XB, UK. Tel. : +44 (0) 208 123-0704
2. The Islamic Banker Subscriptions and Marketing, Mushtak Parker Associates Ltd
50 Portland Place, London WIN 3DG U.K.
3. Islamica
Online subscription: www.islamica-me.com
E-Mail: subscription@islamica-me.com
Tradewind Business Media & Communications Co. Ltd, PO Box 506510, Dubai
U.A.E. Tel: + 971-4-2957790
4. Islamic Tijara Email: contact@islamitijara.com
5. Islamic Finance News Malaysia
Books
1. Issues in Islamic Accounting by Balashanmugham, Vignesan Perumal, Alfiya Hanuum,
Ridzwan, Universiti Purtra Malaysia Press - ISBN -983-3455-07-7
2. Islamic Bonds-Your guide to structuring, issuing and investing in Sukuk by Nathif
Adam and Abdul Kader Thomas, Tel. : +60-3-2143-8100
3. Islamic Bonds by Brian Kettel.
4. Islamic Retail Banking and Finance Edited by Sohail Jaffer
Published by Euromoney Books
5. An Introduction to Islamic Finance : Theory and Practice by Zamir Iqbal and Abbas
Mirakhor - John Wiley and Sons.
14
18. www.qib.com.qa
19. www.bankislam.com.my
20. www.azzadfund.com
21. www.riyadbank.com
22. www.islamicbankingandfinance.com
23. www.cimb.com.my
24. www.securities.com/ifis
25. www.thechildrensmutual.co.uk
26. www.bankerme.com/bme/2005/feb/how_to_structure_sukuk.asp
27. en.wikipedia.org/wiki/sukuk
(Student must verify the authencity of material on the websites and correctness of the
addresses. IIBF is not responsible for any errors on the above issues.)
Global Round Up
Islamic Banking & Finance
15
BAHRAIN
Gulf Finance House inks another restructuring deal
Daily Cover
BAHRAIN: Gulf Finance House (GFH) announced a restructuring of its remaining debt
from a Wakalah facility amounting to US$100 million; having already paid US$55 million
of the total amount.
Under the new restructuring terms, the Shariah compliant investment bank will repay
the remaining debt over six years, until a final maturity in September 2018. The
restructuring period includes a two-year grace period; while the amortization of the
principal amount will start from April 2014.
Banks involved in the syndication include Bahrain Islamic Bank, Emirates Islamic Bank,
Liquidity Management Center (LMC) and Liquidity Management House.
The deal follows GFH's restructuring of US$110 million-worth of Sukuk outstanding
carried out in May 2012, in a transaction that saw the bank extend its repayment of the
debt; also over the next six years. The US$200 million Sukuk was sold in July 2007.
Hisham Alrayes, the acting CEO of GFH, said that: The restructuring of the Wakalah
facility is another positive development for the bank which will facilitate greater financial
flexibility as the bank continues to accelerate and get back to long-term profitable
growth.
This agreement follows the approval on the GFH Sukuk restructuring which was secured
recently. By retaining our key assets and extending the debt maturities, GFH has managed
to enhance its balance sheet significantly and bolster its liquidity position moving forward.
The banks latest restructuring was led by LMC, which also advised on the restructuring
of its Sukuk.
Gulf Finance House announces merger and acquisition plans
Daily Cover
BAHRAIN: Shariah compliant investment bank Gulf Finance House (GFH), whose unit
GFH Capital is speculated to be in a takeover bid for UK side Leeds United Football Club,
announced to the Bahrain and Dubai bourses on the 3rd September 2012 that it is
currently exercising due diligence for the potential acquisition of asset management and
real estate development companies.
In addition to its assessment of various acquisition opportunities, GFH said that: "The
bank is looking to enhance shareholder value and strengthen its balance sheet. To
achieve this, we are looking to increase the stake in its group companies, subject to
obtaining all relevant regulatory approvals."
Apart from GFH Capital, GFH's other associates include Khaleeji Commercial Bank, in
which it owns 40%, Jordan's Al Barakah Takaful, Balexco (Bahrain Aluminium Extrusion
Company) and Cemena Holding Company, a cement-focused business in Bahrain.
16
GFH also clarified that GFH Capital, which successfully won a bid to acquire Turkey's
Adabank last year, is currently awaiting regulatory approval from the Turkish authorities
for the acquisition. In relation to another GFH Capital venture, its flagship Injazat
Technology Fund, GFH said that the firm is in talks with potential partners to launch the
Injazat Technology Fund 2, following the close of the first fund.
The investment bank's merger and acquisition (M&A) plans follow its recent measures
taken to restructure around US$210 million-worth of debt; as part of a larger effort to
regain its footing in the aftermath of the 2008/2009 financial crisis. In July this year, it
announced the restructuring of US$100 million outstanding from a syndicated Wakalah
facility, after in May disclosing the restructuring of US$110 million outstanding from a
US$200 million Sukuk sold in July 2007.
It has also strived to improve its financials; reporting a profit of US$4.74 million in the
second quarter of 2012, against a loss of US$11.26 million a year earlier, on the back of
higher income and lower expenses.
With the bank having strengthened its balance sheet, its M&A plans appear to signal that
it is ready to return to growth.
Today's IFN Alerts
US : Gatehouse Bank acquires US$155 million property portfolio in joint
venture with Brennan Investment Group
UK : London Central Portfolio launches Shariah compliant residential
property fund
INDONESIA : CIMB Niaga Syariah to introduce fixed returns on retail deposit
accounts
UAE : Al Ansari Exchange signs partnership with Noor Islamic Bank
GLOBAL : Sukuk market requires further development, say industry experts
US : Shariah indexes outperform conventional indexes, says CEO of
ShariahShares
SAUDI ARABIA : Kingdom's mortgage law will also boot the mortgage Takaful industry,
says CEO of Tokio Marine Middle East
MALAYSIA : MARC withdraws its ratings on EP Manufacturing's US$37.46 million
Sukuk
KENYA : Kenya Bankers Association appoints Asad Ahmed to its board of
directors
GLOBAL : SNR Denton makes three senior appointments
PAKISTAN : Central bank developing a five-year plan for country's Islamic banking
industry
GLOBAL : GCC Sukuk issuances rise almost twofold in the first half of 2012
from a year earlier, says Markaz
UAE : Tamweel sees local home financing transactions surpassing US$2.17
billion in 2012
UK : Gatehouse Bank completes purchase of department store building in
Leeds for US$53.05 million
MALAYSIA : MARC affirms UMW Holdings' US$257.31 million Sukuk at '1ID/AAAID'
17
GLOBAL
Risk management instruments still lacking at Islamic financial institutions
Daily Cover
GLOBAL: Islamic finance has proven to be more resilient amid financial crises, but
experts believe that more can still be done to manage risks.
Despite Islamic banks high liquidity, namely; in the form of cash, the industry still lacks
the necessary depth to manage risks effectively, commented Jaseem Ahmad, the
secretary general of the Islamic Financial Services Board.
In that sense, there is still a shortage of Shariah compliant instruments and securities.
A capital market is being developed but it is still not as liquid or as deep as we would
want it to be; and it needs to be deeper, Jaseem was quoted as saying.
Hence, there is room for substantial improvement in the equity management framework;
as more instruments will afford Islamic banks more opportunity for risk management.
In addition to providing the banks access to a wider range of instruments, the banks
should also be incentivized and provided with the necessary resources to strengthen
their capabilities. Jaseem also noted that even high levels of loss-absorbing capital could
be negated if risk management frameworks are not sufficiently strong and in spite of
Islamic banks practising more conservative banking methods.
There is a very high ratio of tier one capital and common equity among Islamic financial
institutions which is loss-absorbing; and the kind of capital that Basel III has brought in
now for conventional banks, he noted. However, insufficient risk management and
risky activities can still lead problems to crop up at any bank, even if it is an Islamic
bank, added Jaseem.
EGYPT : Government considers Sukuk sale
INDONESIA : Moodys raises countrys sovereign debt rating to investment grade
MALAYSIA : DRB-Hicom puts speculation on Bank Muamalat Malaysia sale to rest
INDONESIA : International Islamic Trade Finance Corporation in US$60 million
syndicated structured trade financing deal with Angels Products
QATAR : Qatar Islamic Bank reports US$376 million in net profit for the year
ended the 31st December 2011
MALAYSIA : CIMB-Principal Islamic Asset Management targets US$64 million for
newly launched funds
PAKISTAN : Securities Exchange Commission of Pakistan gives green light to 2012
draft Takaful regulations
UAE : Fitch assigns Tamweels US$300 million five-year fixed rate guaranteed
trust certificates a long-term rating of A
UAE : Abu Dhabi Islamic Bank appoints Abdul Hakim Ahmad Kanan as global
head of audit
18
Middle East banking M&As on the uptick
Daily Cover
GLOBAL: Shariah compliant investment bank QInvest and Egyptian investment bank
EFG Hermes have announced that they are exploring a strategic alliance, amid
expectations of a revival of merger and acquisition (M&A) activity in the Middle East this
year.
Another transaction on the burner is the sale of a stake in The Royal Bank of Scotland
by the UK government to Abu Dhabi sovereign wealth funds. The deal could be completed
by the end of this year.
QInvest and EFG Hermes said that: The aim is to create a leading investment bank
with operations in the Arab world and beyond, comprehensively covering the Middle
East, Africa, Turkey and south and Southeast Asia.
Businesses included within the scope of the banks discussions are securities brokerage,
asset management and investment banking. However, EFG Hermes Private Equity will
be left out of the talks.
Should an agreement be met, the banks will announce a general framework of a joint
venture and a timetable for its implementation, subject to relevant approvals.
Our primary objective in these discussions will be to create an investment banking
platform that will play a vital role in the flow of foreign capital into the region, while
enabling Arab investors to participate in future investment opportunities in the regions
that will fall under the umbrella of this new platform, said EFG Hermes.
The announcement comes as business leaders expect a surge in M&As in the Middle
East this year, following a long period of sluggish activity. According to a recent survey
by law firm DLA Piper, the pick-up in consolidation will be driven by improved liquidity,
increased bank lending and the growing financial needs for regional firms to expand.
The survey showed that the most number of deals are expected to occur in the UAE;
followed by Saudi Arabia and Qatar, with financial services and insurance offering the
greatest M&A opportunities.
SAUDI ARABIA : Saudi Electricity Companys first global Sukuk may include 10-year
tranche, say market observers
OMAN : Islamic banking regulations almost ready, says central bank
MOROCCO : First draft of countrys Islamic banking regulations expected in April
this year
CROATIA : Islamic banks to open in Croatia soon
UAE : DP World to settle US$3 billion debt ahead of schedule
KUWAIT : International Investment Group reaches deal to restructure US$200
million exchangeable Sukuk
19
MALAYSIA : Middle Eastern investors no longer involved in Medini Iskandar project,
says Iskandar Investment
TURKEY : Local participation banks post US$450 million in net income for 2011
INDONESIA : Bank Permata Syariah seeks 65% growth in financing activities
PAKISTAN : Al Baraka Bank Pakistan reports US$4.7 million in total net income
for 2011
MALAYSIA : Bank Rakyat reports record net profit for 2011
SAUDI ARABIA : NCB Capital plans to launch four investment funds in the second half
of 2012
QATAR : UAEs AXA Gulf ties up with Qatarlyst to reinforce Qatar Property &
Casualty business
MALAYSIA : RAM no longer rating Poh Kongs US$64.57 million Sukuk Murabahah
OMAN : Bank Nizwa names Tariq al Farsi as general manager of retail and
private banking
KUWAIT : SNR Denton names Stuart Cavet as managing partner of Kuwait office
RBS shake-up spills over into Islamic finance
Daily Cover
GLOBAL: The restructuring of The Royal Bank of Scotland (RBS)s equities assets has
shaken up the financial industry from the Middle East to Asia; creating a spillover into
the Shariah compliant market.
In Dubai, RBS officially ended its partnership with Rasmala Investment Bank to provide
equity research on Middle East companies. Islamic Finance news understands that much
of the business has been in limbo since the UK bank announced in January this year
plans to dispose of its mergers and acquisitions business in the Middle East and reduce
its workforce as part of its global restructuring.
RBSs exit has raised questions as to what action Rasmala will take in regard to the
brokerage; especially with the entry of the European Islamic Investment Bank (EIIB).
EIIB has agreed to invest US$16 million in Rasmala via a facility convertible into shares
representing around 35% of its enlarged capital.
EIIB is likely to keep Rasmalas asset management, private equity and corporate finance/
investment banking business, but it is unclear what the bank intends to do with the
brokerage, commented an observer, who also noted that Rasmalas private equity
business has not been very active with deals over the past year.
In a separate development, RBS has also entered into an MoU with CIMB Group; in
which the Asian bank has proposed to purchase RBSs Asia Pacific cash equities, equity
capital markets and corporate finance business.
20
CIMB is also reportedly looking to retain around two-thirds of the 600 staff currently
employed at the divisions in question; and is in talks to provide guaranteed compensation
packages to keep some of RBSs employees should the deal go through.
With the CIMB name already cemented into the Islamic finance market, it is likely that
the Malaysian banking group can leverage RBSs experience of managing foreign clients
and issuers to further expand its Shariah compliant business; in markets such as Australia
and Singapore.
Meanwhile, as RBS continues with further plans to relocate its Australian fixed income
and currency trading business and seek suitors for its equities and mergers advisory
business; also in Australia, could its overhaul open up more room for smaller players to
emerge in the UK banks place?
GLOBAL : Al Baraka Banking Group plans to purchase 75% stake in Indonesian
bank
SAUDI ARABIA : Kingdom Holding Company seeks shareholders approval to sell Sukuk
or conventional bonds
QATAR : Doha Bank will not convert into a fully-fledged Islamic bank
SRI LANKA : Hatton National Bank launches Islamic banking unit, Al Najah
SINGAPORE : CIMB Bank targets US$79.8 million-worth of Islamic financing for
SMEs in Singapore this year
BANGLADESH : Government to receive US$2 billion from International Islamic Trade
Finance Corporation for fuel imports
INDONESIA : Bank Syariah Mandiri to increase agriculture financing to US$54.9
million
BAHRAIN : Bahrains banking sector recovery relying on Islamic financial
institutions
GLOBAL : Islamic banking industry has bright opportunities to thrive in Africa,
says KFH Research
MALAYSIA : Government to hold talks with Islamic banks and other financial
institutions for financial aspects of build-then-sell model
MALAYSIA : CIMB Islamic Bank to launch Ar-Rahnu service
TURKEY : Country may have to pay higher for sovereign Sukuk
MALAYSIA : Rally in ringgit-denominated Sukuk to end after central bank rules out
interest rate cut
MALAYSIA : CIMB Islamic reports US$148 million profit before Zakat and taxation
for 2011
EGYPT : National Development Bank posts US$98 million net loss for 2011
21
UAE : National Bonds Corporation announces lowest profit rate of 2%
MALAYSIA : Malaysian Insurance Institute to elevate Takaful competency
framework
INDONESIA : Asuransi Jiwa Sinarmas MSIG to expand Takaful range in 2012
MALAYSIA : RAM places AA3 rating of Cerah Samas US$199 million Sukuk
program on Rating Watch
MALAYSIA : Fitch affirms HSBC Amanah Takaful (Malaysia)s insurer financial
strength rating at A-
INDONESIA : PEFINDO downgrades Berlian Laju Tankers Sukuk Ijarah II/2009 to
idD(sy)
SAUDI ARABIA : Al Rajhi Bank names Sulaiman Abdul Aziz Al Zaben as CEO
Bahrain Mumtalakat Holdings Company in US$959.35 million Malaysian Sukuk
sale
Daily Cover
GLOBAL: Malaysia snagged yet another big foreign name into its Sukuk market, with
the entry of Bahrain Mumtalakat Holdings Companys 20-year, RM3 billion (US$959.35
million) facility.
In a statement, Mumtalakat said the issuance is part of its strategy to manage its long-
term refinancing and debt maturity profile.
CIMB and Standard Chartered are joint leads for the transaction. Islamic Finance news
understands that the firm is now in the midst of roadshows for the sale.
Mumtalakat, Bahrains sovereign wealth fund which manages its non-oil and gas related
assets, announced the establishment of the RM3 billion Islamic medium-term notes
program at the end of July 2012, after Mahmood Al Kooheji, its CEO, earlier in the
month said that the firm had no plans to sell new debt; but instead seeks to extend
repayments on existing debt and reducing its debt levels.
The firms debt outstanding includes a 5% US$750 million conventional bond issued in 2010.
Meanwhile, its Sukuk issuance, which was rated AA2 by Malaysian ratings agency RAM,
marks one of Mumtalakats first fundraising exercises in Asia. In announcing the
transaction, Mahmood noted that the Malaysian issuance represents an effort to further
strengthen ties between Bahrain and Malaysias business communities, adding that the
two countries have a history of engagement on a variety of economic and strategic
fronts, while both are also leaders and innovators in Islamic finance.
As Sukuk issuances from the Middle East appear to be taking a breather during Ramadan,
continued sales out of Malaysia look set to pick up the slack amid the lull.
MALAYSIA : Kuala Lumpur Kepong sets up US$320.46 million multi-currency Sukuk
program
22
KUWAIT : National Bank of Kuwait to pay US$430.71 million for 11.05% stake
in Boubyan Bank
UK : Qatar International Islamic Bank extends deadline for offer to buy
Islamic Bank of Britain
BANGLADESH : IDB to launch member country partnership strategy for the country
MALAYSIA : LBS Bina Group redeems and cancels US$6.41 million Sukuk ahead
of maturity
GLOBAL : Russia eyes Islamic finance collaboration with Brunei
UAE : Abu Dhabi Islamic Bank reports second quarter results
UAE : Union National Bank reports 6.3% profit growth in first half results
BAHRAIN : Investcorp reports US$67.4 million in full-year net income
MALAYSIA : CIMB-Principal Asset Management launches new Shariah compliant
fund
International Bank of Azerbaijan expects to set up Islamic unit in Qatar in 2013
Daily Cover
GLOBAL: International Bank of Azerbaijan (IBA) has disclosed that it is looking to
establish an Islamic banking unit in Qatar.
In a report, Behnam Gurbanzada, its director of Islamic banking, said that the bank will
tie up with a local entity, following which it will launch in Qatar in the first quarter of
2013.
The bank, which is a conventional bank, provides Shariah compliant services through a
window in its home market, mainly catering to small and medium-sized enterprises.
However, the sluggish development of Islamic finance in Azerbaijan has likely contributed
to IBAs push to look abroad in its provision of Shariah compliant banking services.
In an earlier contribution to Islamic Finance news, Behnam noted that: Islamic finance
and banking has existed in the Azerbaijani market since 1991, but due to an absence of
appropriate legislation and regulation; stemming from a lack of support from the
regulatory authorities, much of the Islamic activity in the country has been imperceptible,
only silently countenanced by regulatory bodies.
However, he added that since 2010, the industry had become increasingly sanctioned
by officials. Nonetheless, he said that: The existing banking law does not prohibit the
use of certain Islamic banking tools, although at the same time it does not regulate the
fundamental requirements of Islamic banking.
In spite of a limited legal framework for Islamic banking in Azerbaijan, IBA has participated
in several Shariah compliant deals in the country. In 2011, it financed three projects
amounting to US$9.7 million; booking US$40 million-worth of assets in its Islamic finance
portfolio.
The banks Qatari venture will follow the establishment of its Dubai representative office
in 2008. It also has subsidiaries in Georgia and Russia.
23
According to Behnam, the banks services in Qatar will include deal arranging, extension
of credit as well as custody and advisory services.
KAZAKHSTAN : Debut sovereign Sukuk expected to spur more issuances from the
country
GLOBAL : EFG Hermes expects completion of QInvest tie-up by the end of the
third quarter of 2012
GLOBAL : Three Malaysian banks in talks with ITFC for OIC trade tie-up
KENYA : Gulf African Bank launches women-oriented center
BAHRAIN : Liquidity Management Center reports US$1.22 million in second
quarter net profit
OMAN : Bank Sohar reports US$26.81 million in first half profits
MALAYSIA : Government can cease foreign borrowing with inflow of Islamic funds
into Private Retirement Scheme, says Asian Strategic Leadership
Institute
UAE : Emirates NBD Asset Management to dispose of it Islamic Alternative
Strategies Fund
GLOBAL : Islamic exchange-traded funds not in demand, say industry experts
UAE : CI maintains financing strength rating on Sharjah Islamic Bank
JAPAN : Nomura Internationals CEO and chief operating officer resign
SAUDI ARABIA : JP Morgan names Rayan Fayez as co-CEO and head of investment
banking in Saudi Arabia
MENAs Islamic banks show positive growth momentum
Daily Cover
GLOBAL: Islamic banking showed growing popularity in the MENA region, driven by demand
for more trustworthy and stable funding amid the global financial crisis, a report showed.
Shariah compliant banking assets across 18 banks exceeded US$293 billion in 2011, as
lending by 75 banks in the region reached US$855.7 billion during the year. Saudi Arabia
topped the list of the MENA regions Islamic banking market; with its five Islamic banks
combined assets amounting to US$123.4 billion, led by Al Rajhi Bank with US$58.94
billion in total assets.
In terms of Islamic banks per country, Bahrain, Qatar and the UAE were tied for second
place with three banks each, according to research by Forbes Middle East.
Al Rajhi also came in second overall as the regions second largest bank in terms of
assets; while Alinma Bank showed fastest growing profits in 2011, recording a growth
of 2,737.7% to US$115 million in 2011. Another of the regions Islamic banks, Arab
Islamic Bank of Palestine, came in first for deposit growth, with an increase of 232%.
24
The results preceded a strong first quarter for the regions banks, which dominated GCC
earnings during the period, representing almost 40% of total profits; as profits at GCC
banks rose 9% year-on-year to US$5.7 billion, according to research by Markaz.
In the GCC, Saudi banks reported a 23% year-on-year growth in profit; with Al Rajhi
again leading the way with an 18% year-on-year increase in net income to US$536
million.
Meanwhile, of the listed Islamic banks covered by Global Investment Houses Global
Research, all save for Qatars Masraf Al Rayan showed results that were in line or
surprised on the upside in the first quarter of this year. Among these was Qatar Islamic
Bank, which reported a net income of QAR388 million (US$1.05 million) from QAR321
million (US$870,638) a year earlier.
UAE : Tamweel mandates banks for planned Sukuk issuance
UAE : Emirates airline plans to further tap Islamic finance market
MALAYSIA : Local Islamic mortgage market overtakes conventional home loans,
says central bank
INDONESIA : BNI Syariah records US$4.74 million in franchise financing
UAE : Islamic Finance Company in partnership deal with flydubai
MALAYSIA : Al Rajhi Bank Malaysia adopts collateralized commodity Murabahah-i
MALAYSIA : Securities Commission Malaysia to apply new Shariah compliant
screening methodology
UAE : Fitch affirms ratings on HSBC Bank Middle East
KUWAIT : AM Best Europe affirms Gulf Insurance Company and Gulf Life
Insurance Companys financial strength rating
MALAYSIA : MARC affirms rating on Ranhill Powers Sukuk programs
SINGAPORE : Grace Barki steps down as Bank Sarasins head of Southeast Asia
MALAYSIA : Prudential BSN Takaful names Anita Menon as new chief risk officer
25
Fixed income markets unfazed by Eurozone jitters
Daily Cover
GLOBAL: The wider market may be feeling jittery due to the ongoing Greece crisis, but
the fixed income space remains unfazed; with Sukuk sales set to continue at a rapid
pace.
Yields have also maintained stability and are expected to stay steady going forward.
Although the euro declined to a near two-year low on the 24th May, as Greece moved
closer towards an exit from the Eurozone, the currency has not been massively devalued;
with liquidity still abound in the market, commented the Malaysian head of debt capital
markets at a European bank.
Speaking to Islamic Finance news, the banker noted that while the debt market may
see some blips, these are not due to the Greek crisis; and more as a result of locally-
centric factors.
Yields on Malaysian corporate AAA-rated Sukuk have risen marginally from the beginning
of the year, to 3.89% as at the 23rd May; while falling from 3.91% a month earlier,
according to data from Bond Pricing Agency Malaysia.
Meanwhile in Dubai, despite a small increase in yields to 4.32% as at the 23rd May from
4.29% a month earlier, yields in the emirate have fallen from 5.28% at the start of the
year, data from the HSBC/Nasdaq Dubai Corporate US Dollar Sukuk Index shows.
Continued investor confidence and demand for Sukuk have also helped a slew of issuances
this year; with issuers such as Banque Saudi Fransi, The National Industrialization Company
(TASNEE) and Dubai Islamic Bank (DIB) successfully tapping the Islamic debt market in
the last two weeks.
Banque Saudi Fransis US$750 million offering saw orders worth US$4 billion; TASNEEs
SAR2 billion (US$533.31 million) attracted an orderbook of SAR5.2 billion (US$1.39
billion); and DIBs US$500 million program was oversubscribed four times.
With some banks cutting back on financing, the Sukuk market is clearly providing a
booming avenue for corporate fundraising.
INDONESIA : Central bank could announce reduction in banks single-shareholder
limits next month
BAHRAIN : Gulf Finance House looks to diversify income
OMAN : HSBC Oman and Oman International Bank merger temporarily halted
due to lawsuit
MALAYSIA : OSK Holdings and RHB Capital merger receives approval from the
Securities Commission Malaysia
SAUDI ARABIA : Local lending market expected to continue growing, says Alinma Bank
OMAN : Islamic banking popularity on the rise
MALAYSIA : CIMB Group Holdings Q1 profit surges 10% year-on-year
MALAYSIA : Maybank reports US$428.46 million in first quarter profit
26
MALAYSIA : Export-Import Bank of Malaysia posts net profit of US$56 million in
2011
MALAYSIA : Securities Commission Malaysia updates list of Shariah compliant
securities
INDONESIA : Bapepam updates list of Islamic securities
PAKISTAN : Diyanah Islamic Financial Services launched
MALAYSIA : Bursa Malaysia plans bond trading for individuals in the third quarter
of this year
INDONESIA : Sun Life Financial to provide life Takaful coverage for fund investors
GLOBAL : StanChart names Morad Mahlouji as new regional head of MENA and
Pakistan
GLOBAL : Coutts appoints Ali Hammad as co-head of Middle East
Sukuk issuances reach record US$12.7 billion in the year-to-date
Daily Cover
GLOBAL: The volume of Sukuk issuances has reached a record US$12.7 billion in the
year-to-date (YTD), boosted by a landmark US$1.25 billion dual-tranche Islamic bond
sale by the Dubai government on the 24th April.
Data from Dealogic shows that the level of Sukuk offerings so far this year is more than
three times the previous record of US$4.2 billion issued during the same period in 2011.
Domestic issuance continues to dominate Sukuk volume and accounts for 63% (US$8
billion) of total volume in 2012 YTD. Despite this, the share of internationally marketed
Sukuk issuance, dominated exclusively by the issuers from the MENA region, has risen
to 37%, the highest share since 2008 (43%) as volume has more than trebled year-
on-year to US$3.5 billion, noted Dealogic in its DCM StatShot.
The unprecedented level of Islamic bond sales has fuelled optimism that 2012 will be
another record-breaking year for the international Sukuk mart. Professor Dr Malik
Muhammad al Awan, the Shariah advisor at Hong Leong Islamic Bank and Hong Leong
MSIG Takaful, believes that the market will close at US$125 billion this year; driven by
sales from the GCC.
The activity in the Sukuk market has also seen competition heat up between Malaysian
and Saudi offerings. Malaysian Sukuk sales that have traditionally dominated the market
recorded a 42% share of domestic issuances in the YTD, a record low; while Saudi sales
accounted for 59% or US$4.7 billion of local Sukuk sales during the period.
Nonetheless, Dr Malik noted that Malaysia will continue to be an attractive platform for
Sukuk sales, due to the pricing of Islamic bonds in the country and its accommodative
tax environment.
27
Meanwhile, the DCM StatShot showed that HSBC led in rankings for international Sukuk
bookrunner, with a 31.8% market share; followed by Deutsche Bank and Citi with
market shares of 18.6% and 13.2%, respectively.
UAE : Dubai government launches US$1.25 billion dual-tranche Sukuk
UAE : Emirates NBD may tap Sukuk market again
SOMALILAND : Government approves two-tiered banking system that utilizes Islamic
banking
KUWAIT : Gulf One Investment Bank advises and arranges US$23.5 million
Islamic debt refinancing for Gulf University for Science and Technology
BAHRAIN : Government eyes sovereign debt sale
HONG KONG : Legislative amendments for development of Sukuk market on track,
says financial secretary
GLOBAL : The Central Bank of Turkey to host pre-summit event for IFSBs 9th
Annual Summit
UAE : Mashreqbank posts US$74 million in first quarter profit
QATAR : Masraf Al Rayans first quarter results higher year-on-year
BAHRAIN : Bahrain Islamic Bank reports lower profit in first quarter results
UAE : Dubai Islamic Bank launches two-year UAE dirham-denominated
investment certificate
MALAYSIA : Bumi Armada to be included in Dow Jones Islamic Market Malaysia
Titans 25 Index
MALAYSIA : Takaful Ikhlas to introduce new health and medical products this year
UAE : Dubai Gold and Commodities Exchange names Gary Anderson as
new CEO
MALAYSIA : C Rajandram to leave as executive deputy chairman and group CEO
of RAM Holdings
28
Islamic banks grow strongly but prospects still mixed
Daily Cover
GLOBAL: Islamic banks performed strongly last year, although expectations of further
growth in 2012 remain mixed.
In Pakistan, the State Bank of Pakistans July-September 2011 Islamic banking bulletin
showed that the industrys profits reached PKR8 billion (US$88.7 million) during the
period, growing 58% from the previous quarter.
However, the statistics revealed that earnings growth of conventional banks with Islamic
branches was significantly higher than that of fully fledged Islamic banks. Furthermore,
while fully fledged Islamic banks contributed to 55% of the industrys overall profit, their
growth rate was lower than in the previous quarters 100% increase, attributed to a low
base effect.
Total assets of Pakistans Islamic banking industry amounted to PKR568 billion (US$6.3
billion) as at the end of September 2011, constituting 7.3% of the countrys overall
banking industry assets.
Meanwhile, the Islamic financial services sector in the UAE has grown to make up 30%
of the global Shariah compliant industry in 2011, according to a recent report by Abu
Dhabi Islamic Bank and the Oxford Business Group.
The growth has been attributed to the increasing demand for Islamic financial services,
with Islamic banks playing a major role in financing infrastructure projects and residential
properties for nationals in the emirates.
In 2010, Islamic banking assets in the MENA region rose to US$416 billion, representing
a cumulative annual growth rate of 20% over five years, compared with less than 9%
for conventional banks.
The market currently awaits earnings reports from banks in the UAE, although
expectations are dampened by continued prospects for provisions and non-performing
financing.
UK : Sovereign Sukuk does not offer value for money
OMAN : Government has no plans to invest in Islamic banking industry, says
financial affairs minister
UAE : Limitless and creditors reportedly reach deal for US$1.2 billion Islamic
syndicated financing
GLOBAL : Al Baraka Banking Group looks to Oman presence in 2014
TURKEY : Citigroup Europe keen to enter countrys Islamic bond market
UAE : Majid Al Futtaim Holding to avoid bond issuances until market
conditions stabilize
29
UAE : Al Hilal Bank mandates HSBC, National Bank of Abu Dhabi and
StanChart to manage US$500 million debut Sukuk
GLOBAL : Credit Agricole gets two Sukuk mandates in Saudi Arabia
BAHRAIN : Bahrain Islamic Bank and Al Baraka Islamic Bank fund Gulf Technics
new components business
OMAN : Bank Nizwa and Al Izz International Bank to float 40% of shares by
June, says central bank
PAKISTAN : IDB to provide US$3 billion financing to country during 2012-2015
period
SAUDI ARABIA : GACAs US$4 billion debut Sukuk oversubscribed three times
UK : Emirates Islamic Bank and First Gulf Bank Sukuk list on London Stock
Exchange
GLOBAL : Sovereign Sukuk market can meet demand from Islamic institutional
investors and banks, says Fitch
INDONESIA : Bank Muamalat Indonesia 2011 profit up 61.85% year-on-year
QATAR : Islamic Holding Group 2011 profit up 16%
INDONESIA : Bank BRI Syariah triples profits in 2011
QATAR : Qatar International Islamic Bank reports US$179 million net profit for
the year ended 2011
QATAR : Tebyan Asset Management unveils CHIME Opportunities Fund
PAKISTAN : UBL Fund Managers announces interim payout for UBL Islamic Savings
Fund
UK : BLME makes third property purchase for Light Industrial Building Fund
MALAYSIA : RAM assigns enhanced rating of AAA(bg) to Musteq Hydros Sukuk
Musharakah
MALAYSIA : Habibah Abdul is new independent non-executive director of CIMB
Islamic
SAUDI ARABIA : Faisal Shaker is head of wealth for Barclays Saudi Arabia
30
Asia Pacific banks can manage impact of Europe crisis, says S&P
Daily Cover
GLOBAL: Europes debt crisis has raised concerns of creating a global contagion; but its
impact on Asia Pacific (APAC)s banks will be manageable, according to S&P.
The firm, which has downgraded ratings for banks in Europe; including 15 in Spain, said
that the interconnected risk between Europes sovereigns and its banking system does
not have an immediate direct and material impact on APAC bank ratings.
Currently, the outlooks on 79% of S&Ps APAC bank group ratings are stable; backed
by a number of factors including relatively solid growth prospects in the region, good
capitalization, strong franchises and stable funding, it said.
However, it cautioned that should the euros debt woes lead to a more severe global
recession; this could prompt it to lower its assessment of APAC banks. It could also
revise its views on the regions banks if the industrys credit profile is impacted by a
pronounced global economic slowdown.
We may also consider negative rating actions if stresses in the Eurozone cause a
market dislocation and result in funding difficulties for APAC banks, it added.
On a positive note, the ratings agency commented that the regions banks generally
have limited investment exposure to euro sovereigns such as Greece, Italy, Ireland,
Portugal and Spain. It also noted that while a pullback of lending by European banks in
the Asian region could lead to higher credit costs, this could create opportunities for the
regions banks to boost their local and global presence.
Nonetheless, rapid expansion will be constrained as a result of the tough economic
landscape; uncertainty regarding the stability of the foreign currency funding market;
and higher capital requirements under Basel III, it added.
SAUDI ARABIA : Kingdoms investors said to be warming to proposed sale of US$2
billion Sukuk by Goldman Sachs
PAKISTAN : Meezan Bank in talks to manage US$1.6 billion government Sukuk
issuance
INDONESIA : Central bank establishes ceiling for gold pawning at US$27,634
SAUDI ARABIA : Dar Al Arkan Sukuk surges on better outlook for debt repayment
UAE : Dana Gas Sukuk yield hits a low
MALAYSIA : Maxis secures Securities Commission Malaysias consent for proposed
issuance of US$809.66 million Sukuk
UK : BLME signs US$22.2 million leasing agreement with Global Marine
Systems
UK : HSBC Amanah against Mortgage Market Reviews decision to ban
non-advised sales for home purchase plans
31
INDONESIA : Bank Tabungan Negara to spin-off Islamic bank by 2016
OMAN : Oman Arab Bank to raise US$26 million for Islamic banking capital
through rights issue
BAHRAIN : Power and water venture part-owned by Bahrain Islamic Bank
commences operations
OMAN : National Bank of Oman could kick-off Islamic banking operations this
year
UAE : Abu Dhabi Equity Partners set to launch soft commodity-backed
products
MALAYSIA : AFFIN Holdings posts 11.2% increase in profit before tax for 2011
GLOBAL : Altaira Wealth Management launches Bahrain subsidiary
SAUDI ARABIA : NCB Capital Real Estate Fund raises US$74.7 million
UAE : Abraaj Capital acquires UK-based specialist fund manager Aureos
Capital
MALAYSIA : MARC affirms AAAID(bg) and MARC-1ID(s) ratings on Horizon Hills
Developments Islamic bank guaranteed debt facilities
INDONESIA : PEFINDO downgrades Berlian Laju Tankers corporate rating to idSD
from idCCC
IIFM and ISDA launch Shariah compliant profit rate swap standard
Daily Cover
GLOBAL: The International Islamic Financial Market (IIFM) and the International Swaps
and Derivatives Association (ISDA) have launched standards for profit rate swaps for
Shariah compliant hedging; as the growing global business of Islamic financial institutions
point to the need to mitigate foreign currency risks.
The new agreement, known as the Mubadalatul Arbaah (MA) standard, follows the
ISDA/IIFM Tahawwut (Hedging) Master Agreement launched in March 2010.
Islamic financial institutions have largely shown resilience in the current difficult financial
environment and some are even going through an expansion phase. However, due to
the inter-linkages with the global financial system, the balance sheet of Islamic financial
institutions are exposed to fluctuations in foreign currency rates and also cash flow
mismatches due to fixed and floating reference rates, said Khalid Hamad, chairman of
the IIFM.
The standards allow for the bilateral exchange of profit streams from fixed rate to
floating rate, or vice versa.
While some quarters still disagree on the use of hedging under Shariah, it cannot be
denied that Islamic banks need an instrument to protect against foreign currency risks.
32
Banking giants such as Abu Dhabi Islamic Bank (ADIB) and Dubai Islamic Bank reported
foreign currency exposure on assets worth AED70.68 billion (US$19.24 billion) and
AED85.17 billion (US$23.2 billion) for 2011, respectively.
In its financial statements, ADIB also noted that a 5% increase in the US dollar exchange
rate would decrease its net profit by AED116.55 million (US$31.2 million) in 2011,
against a decline of AED67.41 million (US$18.35 million) in 2010.
The new standard from IIFM and ISDA will provide product schedules based on two
separate structures for transacting MA to mitigate cash flow risks. The documentation
was developed under the guidance and approval of the IIFMs Shariah advisory panel, in
coordination with Clifford Chance as external legal counsel, as well as other global market
participants.
SAUDI ARABIA : Saudi Electricity Company launches US$1.75 billion dual tranche global
Sukuk
MALAYSIA : Pembinaan BLT said to sell US$440.38 million Sukuk to yield between
3.6-4.4%
UAE : Jafza reportedly preparing syndicated loans to refinance part of US$2
billion Sukuk
MALAYSIA : Khazanah Nasional to use proceeds from US$357.8 million
exchangeable Sukuk for Asian investments
UAE : Central bank not responsible for setting up Shariah supervisory board,
says minister of state for financial affairs
MALAYSIA : Cagamas issues US$162.34 million Sukuk Wakalah
INDIA : Countrys legal system a setback for Islamic banking, says minister
of state for finance
KUWAIT : Ahli United Bank Kuwait reports net profit of US$113.2 million for
2011
PAKISTAN : The Bank of Khyber reports highest ever net profit for 2011
PAKISTAN : UBL Fund Managers announces payout for first quarter of 2011
OMAN : Oman United Insurance Company calls for more Takaful opportunities
JORDAN : IIRA reaffirms ratings of Jordan Islamic Bank
BAHRAIN : United Gulf Bank names Faick Al Saleh and Bader Al Awadi as
independent directors
33
Non-traditional markets and cross-border deals fuelling Islamic finance forward
Daily Cover
GLOBAL: The Islamic finance industry is set for further growth with rising interest seen
from non-Muslim markets, according to industry players.
According to Syed Alwi Mohamed Sultan, the head of Islamic banking for Asia at BNP
Paribas Malaysia, the bank sees greater diversification in the Sukuk markets investor
base; with the participation of more non-Muslim investors.
He also said that the market will likely see issuances from non-traditional markets for
Islamic finance this year, such as South Africa, Kenya and Senegal; while Hong Kong has
issued its consultation paper on Sukuk aimed at leveling the playing field between Islamic
and conventional bonds.
Cheryl Packwood, the CEO of Business Bermuda, is also quoted as saying that China
has shown growing interest in Islamic finance; noting that: Islamic finance is beginning
to be seen as an alternative way of doing finance, rather than an extension of the
religion.
Meanwhile, Malaysias CIMB Investment Bank is looking to promote Islamic finance to
the oil and gas industry; as it woos foreigners entering Malaysia to take advantage of
the countrys investor base.
Mukhtar Hussain, the global CEO of HSBC Amanah, also noted that Malaysia represents
an important gateway for firms to access diversified funding sources; including in the
Islamic markets. Malaysia has the ability to attract financing offshore and onshore; and
also using onshore liquidity to facilitate offshore transactions, he added.
With growing connectivity, it appears that growth in the Islamic finance industrys non-
traditional markets and increasing opportunities in international transactions could be
the next way forward for the industrys further development.
UAE : Jafza to raise US$1.85 billion through Islamic facilities
EGYPT : Planet IB calls on EFG Hermes to postpone plans with QInvest
SINGAPORE : Sustained growth of Islamic finance is not guaranteed, says Monetary
Authority of Singapore
GLOBAL : IDB calls for better connectivity between Islamic and conventional
finance
INDONESIA : Government aims to raise US$106.38 million through new Sukuk
auction
MALAYSIA : KFH Malaysia aims to derive 20% of income base from regional
expansion by 2015
SINGAPORE : CIMB Bank Singapore launches new range of Shariah compliant
products
MALAYSIA : Central bank to intervene to keep short-term rates stable
34
SAUDI ARABIA : Alistithmar Capital appoints Saudi National Technology Group to set
up e-broking system
INDONESIA : Manulife Asset Management Indonesia signs cooperation agreement
with Bank Danamon
MALAYSIA : Employees Provident Fund reports growth in first quarter results
UK : UK Real Estate Fund acquires second property for US$34.43 million
GLOBAL : Dow Jones Islamic Indexes post negative returns in May
MALAYSIA : RAM reaffirms Bank Muamalat Malaysias Islamic notes
MALAYSIA : Etiqa Insurance names Kamaludin Ahmad as new CEO
StanChart riding on the strength of Gulf Islamic finance
Daily Cover
GLOBAL: Standard Chartered Bank (StanChart) has announced that it will be arranging
up to four Sukuk within the Gulf region this year. Afaq Khan, CEO of Standard Chartered
Saadiq, has confirmed that the bank is involved in the arrangements of both corporate
and sovereign Sukuk in multi-currencies.
There are three to four Sukuk deals in the pipeline that StanChart is working in the
region. These are UAE dirham, US dollar and Malaysian ringgit-denominated Sukuk to be
issued by corporate and sovereigns, he said. However, he did not disclose the value of
the Sukuk, saying that they would be at least benchmark sized.
StanCharts announcement came on the back of a recent report which stated that
Sukuk issuances out of the Gulf has been at its strongest in the last six months as the
region takes advantage of low interest rates.
The Islamic market in the UAE has grown from 6% of the banking system to 22% in
2010, and in Qatar it has grown from 12% to 27% in the last decade. Other countries
such as Kuwait, Saudi Arabia, Bangladesh, Indonesia and Malaysia also show the Islamic
banking sector growing faster than the conventional system, he said, commenting that
if the market continues to grow as much, it will become a significant part of the financial
system within the region.
The bank which has recently been involved in a number of Sukuk issuances, namely that
of DIFC Investments (US$1 billion), Majid Al Futtaim (US$500 million), Jafza (US$650
million) and Sharjah Islamic Bank (US$300 million) sees no slowing down in its Islamic
unit as impact of the ongoing Eurozone crisis spilling over to the regions Shariah compliant
institutions is minimal as they have little or no exposure.
ZAMBIA : Government finalizes Islamic finance regulations
EGYPT : International Islamic Trade Finance Corporation extends US$1 billion
financing to Egypt
35
GLOBAL : Islamic finance industry to grow by 15% annually within the next
decade
GLOBAL : IDB signs financing deal worth US$1 billion with Korea Development
Bank
MALAYSIA : Disparity in Islamic finance a hindrance, says Securities Commission
Malaysia
US : Shariah Capital announces 2011 results
UK : The countrys real estate sector gaining importance in Islamic finance,
says legal firm K&L Gates
KENYA : Capital Market Authority publishes draft REIT 2012 regulations
MALAYSIA : Takaful providers register for government health scheme for the state
of Sabah
Asian bond market integration urged
Daily Cover
GLOBAL: With global Sukuk sales poised to lock in another record-breaking year this
year, industry players are now calling for measures to help further develop the flourishing
market.
In Asia, Ranjit Ajit Singh, the chairman of Securities Commission Malaysia, has urged for
further efforts in developing the regional fixed income market; highlighting moves such
as the establishment of the Asian Bond Fund, the set-up of the Asian Bond Market
Initiative; aimed at developing more accessible and well-functioning bond markets within
the ASEAN+3 (China, Japan and South Korea) region.
However, he said that the outcomes of the regional initiatives have not reflected the
need for such measures, noting that: It is time for policymakers, regulators and leading
private sector players, who have made in-roads in creating a regional presence, to take
an acute and concerted assessment on the key measures needed to fulfill the vision of
having a vibrant and sustainable Asian bond market.
Data from HSBC shows that new Asian bond issuances amounted to around US$56
billion as at the end of May this year. According to Ranjit, east Asias local currency bond
markets grew to US$5.7 trillion from US$948 billion between 2001-2011, in contrast
to a 150% increase in foreign currency issuances in the region to US$603 billion during
the same period.
He also stressed on Malaysias role in developing the regions bond market, due in part
to its strong Sukuk market, which makes up for 63% of total corporate bonds
outstanding. Nonetheless, he noted that the country must continue to scale up its
market for Islamic products, using our expertise to further expand offshore and work
with both regional partners and the private sector, to create a bigger and more integrated
Sukuk market.
36
The development of a regional bond market should also be bolstered by widening the
issuer base and instilling investor awareness on bond market products, risks and rewards.
Underpinning the development of an Asian bond market is a framework that facilitates
cross-border bond transactions. In this regard, there needs to be a greater push among
policymakers and regulators to increase efforts in creating a facilitative framework that
includes more harmonized rules and regulations, standardized bond offering documents,
as well as a set of common disclosure standards for bond issuances, he said.
UAE : Emaar Properties offers 6.4% for US$500 million Sukuk
IRAN : National Iranian Oil Company to issue US$12.21 billion-worth of bonds
this year
PAKISTAN : Islamic financing maintains market share amid decline in financial sector
lending for house construction
PAKISTAN : Standard Chartered Saadiq launches flagship branch in Karachi
MALAYSIA : Lembaga Tabung Haji poised to pay higher dividends in 2012
UK : Shariah compliant 90 North Real Estate Partners completes US$71.14
million property acquisition
MALAYSIA : RAM reaffirms Axis-REITs US$34.49 million Sukuk program
UAE : National Bank of Abu Dhabi promotes key executives
First Resources sells US$190.81 million Sukuk in rare Singapore-linked issuance
Daily Cover
GLOBAL: Palm oil company First Resources issued a RM600 million (US$190.81 million)
Sukuk, in a rare Shariah compliant offering from a Singapore firm.
The company, which is based in Singapore but is principally involved in palm oil operations
in Indonesia, issued the Islamic medium term notes (IMTN) from its RM2 billion
(US$635.87 million) program. The IMTNs have a tenor of five years and will mature on
the 31st July 2017.
Issued on a bookbuilding basis, the IMTNs were upsized from an initial issue size of
RM500 million (US$158.97 million). The papers, bearing a profit rate of 4.45%, were
oversubscribed 3.8 times.
Proceeds from the companys maiden Malaysian ringgit-denominated issuance will be
used for its Shariah compliant general corporate purposes and for the expansion of its
plantations in Indonesia.
Malaysias OSK Investment Bank and RHB Investment Bank acted as the joint principal
advisors, joint lead arrangers for the transaction, while also acting as joint lead managers
and bookrunners for the distribution of the IMTNs in Malaysia. Meanwhile, DMG & Partners
Securities and RHB Banks Singapore branch were appointed international dealers for
the distribution of the notes outside Malaysia.
37
The successful Sukuk issuance by First Resources is a testament of the breadth and
depth of our Malaysian debt capital market which is supported by ample liquidity. It is
also a reflection of the growing sophistication of our local investors and we expect the
demand for regional quality corporate debt papers to continue to rise, said U Chen
Hock, CEO of OSK Investment Bank.
Abdul Rani Lebai Jaafar, the managing director of RHB Islamic Bank, commented that
the strong demand for First Resources issuance underscores the depth of the Islamic
market.
The transaction also marks a milestone for RHB Investment Bank and OSK Investment
Bank, which are in the midst of completing their merger, signalling that Malaysias latest
merchant banking giant is in a strong position to manage more Shariah compliant deals,
especially across the ASEAN region.
BAHRAIN : Mumtalakat mandates CIMB and StanChart for US$938.12 million
proposed Sukuk program
QATAR : Masraf al Rayan launches brokerage subsidiary
GLOBAL : Nature of Islamic finance products significant factor in lack of Islamic
finance take-up, says law firm Pinsent Masons
MALAYSIA : Axiata Group appoints legal firms for US$1.5 billion multi-currency
Sukuk program
GLOBAL : Maybank remains confident of maintaining stake in Bank Internasional
Indonesia
MALAYSIA : Tun Razak Exchange set to further propel countrys Islamic finance
market, says prime minister
38
Islamic funds industry in for an upswing
Daily Cover
GLOBAL: With banks such as Standard Chartered and CIMB recently announcing a new
push for Islamic private banking and wealth management, it appears that the rest of the
sectors stakeholders are coming together in a move that could prove to be a turning
point for the Islamic funds market.
One of the crucial developments that could provide a new impetus for the market has
emerged in the UAE, where the Securities and Commodities Authority (SCA) launched a
new system for investment funds aimed at attracting fresh investments and creating
more stability in the emirates financial market.
The new framework covers definitions, systems and rules for setting up investment
funds and promoting them; with the SCA Resolution No. 37 of 2012 governing the
investment funds set out in four chapters overseeing local funds, investment fund service
providers, the promotion of foreign funds inside the UAE; and final provisions including
provisions of investment funds of special nature, offences and penalties and fees.
Meanwhile, Franklin Templeton Investments is set to debut its Shariah compliant funds,
with plans to offer three Sukuk and stock investment vehicles out of Luxembourg this
year; and Malaysias AmIslamic Funds Management just launched a new ringgit-
denominated global Sukuk fund.
A recent initiative by Malaysias government to allow private retirement schemes is also
expected to open up room for the Islamic funds market, as fund managers offer Shariah
compliant alternatives as part of the private pension plans.
The UK Islamic Finance Secretariat has estimated that the Islamic funds industry grew
to US$60 billion in 2011; while Malek Khodr Temsah, the vice-president of treasury and
investment at Albaraka Banking Group is reported as saying that he expects the industry
to grow between 7.5-10% this year.
With wealth controlled by Muslims growing rapidly and in some cases outpacing growth
seen in conventional markets; and an increasingly conducive regulatory and product-
driven environment, the Islamic funds industry could just be in for an upswing.
BAHRAIN : Bahrain Mumtalakat Holding Company proposes US$938.12 million
Sukuk program
OMAN : Bank Nizwa announces first board of directors after second try
MALAYSIA : Islamic banks appeal for more incentives from government
NIGERIA : NSE Lotus Islamic Index makes debut on Nigerian Stock Exchange
MALAYSIA : AmIslamic Funds Management launches global Sukuk fund
BANGLADESH : Takaful providers allegedly depositing funds in conventional banks to
earn profit
QATAR : Qatar Islamic Insurance Company announces 4% growth in first half profits
39
Shariah Capital may consider opportunities outside of Shariah amidst delisting
of shares
Daily Cover
GLOBAL: Shariah Capital, which proposed to cancel the admission to trading of its
shares on Londons Alternative Investment Markets (AIM), has said that the firm may
consider new opportunities outside of Shariah as it seeks to preserve its business.
In a filing to the exchange, the firm said that following careful consideration, its directors
concluded it is no longer in the best interest of the company or its shareholders for the
company to maintain its listing, taking into account the illiquidity of its shares, a projected
difficulty by the firm to attract equity investments, or other forms of investments,
through its listing; and the low trading volumes of the shares.
The directors estimate that the annual direct and indirect costs of admission are at
least US$300,000 per annum, it said, including for listing expenses and advisory, legal,
insurance, compliance and audit fees. It added the amount of senior executive time
spent in relation to regulatory and compliance requirements associated with maintain its
listing is disproportionate to the benefits of its listing.
Following this, the firm, which is headquartered in the US and has regional operations in
Dubai, said that it intends to protect its cash position, which amounted to US$4.1
million as at the 31st July 2012, as it attempts to wait out the uncertain financial
environment, preserve its Shariah franchise and seek new business opportunities.
However, it also said that: This may include opportunities outside of its Shariah operations
which the board believes will become increasingly prevalent should, as the board expects,
market conditions continue to stay the same or worsen.
Shariah Capital, which manages the DSAM Kauthar Funds through its joint venture with
the Dubai Multi Commodities Authority, noted that the business environment in the Gulf,
global stock markets and commodities had materially worsened since June this year,
when it announced its 2011 financial results. It reported its fifth straight year of losses in
that year, amounting to US$463,984 against US$353,954 in 2010; impacted by the
Eurozone debt crisis and Gulf investors reluctance to invest in hedge funds.
The company, which published a circular on the planned cancellation of its shares, will
convene a special meeting on the 23rd August to seek shareholder consent on the
move. Should it receive shareholder approval, the firm expects trading of its shares on
AIM will cease on the 4th September; with the cancellation effective on the 5th
September.
MALAYSIA : Tanjung Bin Power gets the nod to issue US$1.44 billion-worth of
Sukuk
AZERBAIJAN : TuranBank to sign second line of financing with ICD
OMAN : BankMuscats rights issue oversubscribed 1.28 times
UAE : Majid Al Futtaims US$400 million Sukuk Wakalah posts record low
yield
40
SRI LANKA : Amana Banks asset growth and profitability directly impacted by
central banks imposition
TURKEY : Participation Banks Association Of Turkey reports first half results
SRI LANKA : Maiden Shariah compliant offering from Innovest Investments
MALAYSIA : RAM reaffirms CIMB Islamic Bank at AAA/Stable/P1
MALAYSIA : Sarawak Energys US$4.8 billions Sukuk program reaffirmed at AA1
with a stable outlook
MALAYSIA : CIMB Group Holdings makes two senior appointments
MALAYSIA : Syed Moheeb Syed Kamarulzaman to step down as CEO of Takaful
Ikhlas
Takaful industry sees rapid development in emerging markets
Daily Cover
GLOBAL: Growth of Takaful globally may have lagged that of the wider Islamic financial
space, but new developments in emerging markets for Islamic insurance have created a
new growth momentum for the industry.
In Oman, which just adopted Islamic finance this year and has seen the launch of a
handful of Islamic banks and Islamic banking windows, the Capital Market Authority
(CMA) is reviewing a draft law which includes rules on the formation of Takaful operators.
The proposed law, which also covers rules on Sukuk, was drafted by law firm Clifford
Chance. According to reports, the CMA is also consulting the draft with other bodies,
such as the IFSB. It hopes to prepare a final draft sometime in September 2012.
The CMA has already granted three approvals in principle for insurance companies to set
up Takaful operations, among them Al Madina Insurance Company, which has set its
sights on converting into a Takaful firm and offering Life, medical and non-Life Takaful
products. The authority is also expected to stipulate separate businesses with separate
licenses for conventional insurers seeking to enter the Takaful market.
Meanwhile, MetLife Alico Bangladesh is reportedly considering a venture into Takaful,
due to strong demand for Takaful products in Bangladesh. Akhlaqur Rahman, its chief
operating officer, is also quoted as saying that the viability of the industry in Bangladesh
has improved due to the availability of Shariah compliant investments.
On another note, Kenya Reinsurance Corporation is in the midst of setting up a Shariah
board to oversee its planned re-Takaful operations. In a report, Jadiah Mwarania, its
managing director, said the firm has tied up with Total Risk Solutions, an Australian
consulting firm, to educate Kenyas market on Takaful.
While markets such as Pakistan has seen doubt cast over the development of its Takaful
industry as its newly released rules on the industry were blocked from implementation
by the Sindh High Court, there may still be some hope yet for the industry to enter a
new growth trajectory on developments from other markets around the world.
41
TURKEY : TAV Havalimanlari Holding secures US$1.2 billion Islamic financing
facility
BANGLADESH : StanChart provides US$20 million term finance facility to Incepta
Pharmaceuticals
GLOBAL : Islamic syndicated financing transactions in Africa, Europe and the
Middle East rise to the highest level in four years
GLOBAL : International Sukuk issuances reach US$79.3 billion as at the end of
July 2012
INDIA : Indian Center for Islamic Finance meets with central bank officials
UAE : Abu Dhabi Islamic Bank launches Oil Note III
Faith-based investing put to the test
Daily Cover
GLOBAL: JP Morgan Asset Management has liquidated its Global Catholic Ethical Balanced
Fund as it failed to gather the same momentum seen by Shariah compliant funds.
The firm said that its decision to liquidate the fund, which aimed to mirror the success of
Islamic funds, followed reduced prospects of attracting new investments.
This is also despite the fund posting positive returns during its life cycle, returning 10.18%
over a one-year period and 7.8% in the year-to-date. However, the Luxembourg-
based fund only recorded net assets of EUR4.3 million (US$5.31 million) as at the end
of May this year, compared to a target of US$30 million.
The funds mandate was to provide long-term capital growth through investments in a
portfolio of global equities and debt securities issued by the EU governments.
Relative to the growth of Islamic funds, JP Morgans Catholic fund has indeed fallen
short. In comparison, CIMB-Principal Islamic Asset Management, seen as a global leader
in the Islamic asset management space, recorded assets under management (AUM)
equivalent to US$8.82 billion as at the 30th November last year, while NCB Capitals
AlAhli Saudi Riyal Trade Fund, touted as the largest Shariah compliant fund in the world,
holds US$4.4 billion in AUM through 26 mutual funds.
Nonetheless, with the Islamic asset management industry still seen as a nascent market
within the wider Islamic finance space, JP Morgans case should serve as a reminder to
the industry not to rest on its laurels.
INDONESIA : Bank Indonesia to set new regulations for Islamic financing
MALAYSIA : SME Bank sells US$160.14 millionworth of Sukuk
EGYPT : Al Baraka Bank Egypt outlines aggressive growth plans
MALAYSIA : Putrajaya Holdings sets up US$962.62 million Sukuk Musharakah
42
UAE : Dana Gas seeks equitable solution to stakeholders for US$1 billion
Sukuk repayment
TUNISIA : IDB to provide financing for power plant project
AZERBAIJAN : Country seeks assistance from the IDB for rollout of Islamic banking
GLOBAL : IDB Group to implement Misys financial application software
BAHRAIN : Gulf Finance House announces profitable second quarter
BAHRAIN : Al Baraka Banking Group announces 10% year-on-year growth in
net income for the first half
JORDAN : Jordan Islamic Bank reports higher profits in the first half of 2012
AUSTRALIA : Crescent Wealth reports July returns for funds
EGYPT : Al Baraka Bank Egypt to launch Shariah compliant fund by the end of
2012
MALAYSIA : MARC assigns preliminary rating for Putrajaya Holdings proposed
US$962.62 million Sukuk program
S&P report highlights desire for longer-term paper
Daily Cover
GLOBAL: Standard & Poors (S&P) has recently released a report citing the potential
for Sukuk to become the instrument of choice particularly for the funding of infrastructure
projects in Asia and the GCC.
The report, entitled: Beyond borders: The GCC and Asia could rev up their economies
And the Islamic finance market stated that the current dearth in longer-term paper,
especially in the conventional market could create a greater affinity for Islamic paper
amongst corporates looking to fuel capital intensive projects such as infrastructure and
development in these markets.
According to S&P, the GCC market saw over US$19 billion-worth of issuances as of July
2012, and of that, infrastructure represented 30%, compared with just 7% in the
previous year. The reasons behind this surge are low yields, relatively high liquidity, large
capital expenditure needs, and strong investor appetite.
The report also noted that although the GCCs collective Islamic finance activities totals
at an estimated US$1 trillion, it is Malaysia who is leading the pack when it comes to
Sukuk issuances. Allan Redimerio, credit analyst at S&P said: Malaysia is now the world
leader in Sukuk issuance. Political will, recognition of beneficial ownership, tax incentives
and a rising investor base have all supported the countrys continued growth trajectory.
Malaysia has issued a number of record-size Sukuk for its infrastructure needs namely
Projek Lebuhraya Usahasama (PLUS)s RM30.6 billion (US$9.94 billion) Sukuk and
DanaInfra Nasionals RM2.4 billion (US$779.42 million) Sukuk this year alone.
43
The report also added that cross-border deals between Asia and the GCC, such as the
Abu Dhabi National Energy Companys ringgit-denominated Sukuk, which saw high
demand from a wide pool of investors, could also potentially be seminal in the
standardization and globalization of the Islamic finance market.
IRELAND : Ireland to tap into Islamic funds industry
SAUDI ARABIA : Saudi Automotive Services Company in US$68 million Islamic financing
deal with Banque Saudi Fransi
MALAYSIA : Binariang GSM Senior Sukuk partially redeemed
OMAN : Amanie Advisors launches new firm in Oman
44
INDONESIA
Indonesia should utilize Islamic finance to address dire infrastructure needs,
says S&P
Daily Cover
INDONESIA: Despite its booming economy, Indonesia continues to suffer from lacking
infrastructure; and ratings agency S&P believes that its crucial infrastructure needs can
be addressed by utilizing Islamic finance.
In a report, the ratings agency noted that like its neighbor, Malaysia, Indonesia can also
rely on Islamic financing for infrastructure development, given its needs, the governments
willingness to attract private capital to fund infrastructure investment and the growing
demand for investable assets for the countrys expanding local Islamic finance market.
While Indonesias economy has shown rapid growth, accelerating 6.4% in the second
quarter of this year, S&P noted that the poor state of the countrys infrastructure is
holding back its growth potential. Nonetheless, the government has plans to spend
over US$200 billion to upgrade and expand it infrastructure, with between 30-40% of
that spending expected to be contributed by the private sector. The government however
is still considering alternatives to finance the remainder.
Of factors creating a challenge for Indonesia to utilize Islamic finance for its infrastructure
needs, Allan Redimerio, a credit analyst at S&P, said that: We believe the lack of
recognition for beneficial ownership and tax incentives is impeding the growth potential
of this funding source. Ways to generate interest in this sector include offering a range
of products to the population with support from the countrys political, corporate and
financial institutions.
The country can also take a page from Malaysia, whose finance ministry set up funding
vehicle Dana Infra Nastional to finance the countrys infrastructure program. Among its
main mandates has been the establishment of a RM8 billion (US$2.55 billion) Sukuk
program to part-finance a mass rapid transit project. Like Dana Infra, Indonesia has
already set up Indonesia Infrastructure Finance, a government-backed investment firm
designed specifically for the countrys infrastructure developments.
Indonesia has also already made a name for tapping the global Sukuk market to fund its
budget, including a US$1 billion Sukuk issued in November last year. The government is
also reportedly planning to issue another global Sukuk offering by the end of this year.
Given its large infrastructure needs and room for Islamic finance to channel investments
and funds towards the requirements, all signs seem to point to the title role the Shariah
compliant financial industry can play in Indonesias sizzling economic growth.
TURKEY : Is Gayrimenkul Yatirim Ortakligi receives US$50 million Murabahah
financing from banks
INDONESIA : Central bank to impose separate down payment limits for Islamic
banks
45
BAHRAIN : Governments monthly Sukuk offering oversubscribed by 351%
MALAYSIA : Islamic business contributes strongly to RHB Capitals financials
UAE : Fajr Capital buys Dubai International Capitals stake in MENA
Infrastructure Fund
UAE : Emirates NBD Asset Management announces dividend for Emirates
Global Sukuk Fund
PAKISTAN : Pak-Qatar Family Takaful announces distribution of surplus Takaful
funds
Indonesia keeps stacking its chips
Daily Cover
INDONESIA: The country continues to ride high on its return to investment grade
status following a second upgrade to its credit rating in the span of one month; this time
by Moodys.
Investment flows have already been picking up even before it received its first upgrade
by Fitch in December last year; with foreign direct investment (FDI) hitting a record of
US$19.3 billion in 2011, also the highest in Southeast Asia. Its FDI is also expected to
rise another 25% this year.
Two out of three nods from the worlds leading rating agencies S&P has yet to raise its
rating, currently the highest level below investment grade is certain to open up room
for further investment inflows; and the Sukuk mart is expected to be among the sectors
with the most to benefit.
The interesting area for Indonesia here is Sukuk. For some Middle East buyers who
could not invest earlier because it was not investment grade, this is a new thing for
them, which is good, Guan Ong, the principal at Blue Rice Investment Management, a
hedge fund that specializes in fixed income, was quoted as saying.
Indonesias stacked chips also could not have come at a better time, with the global
economy looking the way it is. Furthermore, Moodys has also noted that high-yield
corporate bond issuances in Asia will remain highly uncertain in the next few months
as credit markets stay choppy on concerns over European sovereigns and Chinas
corporate governance issues keeping investors cautious.
Caution and uncertainty look to be the by-words for at least the early part of 2012;
and while Asian corporates may make preparations for the reopening of the high yield
bond markets, it will likely take a higher speculative-grade rated, existing issuer to break
the deadlock and open the floodgates for smaller and first-time names to the market,
said Laura Acres, a vice-president and senior credit officer at Moodys.
For Asia this year, what better name is there than Indonesia to set credit flowing?
BAHRAIN : Kingdoms debt cost rises the most in two months as Iran-US tensions
escalate
46
SOUTH AFRICA : First National Bank reportedly reshuffles Islamic banking unit on
corporate governance concerns
TURKEY : Construction companies receive most financing as Islamic banks boost
lending 20% in 2011
MALAYSIA : Axis REIT considers issuing US$64.45 million Sukuk
GLOBAL : Islamic banks all set for full implementation of Basel III framework in
2019
BRUNEI : Sukuk can assist in financing countrys infrastructure projects
Indonesian governments next moves hotly watched
Daily Cover
INDONESIA: All eyes are back on Indonesia as the government is said to be preparing
to unveil its new shareholding rules for the countrys commercial banks this month.
In addition to the impact the new regulations expected to limit single-shareholder
ownership in banks will have on foreign institutions present in Indonesia, market
watchers now ponder whether the countrys uncertain regulatory environment has
weakened the momentum of its recent sovereign rating upgrades by Moodys and
Fitch.
In fact, not all are convinced that Indonesia has turned a fresh page in terms of economic
and political reform; with Standard & Poors maintaining its junk rating on Indonesia.
Its opinion is based on the countrys low per capital income, structural and institutional
impediments to higher economic growth, continued high private sector external debt
and shallow domestic capital markets.
We have detected some policy slippages, after a remarkable decade of entrenching
democracy following the collapse of the Suharto administration. The abandonment of a
planned electricity tariff rise, the inability to implement fuel subsidy cuts despite rising oil
prices and a host of proposed or actual policy measures in industry and trade point to
rising policy uncertainty, noted the ratings agency in a recent report.
Meanwhile, Cheah King Yoong, a banking analyst at Malaysias Alliance Research, noted
that CIMB Group and Maybank could be negatively hit by Indonesias limits on single-
shareholder stakes in local banks; due to their majority stakes in CIMB Niaga and Bank
Internasional Indonesia, respectively.
The implementation of this regulation could force these banks to pare down their
stakesand dampen their earnings prospects, said Cheah in a report.
Another Malaysian player, Syarikat Takaful Malaysia, may also face difficulties in Indonesia
due to the expected new rules. The regulatory framework in Indonesia is ever changing
and unpredictable. Sometimes it poses risks to what we want to do moving forward,
said Hassan Kamil, its group managing director.
47
The firm owns 56% in Syarikat Takaful Indonesia (STI) and could see hurdles on two
fronts: Firstly as STIs partnership with Bank Muamalat Indonesia could be affected by a
possible streamlining of the banks business due to its own foreign ownership conundrum
(Bank Muamalats foreign shareholders include the IDB and Kuwaits Boubyan Bank);
and secondly as Takaful Malaysia will have to pare down its own stake in STI.
Hassan noted that Takaful Malaysia will need a longer time to reduce its stake in STI;
while it also planned for the Indonesian subsidiary to contribute strongly to the groups
growth going forward.
With the far-reaching impact of Indonesias regulatory framework and its possible negative
effect on foreign investments, the countrys government may need to re-balance its
policy moves to ensure its newfound shine is not short-lived.
SWITZERLAND : Faisal Private Bank up for sale after failing to raise funds
PAKISTAN : Burj Bank implements Path Solutions iMAL
MALAYSIA : SME Bank seeks to raise US$987 million via government-guaranteed
Sukuk
CHINA : Country could be the next growth market for Islamic finance, says
Malaysian central bank governor
INDONESIA : Bank Muamalat Indonesia to issue US$162.45 million Sukuk in June
AUSTRALIA : CIMB Group to venture into Australia within the year
EGYPT : Al Baraka Bank Egypt reaches agreement with the World Bank to
receive US$16 million in funding
BAHRAIN : BMI Bank reports first quarter results
FRANCE : La Franaise AM launches Frances first Islamic fund
MALAYSIA : Takaful Malaysia eyes expansion following implementation of risk-
based capital framework
INDONESIA : Islamic Corporation for the Insurance of Investment and Export Credit
inks deal with Indonesia Infrastructure Guarantee Fund
INDONESIA : PEFINDO assigns idA + rating to Bank Muamalat Indonesia
MALAYSIA : Hong Leong Industries redeems US$16.5 million outstanding Sukuk
MALAYSIA : RAM reaffirms Al-Aqar Capitals Class A, B and C Islamic notes
GLOBAL : Law firm Appleby promotes Sarah Demerling to partner
48
Bank Syariah Mandiri could launch IPO as early as 2013
Daily Cover
INDONESIA: Bank Syariah Mandiri (BSM) is reportedly deliberating on an initial public
offering (IPO) to be launched as early as next year, as its shareholder Bank Mandiri
pushes for a public float of its subsidiaries in order to abide by the countrys new regulations
on bank ownership.
According to the new rules, banks owned by other banks must issue a minimum of
20% of their shareholding to the public by 2019. Zulkifli Zaini, the president director of
Bank Mandiri, said that plans for BSMs IPO are expected to be drawn out next year,
while Yuslam Fauzi, the president director of BSM, has said that 2014 appears to be the
ideal year for a public float.
Nonetheless, Sunarso, the director of commercial and business banking at Bank Mandiri,
has reportedly expressed optimism that the IPO could take place as early as 2013.
Yuslam has also noted that BSM needs to raise up to IDR1 trillion (US$108.7 million) in
order to strengthen its capital adequacy ratio (CAR), although Bank Mandiri has committed
to providing it with capital support until 2015.
Meanwhile, with the Indonesian central banks recent directive on single ownership in
local banks seen as a possible deterrent to new investments in the countrys banking
sector, an IPO could provide the best route for banks looking to raise funds. The country
has also seen an uptick in IPO activity this year, amid strong demand from local investors,
with 13 companies listed on the Indonesia Stock Exchange in the first half of this year.
Furthermore, the Indonesian economy has bucked the trend of slowing global growth,
fuelled by its booming domestic sector.
With BSM preparing for its stock market debut amid buoyant investor sentiment and
local rules encouraging bank listings, could the banks IPO open up room for the countrys
other Islamic banks to tap the equities market to raise funds?
GLOBAL : Maturing Sukuk and bonds from the Gulf to balloon to US$41.4 billion
in 2014, says Markaz
KENYA : Gulf African Bank reports glowing first half results
MALAYSIA : Government could offer further incentives to boost Islamic finance
industry
BAHRAIN : International Investment Bank announces dividend for investors of
IIB Automotive
49
KUWAIT
Global Investment House discloses debt-for-equity exchange plan
Daily Cover
KUWAIT: Global Investment House has disclosed details of its debt-for-equity swap
that could see the firm cede 70% of its ownership to creditors and write off KWD108.2
million (US$382.78 million)-worth of debt.
In a filing to the Dubai Financial Market, Global, which owes an estimated US$1.7 billion-
worth of debt in conventional and Islamic facilities, announced that it will convene an
extraordinary general meeting (EGM) on the 2nd September 2012 to approve its debt-
for-equity proposal. Its shareholders will also meet on the same day for its annual
general meeting (AGM).
In its EGM agenda, Global proposed the cancellation of 17.33 million shares worth
KWD11.48 million (US$40.56 million), comprising shares from its paid-up capital account
and KWD1.06 million (US$3.75 million) from its treasury shares reserve. It also proposed
to transfer losses resulting from the cancellation of KWD8.69 million (US$30.76 million)-
worth of treasury shares to its share premium account.
Additionally, Global seeks to write off KWD31.09 million (US$110.02 million)-worth of
its accumulated losses against its remaining share premium and write off KWD77.12
million (US$272.47 million)-worth of losses against its paid-up capital.
The kicker however, is its proposal to issue KWD122.24 million (US$431.88 million)-
worth of new shares to its creditors, raising its capital to KWD174.62 million (US$616.95
million) in a move that would give creditors 70% ownership in the firm.
The subscription in the capital increase shall be made in full from the creditors account
and the companys existing shareholders waive their pre-emption right to subscribe in
the capital increase in favour of a special purpose company (or more [companies])
established for the benefit of the financial creditors and to delegate the board of directors
to set the requirements, rules and conditions for the calling of the capital increase, it
said.
In addition, Global has asked its existing shareholders to approve the transfer of part of
the firms assets and investments to a special purpose vehicle set up for its creditors;
provided that the current fair value of the assets and investments do not exceed the
amount of its lower liabilities as a result of the transfer.
As at the 31st March 2012, its total assets amounted to KWD550.26 million (US$1.26
billion).
Meanwhile, at its AGM, the firm will seek shareholder approval on a recommendation to
withhold bonuses to its board of directors and to freeze dividend distributions for its
2011 financial year. It has also asked shareholders to discharge its board from liabilities
relating to their financial and legal actions during that year.
50
INDONESIA : Government plans sale of yen and US dollar-denominated Sukuk by
the end of 2012
QATAR : Qatar Gas Transport Company receives US$380 million Murabahah
financing facility
GLOBAL : IDB Groups financing to energy sector exceeds 25% of total funds
channelled since inception
GLOBAL : Malaysia responds to Sudans request to cooperate in Islamic finance
MALAYSIA : Aberdeen Asset Management (Malaysia) awaiting approval to launch
two Shariah compliant funds
MALAYSIA : Syarikat Takaful Malaysia reports robust second quarter results
EGYPT : Allianz Egypt appoints Ayman Hegazy as new chief financial officer
US : Dr Natalie Schoon joins Noriba Investings board of advisors
51
MALAYSIA
SME Bank launches Sukuk program
Daily Cover
MALAYSIA: State-owned SME Bank established a RM3 billion (US$950.61 million)
government-guaranteed Islamic medium-term notes (IMTN) program, with a tenor of
up to 20 years.
The first tranche is expected to be issued in the fourth week of July 2012, comprising a
RM500 million (US$158.59 million) tranche with tenors ranging from seven to 10 years.
The Wakalah-structured program was tailored with the GCC in mind, as the bank is
hopeful that it will be able to entice GCC-based investors with the offering.
The program, which forms part of the governments SME masterplan aimed at developing
the countrys SME sector, also marks SME Banks maiden foray into the Malaysian
Islamic capital market.
The establishment of the IMTN program represents a significant growth for SME Bank
towards its mission to be a development financial institution that nurtures the small and
medium-sized enterprises which form the backbone of the nations economy, said
Mohd Mohd Radzif Mohd Yunus, its managing director.
The proceeds will be used towards SME Banks working capital requirements.
AmInvestment Bank, Kuwait Finance House (Malaysia) and Maybank Investment Bank
are the joint lead managers for the transaction. KFH Malaysia is also lead Shariah advisor
for the deal.
KAZAKHSTAN : Development Bank of Kazakhstan issues US$76.07 million debut
sovereign Sukuk
MALAYSIA : Axiata Group sets up US$1.5 billion multi-currency Sukuk program
MALAYSIA : Chemical Company of Malaysia cancels Sukuk facilities
UAE : Total nominal value of Sukuk listed on Nasdaq Dubai surpasses US$5
billion
UAE : Barclays to withdraw from Eibor rate-setting panel
MALAYSIA : Lembaga Tabung Haji has US$1.11 billion to spend on property
investments
INDONESIA : Allianz Life Syariah on track to meet US$63.56 million gross premium
income target for 2012
MALAYSIA : StanChart Saadiq Malaysia signs bancaTakaful pact with Prudential
BSN Takaful
52
UAE : Abu Dhabi National Takaful launches offerings for National Bonds
Corporations customers
MALAYSIA : S&P assigns Axiata Groups multi-currency US$1.5 billion Sukuk
program a BBB-
MALAYSIA : Securities Commission Malaysia announces members of Shariah Advisory
Council
Malaysian central bank to convert Asian Finance Bank into Islamic megabank?
Daily Cover
MALAYSIA: News of a plan by Bank Negara Malaysia (BNM), the central bank, to use
public funds to takeover Asian Finance Bank (AFB) and convert it into a megabank has
raised eyebrows; with industry players criticizing the move as unnecessary and
embarrassing.
Additionally, Mohamed Azahari Kamil, CEO of AFB, 67%-owned by Qatar Islamic Bank,
said that he is not aware of any such plan, commenting that it remains business as
usual at the bank. Speaking to Islamic Finance news, Mohamed Azahari also said that
the plan, reportedly involving a takeover of AFB by BNM, doesnt make sense, as it is
not in a regulators role to perform acquisitions.
The Malaysian Islamic megabank plan, which has been mooted by BNM for several
years, has reportedly come to a head with Dr Zeti Akhtar Aziz, the governor of BNM,
said to have made a personal appeal to state-owned oil company, Petronas and state
pension fund Kumpulan Wang Persaraan (KWAP), to inject capital into the megabank.
After reportedly being rejected by KWAP, Zeti is said to have returned with the latest
proposal involving AFB, with the plan also including the offer of up to 9% interest in the
planned US$1 billion megabank to promoters including professor Dr Rifaat Ahmed Abdel
Karim, who is currently adjunct research professor at INCEIF. KWAP is now said to have
agreed to a due diligence to takeover AFB for US$1 billion.
Commenting on the matter, an industry player told Islamic Finance news that it is
ludicrous for Petronas to be involved in such a deal; while the idea of an Islamic
megabank in Malaysia, in general, is embarrassing as the local market is already very
competitive.
The banker also questioned the role of Dr Rifaat in the deal, noting that Rifaat, who
previously served as secretary general at AAOIFI and IFSB, lacks experience as a banker.
Heading up a megabank is an entirely different ballgame, said the banker, adding that
the venture would need the involvement of big banks such as Emirates NBD, National
Bank of Abu Dhabi or Saudi Arabias National Commercial Bank.
GLOBAL : Islamic financing year-to-date volume at highest level since 2008
GLOBAL : Islamic banking assets to reach US$1.1 trillion this year, says StanChart
53
MALAYSIA : Bank Muamalat Malaysia and Pos Malaysia to start new Islamic financing
company
OMAN : BankMuscat to raise US$250.28 million through rights issue to finance
Islamic business
INDONESIA : CIMB Niaga Syariah Islamic to launch interbank money market
transactions
GLOBAL : Standard Chartered Private Bank launches Islamic financial solutions
UAE : DP World Sukuk completes periodic distribution for US$1.5 billion Sukuk
LUXEMBOURG : Sustainable Capital launches Shariah compliant funds
GLOBAL : Fitch assigns expected rating to Development Bank of Kazakhstans
Islamic medium-term note program
UAE : Moodyss downgrades rating on HSBC Bank Middle East
KUWAIT : Mamdouh El-Sherbiny steps down as CEO of Al Madina for Finance
and Investment
MALAYSIA : Mohamad Damshal Awang Damit to step down as managing director
of Amundi Islamic Malaysia
Retail investors among regulators priorities
Daily Cover
MALAYSIA: Securities Commission Malaysia (SCM) has outlined its plans for 2012,
which includes boosting retail participation in Sukuk and conventional bonds by facilitating
the offering of corporate bonds to retail investors. The Malaysian regulator is also set to
launch a framework for business trust to create a regional funds passport to facilitate
cross-border unit trusts investments.
A statement released by SCM said: Retail investors can look forward to an expansion
in product range and asset classes to cater to their investment needs. Other initiatives
include improving the access of retail investors to fixed income, derivative and regional
products. To facilitate retail participation in Sukuk and conventional bonds, SCM and
Bursa Malaysia are working together to facilitate the offering of corporate bonds to
retail investors.
The regulator also revealed its efforts to protect foreign and local issuers and investors
in the private debt securities and Sukuk markets by creating tailor-made protection
requirements for investors.
It was also revealed that the amount of fund-raising approved by SCM in 2011 totaled
to RM118.93 billion (US$38.69 billion) as at the end of 2011, compared to RM77.02
billion (US$25.5 billion) in 2010. Sukuk approvals had also more than doubled to RM78.9
billion (US$25.67 billion) from RM38.3 billion (US$12.46 billion) the year earlier. An
increase in demand from global investors in private debt securities had also boosted
54
numbers to RM15.1 billion (US$4.92 billion) at the end of 2011, compared to RM14.3
billion (US$4.65 billion) in the year before. Out of this, RM5.05 billion (US$1.64 billion)
was invested in Sukuk.
Todays IFN Alerts
UAE : Dubai Islamic Bank settles US$750 million debt using internal revenues
SAUDI ARABIA : Saudi British Bank sells maiden subordinated Sukuk worth US$400
million
MALAYSIA : Pembinaan BLTs third tranche fully subscribed
PAKISTAN : Countrys Islamic banking sector expansion plan on target, says central
bank
SAUDI ARABIA : Kingdom Holding Company gets shareholders nod to sell either
conventional bond or Sukuk
MALAYSIA : Arab investors not bailing out from responsibility in developing Medini
Iskandar project, says Iskandar Investment
GLOBAL : IDB allocates US$52 million for Gaza
BAHRAIN : National Bank of Kuwait Bahrain announces net profit of US$70 million
for 2011
SAUDI ARABIA : Saudi British Bank sells maiden subordinated Sukuk worth US$400
million
UAE : Takaful Emarat reports total assets of US$32 million for 2011
TURKEY : Bank Asya refutes news reports on selling general insurance unit to
Germanys Gothaer Insurance Group
BAHRAIN : Bahrain National Holding opens discussions with regional investors to
jointly establish a new Takaful company
MALAYSIA : MARC affirms AAAIS rating on TTM Sukuks US$195 million Sukuk
Murabahah with a stable outlook
UAE : Emirates NBD names Jamal Ghalaita as new CEO of its Islamic
subsidiary, Dubai Bank
QATAR : Qatar Islamic Bank names three new senior appointments
55
Big things in store as RHB Capital wraps up M&As
Daily Cover
MALAYSIA: RHB Capital (RHBCap), which expects to complete its proposed merger
with OSK Investment Bank (OSK) and acquisition of Indonesias Bank Mestika Dharma
(Bank Mestika) by the end of the third quarter of this year, could attract foreign suitors
as its enlarged size increases its Islamic banking proposition.
In addition to becoming Malaysias largest stockbroker, the RHB banking group will also
grow to the countrys fourth-largest bank by assets, post-OSK merger.
What RHBCap could really offer is a foothold; a platform to offer Islamic finance products
by capitalizing on Malaysias leading position in this area, Cheah King Yoong, an analyst
at Alliance Research is quoted as saying. He also noted that the merged entity will also
provide RHBCap a size and scalability premium which could put it on the radar for
investors looking to enter Malaysias banking industry.
Gerald Ambrose, the managing director of Aberdeen Asset Management, also noted
that RHBCap is a takeover target; with its OSK merger set to boost its attractiveness
to potential buyers; due to its national coverage and good exposure to retail and
investment banking. There are foreigners who want exposure here [Malaysia]; and if
youre a foreign Islamic bank, youd better be buying a local brand, he said.
RHBCap has also led bookrunning of Sukuk deals in Malaysia this year; coming out tops
with seven transactions worth US$663 million as at the beginning of April, leaving the
usual giants, Maybank Investment Bank and CIMB Group, trailing at second and fifth
place, respectively, Dealogic data shows.
Top that off with a possible presence in Indonesia via Bank Mestika; and RHBCap may
not just be the bank to watch for the growth of its business, but also as a fruitful
strategic investment for foreign acquirers.
MALAYSIA : Maybank may bid for Philippines Al-Amanah Islamic Investment Bank
KUWAIT : National Bank of Kuwait receives central banks approval to raise
stake in Boubyan Bank
UAE : Emirates Airline could pay less than other Gulf corporate issuers to
sell Islamic bonds
UAE : Nakheel plans second tranche of Sukuk to creditors by the end of
April
UAE : Abu Dhabi Islamic Bank joins Dubai Duty Frees US$1.1 billion financing
as lead arranger
SAUDI ARABIA : Riyad Capital receives mandates for Sukuk and IPO
OMAN : Launch of sultanates first Islamic bank delayed to the second half of
2012, says central bank
BAHRAIN : Sakana signs MoU with Fontana Tower developer to provide mortgage
financing
56
UAE : Dubai may need to sell more assets to fund US$80 billion of debt,
say analysts
BAHRAIN : Gulf Finance House in talks with Sukukholders to reschedule US$137
million in Sukuk repayment
KAZAKHSTAN : The Development Bank of Kazakhstan may need to pay more for
Malaysian ringgit-denominated Sukuk
JORDAN : Jordan Dubai Islamic Bank picks SunGards Ambit credit risk solution
BANGLADESH : Prime Bank and Al-Arafah Islami Bank sign MoU with Hajj Agencies
Association of Bangladesh
SAUDI ARABIA : Local banks report strong results for the first quarter of 2012
QATAR : Qatar Islamic Bank reports US$107 million in first quarter net profit
SAUDI ARABIA : Bank Aljazira reports US$38.13 million in first quarter profit
MOROCCO : Consortium releases more funds for GFHs Royal Ranches Marrakech
project
MOROCCO : BMCE Capital Gestion may offer Islamic funds
MALAYSIA : Great Eastern Takaful expects strong year ahead
UAE : SHUAA Capital names Colin Macdonald as new CEO
Embattled MAS announces US$800.19 million Sukuk plan
Daily Cover
MALAYSIA: National carrier Malaysian Airline System (MAS) has unveiled a RM2.5
billion (US$800.19 million) Sukuk program in an effort to boost capital after reporting
record losses in 2011.
Its Sukuk program forms the tip of the iceberg of a RM9 billion (US$2.88 billion) funding
plan that includes a RM1 billion (US$320.08 million) bridging loan from a consortium of
banks and a proposal for the government to set up a special purpose vehicle to raise
RM5.3 billion (US$1.69 billion) to pay for aircraft purchases.
The proposed Sukuk would have an effective tenor of 10 years, as MAS would have a
call option to redeem the Sukuk in full from year 10 onwards. For the first 10 years, the
profit rate payable on the Sukuk is based on the prevailing market rate at the time of
issuance; and after the tenth year, the profit rate payable on the Sukuk would rise by a
pre-determined rate.
We anticipate to drawdown the first tranche of RM1 billion of the proposed Sukuk,
sometime in June 2012 once all regulatory approvals are cleared; and for the remaining
amount of the program later, said MAS.
57
MAS also received a RM1 billion bridging loan from CIMB Bank on the 30th March 2012
to ensure its working capital cash balances remain adequate until the expected drawdown
of the first tranche of its planned Sukuk.
Having been distressed for several years, the airline recently announced its widest ever
loss of RM2.5 billion for 2011, followed by a loss of RM171.8 million (US$54.99 million)
in the first quarter of this year. It reported cash and cash equivalents of just RM1.35
billion (US$432.1 million) during the quarter.
SAUDI ARABIA : The National Industrialization Company completes US$533 million
maiden Sukuk offering
UAE : Dubai Islamic Bank launches US$500 million, five-year Sukuk
UAE : Dubai Duty Free increases five-year, multi-tranche Islamic and
conventional financing to US$1.5 billion
SAUDI ARABIA : Saudi Hollandi Bank to provide US$123 million Islamic financing to
National Prawn Company
SAUDI ARABIA : More debt offerings in the future, says finance minister
AZERBAIJAN : IDB and national water operator agree on terms to finance water
project
GLOBAL : Al Baraka among Middle East banks eyeing Australian exposure
MALI : IDB grants US$400,000 to help overcome food crisis
INDONESIA : Finance ministry raises US$58.8 million via Sukuk auction
TURKEY : Kuveyt Trk Katilim Bankasi reports 18% growth in first quarter results
PAKISTAN : UBL Fund Managers announces interim distribution for UBL Islamic
Savings Fund
MALAYSIA : Better Islamic finance planning can help turn country into high income
nation, says Financial Planning Association of Malaysia
UAE : Emirates NBD names Mohammad Kamran Wajid as CEO of two
subsidiaries
Celcom Transmission (M) sells US$1.59 billion-worth of Sukuk
Daily Cover
MALAYSIA: Celcom Transmission (M) (CTX), a unit of Celcom Axiata which is in turn
owned by telecommunications group Axiata Group, has issued RM5 billion (US$1.59
billion)-worth of Sukuk.
In a response to Islamic Finance news, which reported on the 10th August that CTX
was looking at issuing the papers by the end of the month, Celcom said that the Sukuk,
of which RM3 billion (US$956.65 million) was sold via a public issuance, was priced at
3.45%, 3.6% and 3.75% for its three, five and seven-year tranches, respectively.
58
The final pricing of the papers are below initial guidance of 3.5-3.65%, 3.65-3.8% and
3.8-3.95%, it said.
The remainder of the papers were privately placed in tranches of eight, nine and 10
years.
The Sukuk is also touted as the largest rated Sukuk Murabahah based on a Tawarruq
agreement offered in the Malaysian debt capital market to-date.
According to a statement, the RM3 billion tranche received over RM10 billion (US$3.19
billion)-worth of orders from asset management firms, financial institutions, insurance
companies and corporates.
Proceeds from the offering will be used to refinance CTXs existing debt and to fund its
capital expenditure and working capital requirements. The successful refinancing is part
of Axiata Groups active capital management efforts and is estimated to save over
RM350 million (US$111.64 million) over the remaining tenor of the existing unrated
Sukuk, said Celcom in the statement.
CTX sold a landmark RM4.2 billion (US$1.34 billion) Sukuk Ijarah in 2010.
The companys latest offering saw the participation of CIMB Investment Bank and HSBC
Amanah Malaysia as joint principal advisors and joint lead arrangers. The banks were
also joint lead managers and joint bookrunners for the Sukuk, together with Maybank
Investment Bank.
According to MARC, which assigned a preliminary rating of AAAIS to the Sukuk program,
the papers also benefit from a letter of support from Celcom, which would ensure that
CTX maintains financial prudence.
MALAYSIA : AMMB Holdings harbors no plans to venture out of Malaysia
BANGLADESH : Zakat and Waqf funds should be injected into development projects,
says scholar
MALAYSIA : CIMB Group Holdings announces US$677.71 million in first half net
profit
UAE : Emirates Islamic Bank launches offering for new workers
PAKISTAN : Burj Bank launches countrys first Islamic debit card in collaboration
with MasterCard Worldwide
MALAYSIA : Alliance Financial Group reports lower first quarter results
MALAYSIA : Al-Hadharah Boustead REIT reports US$7.02 million in second quarter
net profit
UAE : New Takaful savings and investment offering from AMAN, FWU Global
Takaful Solutions and Emirates Money
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National Bank of Abu Dhabi Malaysia to bridge Middle East investments
Daily Cover
MALAYSIA: National Bank of Abu Dhabi (NBAD), which launched its Malaysian operations
under National Bank of Abu Dhabi Malaysia in July this year, aims to bridge investments
into the country from the Middle East and facilitate Malaysian business in Arab countries.
According to Leong See Meng, CEO of NBAD Malaysia, the bank poured in RM300 million
(US$96.73 million) to fund its operations, including for the establishment of at least five
branches in three-five years. He added that the banks long-term strategy is to have a
substantial amount of branches in the country, namely in its key business centers.
See Meng also said that ideally, the bank would set up 30 branches in the next 10 years,
leveraging Arab interest in Malaysia.
The bank aims to focus on wholesale banking products, such as working capital,
refinancing facilities and treasury products.
NBADs presence in Malaysia has brought excitement to the local banking scene, in a
market vying for Middle East investment, especially via Islamic finance. Although NBAD
Malaysia only has a commercial banking license, its parent bank operates NBAD Islamic
Banking in its home market.
Its establishment in Malaysia has also fuelled hope the bank will help attract more Middle
East names to the countrys Sukuk market, boosting its internationalization.
According to data from Dealogic, in the last 12 months to the 23rd August, NBAD has
managed six Sukuk deals worth US$797 million. It is also ranked 26th in Dealogics
league table for top mandated lead arrangers for Islamic financings, arranging two deals
worth US$175 million; while it is also ranked the eighth-top bookrunner for Islamic
financing, for two transactions worth US$211 million.
UAE : Emirates Banks Association said to appeal for postponement of central
bank deadline for government exposure limit
MALAYSIA : Government receives US$97.5 million-worth of bids for Islamic
treasury bills
MALAYSIA : Offshoreworks Capital fails to make profit payments for US$16.15
million Sukuk
MALAYSIA : Maxis unit to make partial redemption of US$3.32 billion Sukuk
outstanding
NIGERIA : Lotus Islamic Index leads trading on Nigerian Stock Exchange
MALAYSIA : RAM downgrades ratings on MRCB Southern Links Sukuk
MALAYSIA : RAM monitors developments at Affin Holdings and Bank Muamalat
Malaysia
60
Bursa Malaysia introduces rules on listing of exchange traded bonds and Sukuk
Daily Cover
MALAYSIA: Bursa Malaysia, the stock exchange operator, introduced rules for the listing
of exchange traded bonds and Sukuk (ETBS) on the 26th September 2012, following its
issuance of a consultation paper seeking feedback on the new products in May.
The exchange is now working with issuers for the potential listing and trading of their
Sukuk and bonds.
The new rules have been published just after Securities Commission Malaysia launched
its framework for ETBS early this month, allowing retail bonds and Sukuk to be issued
and traded on the stock exchange or over-the-counter through appointed banks.
The introduction of ETBS to the Malaysian market is aimed at attracting retail investor
participation in bond and Sukuk sales, while increasing the range of tradable products on
Bursa Malaysia. We are creating an environment that provides something for every
type of investor, said Tajuddin Atan, CEO of Bursa Malaysia.
In addition, Sukuk and bond issuers will be able to benefit from greater flexibility in their
fundraising exercises. The initiative is also a project under the governments economic
transformation program.
In its introductory phase, investors will be allowed to invest in Sukuk and bonds sold or
guaranteed by the Malaysian government, with investments in debt issuances from
public listed companies and banks likely to be introduced next year. The authorities are
expected to issue rules on investing in corporate debt issuances in January 2013.
UK : Greenergy Biofuels receives Murabahah financing facility from banks
OMAN : Domestic Islamic banking assets projected to exceed US$5.18 billion,
says Alizz Islamic Bank
UK : Sterling UK Real Estate Fund completes third property acquisition
MALAYSIA : AmIslamic Funds Management launches AmGlobal Sukuk1 fund
OMAN : Fitch affirms long-term issuer default rating on BankMuscat
BAHRAIN : Al Baraka Islamic Bank appoints Abdul Rahman Abdullah Mohammed
to its board of directors
61
OMAN
Promising outlook for sultanates fledgling Islamic finance industry
Daily Cover
MALAYSIA: The sultanate may have been slow to jump on the Islamic finance
bandwagon, but the promising potential of its fledgling Shariah compliant finance industry
has caught the eye of the likes of investment giants such as Abu Dhabis sovereign
wealth fund, Aabar Investments.
The sovereign fund, which in June last year acquired a 24.9% stake in Malaysias RHB
Capital, announced plans to invest heavily in Al Izz Islamic Bank, one of Omans two
pioneering fully-fledged Islamic banks.
Aabar is a cornerstone investor in Al Izz; for which the fund is a joint promoter with
local trading company, Huriah Company and Abu Dhabi-based Tasameem Real Estate
Company.
According to Mohamed Badawy Al-Husseiny, CEO of Aabar, the funds investment in Al
Izz will be among its largest in the Middle East.
It builds on our significant investments in financial services in key European and Asian
markets and affirms our confidence in the outlook for Oman and wider Gulf financial
services markets, he noted.
Meanwhile, Bank Nizwa, the sultanates other pioneer Islamic bank, sees a bright outlook
in pulling Omani funds that have been deposited into Islamic banks outside the sultanate
back to their home market. Dr Jamil El Jaroudi, its CEO, estimates that Omani funds
held in Islamic banks in markets such as Bahrain and the UAE amount to between
OMR3.5-5 billion (US$9.1-12.9 billion).
The sultanates conventional lenders, such as National Bank of Oman and BankMuscat,
are also joining in the Islamic banking push, with all eyes now on BankMuscats
performance in the Shariah compliant space, given its leading position in conventional
market.
While Oman has lagged behind in offering Islamic financial services, the sultanate is set
to be the market to watch going forward, as its local players appear determined to play
catch-up with regional neighbors.
UAE : Dubai International Financial Center Authority announces restructuring
SAUDI ARABIA : Kingdoms debt sales for infrastructure spending beneficial to
government and investors, say analysts
UAE : Dubai Islamic Bank reports US$84.4 million in second quarter net
profit
MALAYSIA : Public Mutual announces total gross distributions for funds
62
QATAR
Qatars US$4 billion sovereign Sukuk sets new benchmark
Daily Cover
QATAR: The country achieved what no other sovereign has with its US$4 billion Sukuk
sale; offering a record low profit rate of 2.1% for a five-year tranche and 3.24% for a
10-year tranche.
The sale is also the largest US dollar-denominated Sukuk issuance to-date. The tranches
were each US$2 billion in size, with the five-year portion yielding 115 basis points (bps)
over midswaps and the 10-year tranche priced at 155 bps over midswaps. In
comparison, the average yield of the 12 constituents of the HSBC/Nasdaq Dubai
Sovereign US Dollar Sukuk Index is 3.56%.
Immense demand for investment-grade debt from the Gulf saw Qatars sale book
US$24 billion-worth of orders; as investors scramble for safe haven assets amid the
ongoing global financial crisis.
Pricing on the Sukuk is also cheaper than that of Qatars last debt sale; comprising a
US$5 billion conventional bond sold in November 2011. The transaction yielded 3.18%
for papers maturing in January 2017 and 5.83% for a tranche due in January 2042.
It is also worth noting that Qatars five-year Sukuk tranche was priced over 100 bps
lower than Malaysias 3.93% sovereign Sukuk.
Barwa Bank, Deutsche Bank, HSBC, Standard Chartered and QInvest were mandated
arrangers for the transaction, proceeds of which will be used towards funding state-
owned development projects.
Qatars is the latest sovereign to come forward with a Sukuk this year, as issuers race
to take advantage of borrowing costs that are nearing record lows; pushing global
Sukuk market sales to US$21.5 billion in the year-to-date.
UAE : Emaar Properties eyes US$500 million Sukuk sale
MALAYSIA : Syarikat Prasarana Negara plans to sell US$1.26 billion-worth of Sukuk
PAKISTAN : Masood Textile Mills secures US$493,945 conventional and Islamic
financing facility
GLOBAL : Tap into green Sukuk, says DIFC
SAUDI ARABIA : New mortgage law to spur Islamic funding, says National Commercial
Bank
UAE : Pulling out of Dubai Group debt talks may be a tactical move for
banks, says EFG-Hermes
UAE : Tamweels second quarter net profit plunges 33% year-on-year
SAUDI ARABIA : Saudi banks report second quarter financial results
63
QATAR : Qatar Islamic Bank reports 8.7% year-on-year decline in second quarter
net profit
Qatar banking industry in the spotlight
Daily Cover
QATAR: As the domestic banking industry endures the shakeup from the segregation
of Islamic and conventional banking businesses and the impending setup of an Islamic
megabank in the country, analysts remain largely positive on the outlook for the local
financial market.
Our outlook for Qatars banking system is stable. The outlook reflects (i) Qatars strong
macro environment and high public spending levels that will continue to fuel bank lending
growth; (ii) the banks solid capitalization levels; (iii) their stable funding base and good
liquidity buffers; and (iv) strong earnings, said Moodys in a report on the 12th April.
The ratings agency also noted that the Qatar Central Banks directive, barring conventional
banks from offering Islamic banking services, will enable the countrys four Islamic
institutions Barwa Bank, Masraf Al Rayan, Qatar Islamic Bank (QIB) and Qatar
International Islamic Bank, which managed around 22% of the local financing market in
December 2011 to expand their market share and boost revenue growth over the
medium-term.
Meanwhile, it expects the overall profitability of the domestic banking system to remain
at comfortable levels; supported by higher lending, low provisioning requirements and
banks low cost bases.
QIB has been among the first to report results for the first quarter of 2012, with a
strong showing that could point to similar growth by its Islamic banking counterparts.
During the period, it posted a net profit of QAR388 million (US$106.56 million), 20.9%
higher than a year earlier; with especially strong growth in fee income; which almost
doubled to QAR99.6 million (US$27.35 million).
Standard & Poors Ratings Services assigned its A- long-term and A-2 short-term
counterparty credit ratings to QIB, with a stable outlook on the long-term rating. The
stable outlook reflects our expectation that QIB will remain an important player in Qatar,
with no significant change in its business and financial profiles over the next 12-24
months. We nevertheless anticipate that QIBs capital and earnings will remain strong,
as we project that QIBs risk-adjusted capital ratio before adjustments will remain between
13.5% and 14% in the next 18-24 months, it said.
INDONESIA : Citra Marga Nusaphala Persada plans to issue five-year Sukuk in the
first half of 2012
INDONESIA : Declining Sukuk yields spur Islamic bond sales
MALAYSIA : Maybank Investment Bank increases stake in Jeddah-based Anfaal
Capital
UAE : Yields on Nakheel Sukuk decline as investors regain confidence in
Dubai economy
64
SAUDI ARABIA : Arab National Bank reports Q1 financial results
KUWAIT : Kuwait Stock Exchange to unveil Nasdaq-backed trading system on
the 13th May 2012
GLOBAL : IDB calls for more Islamic investments in the Turkish Republic of
Northern Cyprus
BRUNEI : Local Islamic banking market share expected to grow up to 60%
within the next five years
MALAYSIA : Microlink Solutions sees first Indonesian contract for Islamic banking
solution by the end of this year
INDONESIA : Bank Syariah Bukopin targeting up to 45% growth in third party funds
MALAYSIA : Johor Corporation to issue US$976.26 million-worth of Sukuk
INDONESIA : BNI Life Insurance seeks to increase premium revenue to US$207
million by the end of this year
MALAYSIA : MARC affirms its ratings on Gas Malaysias US$163 million Murabahah
medium-term notes program at AAAID
QATAR : S&P assigns A-/A-2 long- and short-term counterparty credit ratings
to Qatar Islamic Bank
MALAYSIA : AMMB Holdings names two new senior appointments
Islamic finance gains further traction in Qatar
Daily Cover
QATAR: Islamic finance is continuing to gather rapid pace in the kingdom, six months
after the official closure of the Islamic windows of conventional banks.
Barwa Bank, one of just four Islamic banks remaining in Qatar, said it plans to issue a
Sukuk by next year and is targeting to list its shares over the longer term. Its expansion
plans follow the acquisition of the conventional International Bank of Qatar (IBQ)s
Islamic retail banking business, in line with the Qatar Central Banks ban on Islamic
services by non-Shariah compliant banks.
Barwa, which is in discussions with potential issuers to manage debt sales, projects
more dual-tranche, Shariah compliant issuances across the Middle East, Steve Troop,
its CEO, is quoted as saying.
The bank is also positioning itself as a niche player in the market for private banking;
and sees real opportunities in terms of Islamic wealth management, he said.
Meanwhile, Bawabat Al-Shamal Real Estate Company just signed a QAR3.7 billion
(US$1.02 billion) Islamic and conventional financing facility to develop Doha Festival
City, in a sign that the Islamic finance industry is gaining further traction in the kingdom.
According to law firm Clifford Chance, which advised Barwa and other financiers comprising
Ahli Bank, Al Khalij Commercial Bank, Commercial Bank of Qatar, Doha Bank, IBQ,
65
Qatar Islamic Bank and Qatar National Bank, the transaction is the largest private sector
financing in Qatar.
Bawabat is owned by Al Futtaim Real Estate Services, QIB, Aqar Real Estate Company
and a private Qatari Investor.
QInvest acted as financial advisor on the deal.
THAILAND : Islamic Bank of Thailand plans to raise additional capital to fund growth
OMAN : Islamic finance law to be finalized by the end of this year
UAE : Tamweels Sukuk yield reaches record high
THAILAND : Islamic Bank of Thailand seeks additional US$25.02 million in soft
financing from central bank
GLOBAL : Opportunities for Malaysian investments in Islamic banking in Republic
of Guinea
GLOBAL : More internationalization in next stage of Islamic capital market
growth, says Securities Commission Malaysia
OMAN : Bank Sohar signs on for Path Solutions iMal software
UAE : Emirates Islamic Bank in home financing deal with Manazil Real Estate
SAUDI ARABIA : Alkhair Capital plans two fund launches this year
UK : Oasis Crescent launches in London
OMAN : Capital Market Authority close to finalizing Takaful legislation
GLOBAL : Al Tamimi & Company announces five senior appointments
GLOBAL : Citigroup names Jonathan Larsen as the new global head of retail
banking
66
SAUDI ARABIA
GACA launches landmark sovereign and kingdoms largest Sukuk
Daily Cover
SAUDI ARABIA: The government has launched its debut sovereign Sukuk via the sale
of the General Authority of Civil Aviations (GACA) 10-year Sukuk. The offering comes
amid fierce optimism in the Islamic bond market and follows the sale of the worlds
largest Sukuk offering by Malaysias Projek Lebuhraya Usahasama (PLUS) on the
12thJanuary.
GACAs Sukuk, guaranteed by Saudi Arabias ministry of finance, was launched on the
15thJanuary and will be sold in denominations of SAR1 million (US$266,667); as the
authority aims to raise SAR15 billion (US$4 billion). In addition to representing the
kingdoms first ever sovereign Sukuk, the issuance is also set to make up the largest
issuance from Saudi to-date.
The papers first settlement date is expected on the 18thJanuary, with the transaction
likely to be priced between 2.75-3%.
The landmark sale comes smack in the middle of a big month for Sukuk sales, getting
2012 off to a busy start and leaving market players optimistic on the year going forward.
Apart from PLUS RM30.6 billion (US$9.67 billion) issuance in the second week of January;
Emirates Islamic Bank and First Gulf Bank each sold benchmark-sized papers, while
Tamweel sold a US$300 million offering.
According to a report from Kuwait Finance House Research, global Sukuk sales crossed
US$85 billion last year, up by more than 90% in 2010; in a market driven by US$59
billion-worth of sovereign issuances.
Meanwhile, the GACA Sukuk is seen as significant to the growth of Saudis Sukuk market;
setting a benchmark for more sovereign and corporate Islamic bond issuances from the
kingdom this year. Data from Dealogic shows that in the past 12 months, Saudi Sukuk
issuances amounted to just US$1.5 billion, with Saudi riyal-denominated Sukuk totaling
US$700 million in the same period.
UAE : Economic Zones World could sell UK warehouse property developer
to help repay Jafza Sukuk
UAE : Nakheel could struggle to raise debt without state pledge
UAE : Central bank may cap Islamic credit card fees
KUWAIT : Warba Bank plans to commence retail operations in the first quarter
of 2012
UAE : Sukuk repayment uncertainty hits Dana Gas shares
GLOBAL : 2012 Sukuk sales from MENA to exceed 2011, says Morgan Stanley
INDONESIA : Islamic banking profits reach US$164.13 million in January-November
2011
67
BANGLADESH : Government approves US$2 billion ITFC financing for Bangladesh
Petroleum Corporation
BAHRAIN : Gulf Holding Company and Al Hamed Construction and Development
Company to resume Villamar project
MALAYSIA : Yields for countrys five-year Sukuk drops to lowest level in almost
three years
PAKISTAN : Burj Bank plans to expand branch network to 75 by the end of 2012
KUWAIT : Potential for Kuwait to become an Islamic finance hub
PAKISTAN : Farz Foundation and Highly Keen-The HR Institute ink MoU on Shariah
compliant human resource manual for Islamic microfinance firms
PAKISTAN : Burj Bank and PTL Trakker ink MoU for the provision of automobile
tracking services
BAHRAIN : BMI Bank and Medgulf Allianz Takaful launch two bancassurance
products
UAE : Fitch assigns final long-term rating of A+ to First Gulf Banks US$500
million trust certificates
68
SINGAPORE
Sabana prices convertible Sukuk worth up to US$6.42 million
Daily Cover
SINGAPORE: Sabana Real Estate Investment Management (Sabana), the manager of
Sabana Shariah Compliant Industrial Real Estate Investment Trust (Sabana Shariah
Compliant REIT), announced on the 6th September that it priced a proposed issuance
of convertible Sukuk worth up to SG$8 million (US$6.42 million) at a profit rate of
4.5%.
Pricing for the planned issuance was announced after Sabana disclosed on the same
day its intention to issue the Sukuk, which will be convertible into units of Sabana
Shariah Compliant REIT. The five-year notes will be issued under Murabahah and Ijarah
principles and at an initial conversion rate of S$1.19 (96 US cents) per unit.
The number of new conversion units to be allotted and issued, pursuant to the full
conversion of the Sukuk, is 67.04 million, representing 10.5% of the REITs existing
units in issue.
SG$61 million (US$48.98 million) or 76.2% of the gross proceeds from the issuances
will be used towards the acquisition of the 23 Serangoon North Avenue 5 property in
Singapore, while SG$19 million (US$15.25 million) of the proceeds will be used for
other general corporate purposes and to pay the fees and expenses related to the
Sukuk issuance and the acquisition of the property.
Sabana announced the acquisition of the Serangoon North property last month, noting that
the acquisition will be injected into Sabana Shariah Compliant REITs existing portfolio of 20
properties. The acquisition is expected to be completed in the fourth quarter of this year.
Meanwhile, it has appointed Morgan Stanley Asia (Singapore) as the sole bookrunner
and lead manager for the issuance. The closing date for the issue is expected to fall by
the 24th September this year.
MALAYSIA : DRB-HICOM likely to remain as a shareholder of Bank Muamalat
Malaysia
MALAYSIA : Incentives for industry on Islamic banks Budget 2013 wish list
MALAYSIA : Bank Muamalat Malaysia announces first quarter net profit of US$14.49
million
GLOBAL : Increase in global Dow Jones Islamic Indexes
MALAYSIA : AIA AFG Takaful launches scheme for critical illness
MALAYSIA : Takaful Ikhlas collaborates with LAT Holdings on bereavement Takaful
plan for non-Muslims
MALAYSIA : RAM assigns long-term ratings to senior notes under HSBC Amanah
Malaysias proposed US$961.62 million multi-currency Sukuk program
MALAYSIA : RAM places Malakoff Corporations Sukuk on rating watch
69
SOUTH AFRICA
FNB Islamic Finance in the spotlight
Daily Cover
SOUTH AFRICA: FNB Islamic Finance, the Shariah compliant window of First National
Bank, has found itself in the spotlight after its Shariah board announced its resignation
on the 5thJuly.
In a press release detailing its role in the development of FNB Islamic Finance, Ebrahim
Desai, the ex-chairman of the banks Shariah board, said that: The bank has always
appreciated our services despite our more principled and precautionary approach and
looked forward to our continued engagement until this last moment, while noting the
board did not accept any remuneration for their services during their tenure at the bank.
However, within the recent past, a change of guard within the bank took place. Under
the new non-Muslim senior executives we discerned a change of attitude and lack of
drive to be committed to the more conservative approach we adhere to. In order to
steer the ship into clearer waters, a meeting was held with the Shariah board, the
banks senior executives and prominent businessmen from the Muslim community.
Concerns were ironed out and a new pathway chalked out going forward, he said.
Ebrahim further said that: It is with utter disappointment that we subsequently learnt
that we were clearly lied to by these executives of the bank at the meeting. Our complaint
thereafter to more senior executives fell on deaf ears. Independent clients of FNB, who
were part of the discussions and correspondences, have expressed their shocking dismay
at the banks conduct.
Following this, the Shariah board resigned, with Ebrahim adding that: Those who wish
to deal with FNB Islamic Finance may do so on the clear understanding that we cannot
vouch for their products.
FNB Islamic Finance quickly issued a statement of its own on the 6th July, reiterating its
commitment to Islamic banking and reaffirming the Shariah compliance of its existing
products and services. It also announced the appointment of a Shariah supervisory
compliance oversight committee, comprising scholars Shaykh Mahomed Shoaib Omar
and Zaid Haspatel. The scholars will monitor and ensure the ongoing compliance of our
products and operations going forward, while we reconstitute a permanent Shariah
board, said Amman Muhammad, the newly appointed strategic head of FNB Islamic
Finance.
In a later response to Islamic Finance news, the bank said that: The [Shariah] board
sent an email communication to FNB on the 21st June stating that they had suspended
their services. We accepted their suspension and advice of a breakdown in the relationship
and accordingly terminated their services.
The bank also announced the appointment of Shaheen Suliman as its new chief financial
officer and Yusuf Moola as an investment specialist. These key appointments further
reiterate FNBs commitment to bolstering Islamic Finances capabilities, particularly in
70
exploring new markets and a range of products that adhere to Shariah law, said Amman,
who added that the team will be crucial in realizing the divisions African expansion
objectives and widening its products.
Todays IFN Alerts
Qatar : Kingdom eyes dual-tranche Sukuk
UAE : Commerzbank, The Royal Bank of Scotland and Standard Bank walk
out on Dubai Groups US$10 billion debt restructuring talks
SAUDI ARABIA : Dar Al-Arkan Real Estate Development Company to repay US$1 billion
Sukuk at maturity
MALAYSIA : DanaInfra Nasional begins marketing US$745.25 million Sukuk
GLOBAL : Gulf Sukuk market to exceed US1$100 billion this year, says National
Commercial Bank
GLOBAL : Members of West African Economic and Monetary Union to introduce
Islamic banking by year-end
UAE : First Gulf Bank launches Shariah compliant deposit scheme
OMAN : Bank Sohar signs agreement with Path Solutions
UK : Gatehouse Bank acquires commercial complex in Scotland for US$92.7
million
GLOBAL : Dow Jones Indexes and S&P Indices complete merger
MALAYSIA : Risk-based capital framework to benefit domestic insurance sector,
say industry experts
PAKISTAN : Securities & Exchange Commission of Pakistan to launch new Takaful
legislation
FRANCE : Swiss Life launches Shariah compliant multi-fund insurance contract
QATAR : Moodys assigns provisional long-term rating to Qatars proposed
Sukuk
KUWAIT : AM Best affirms financial strength ratings on Al Fajer Retakaful Insurance
Company
71
Legislation key for debut sovereign Sukuk
Daily Cover
SOUTH AFRICA: The government is expected to walk the walk with its plan to issue
the countrys debut sovereign Sukuk, but it will need to prepare the appropriate ground
rules for Islamic bonds to ensure a successful issuance.The key thing is to create the
right legislative framework for both an issue for the republic, but also one which to use
the phrase coined by the UK Treasury in respect of its own plans is instantly replicable
and capable of use by the (South Africas) state-owned entities. I assume efforts will
focus on an Ijarah structure, commented David Testa, the managing director of financial
consultancy firm David Testa Consultancy.In a response to Islamic Finance news, Testa,
who has worked as an Islamic finance consultant for South Africas Standard Bank and
was also previously CEO of UKs Gatehouse Bank, said that apart from diversifying
government funding, the prospective sovereign Sukuk is also seen as a means to set a
precedent for other South African entities keen to raise funds from new sources.Several
state-owned entities such as (energy and chemicals company) Sasol and (electricity
producer) Eskom Holdings have already been approached by leading Islamic institutions
pitching them the idea of Sukuk issues. The precedent of a sovereign benchmark issue
(together with relevant legislation amendments) will help develop those ideas, he
said.Meanwhile, the countrys planned sovereign Sukuk is also seen as key in promoting
the growth of Islamic finance in Africa. I have thought for some time that Africa is now
the most exciting prospect for Islamic finance generally. With South Africa now joining
the party, it is clear that the prospects for Islamic finance across the whole of the
African continent are very bright, said Testa.
INDONESIA : Central bank to issue new law on mortgage products for Islamic
banks at the end of January 2012
UAE : Nakheel seeks to issue second tranche of US$1.03 billion Sukuk in
the first half of 2012
UAE : Yield for Dana Gas Sukuk reaches record on repayment worries
INDONESIA : New land acquisition law will open doors to sovereign debt rating
upgrade, says Moodys
INDONESIA : Central bank says no to gold pawn broking for three Islamic banks
SAUDI ARABIA : S&P affirms Riyad Banks A+/A-1 rating
KUWAIT : Fitch affirms Al Ahli Bank of Kuwaits A- long-term issuer default
rating
SAUDI ARABIA : Mohammad Ali Taskhiri joins IDBs Shariah board
72
TURKEY
Participation banks shy away from Treasurys revenue-linked bonds
Daily Cover
TURKEY: The countrys Islamic, or participation, banks have reportedly shied away
from the Treasurys auction of revenue index bonds on concerns that the papers are
not Shariah compliant.
The banks decision is said to have been fuelled by comments from local Shariah scholar,
Professor Hayrettin Karaman, who noted that the structure of revenue-linked bonds
does not comply to Shariah as the revenue is based on interest.
Turkeys Treasury last issued revenue index bonds on the 19th February this year, with
a total issuance amount of TRY109.2 million (US$61.3 million). Coupon payments for
the instruments are linked to revenue from state-owned enterprises, the Turkish
Petroleum Corporation, the State Supply Office, the State Airport Authority; and the
Coastal Safety Administration.
As a result of the doubt cast over the revenue-linked bonds, the countrys participation
banks, comprising Kuveyt Trk, Albaraka Turk, Trkiye Finans and Bank Asya now
reportedly await to invest in Sukuk instead. Turkey, which issued legislative changes in
2011 to allow for tax neutrality measures for Sukuk Ijarah, has yet to issue a sovereign
Islamic bond. Kuveyt Trk was the first Turkish issuer to offer a Sukuk in 2010; and was
also the first to sell papers under the new Sukuk Ijarah law last year.
Osman Akyz, the secretary general of the Participation Banks Association of Turkey, is
also quoted as saying that the banks are looking to invest in Sukuk by this August.
According to the data from the association, as of March this year, three of the countrys
participation banks invested in TRY984 million (US$553 million)-worth of revenue index
bonds.
SAUDI ARABIA : Saudi Aramco reportedly plans US$2 billion Sukuk sale in the third
quarter of 2012
GLOBAL : LUKOIL Oil Company receives US$500 million from six banks including
Dubai Islamic Bank
KAZAKHSTAN : Development Bank of Kazakhstan to set up US$500 million Sukuk
Murabahah program
UAE : Federal National Council member to request vote on establishment
of Shariah authority for Islamic banks
THAILAND : Islamic Bank of Thailand to issue US$162 million Sukuk by May this
year
UAE : Alif Investments reportedly to launch IPO next year
SUDAN : Bank of Khartoum to establish new Islamic microfinance institution,
IRADA
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MOROCCO : KFH eyes investment opportunities in Morocco
UAE : DFSA delists DIB Sukuk Company from official list of securities
UAE : HSBC Bank Middle East to hold on to most staff following buyout of
Lloyds UAE
KENYA : Gulf African Bank reports 230% increase in 2011 profit before tax
UK : Ethical Asset Management launches investment Sukuk fund
MALAYSIA : Tremendous potential for local Takaful industry to grow, says OSK
Research
MALAYSIA : AIA-AFG Takaful records 6,000 cases in the first 10 months of 2011
MALAYSIA : AMMB Holdings appoints Ashok Ramamurthy as new group managing
director
QATAR : Bain & Company names Qasim M Qasim as senior advisor
Albaraka Turk secures US$450 million dual-currency Murabahah syndicated
facility
Daily Cover
TURKEY: Albaraka Turk, the Turkish subsidiary of Al Baraka Banking Group, secured a
US$450 million dual-currency Murabahah syndicated facility with 32 banks as it embarks
on a fundraising spree that could see it raise another US$250 million via a Sukuk sale by
the end of this year.
The syndicated facility, arranged by banks from 16 countries, comprises a US$293.2
million tranche and a EUR124.5 million (US$163.69 million) tranche with one-year
maturities. Albaraka Turk will pay a profit margin of three-month Libor/Euribor plus 200
basis points for the facility.
Bank Islam Brunei Darussalam and Al Hilal Bank were mandated lead arrangers for the
transaction, which also saw the participation of ABC Islamic Bank, Emirates NBD, Noor
Islamic Bank and Standard Chartered Bank.
The funds will be used by Albaraka Turk to diversify its funding sources and expand in its
local market.
Adnan Ahmed Yousif, the chairman of Albaraka Turks board as well as the president and
chief executive of Al Baraka Banking Group, was earlier quoted as saying that the
Turkish bank was looking to raise up to US$750 million this year, with US$400-500
million of that comprising the syndicated facility; and US$250 million via a seven-year
Sukuk.
The bank has been talking up a potential Sukuk offering since 2011, with its would-be
debut sale initially targeted for the end of that year. However, the sale was put on hold
due to expensive pricing for the deal; reportedly at around 6.5%. The planned size of its
issuance has also varied from US$200-500 million.
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JORDAN : Senate approves draft Sukuk law
OMAN : Launch of Islamic banking regulations imminent
QATAR : Shareholders approve Qatar Islamic Banks establishment of US$1.5
billion Sukuk program
GLOBAL : Qatar First Investment Bank acquires two properties in central London
MALAYSIA : BIMB Holdings speculated to take over Dubai Groups stake in Bank
Islam Malaysia
BAHRAIN : Kuwait Finance House (Bahrain) collaborates with Tamkeen for SME
financing offering
GLOBAL : HSBC Amanah Malaysia sees uptrend in hybrid Sukuk issuances
MALAYSIA : Malaysian Deposit Insurance Corporation expects risk profiles of
insurers and Takaful operators to improve under differential levy
system
UAE : Dar Al Takaful targets 40% annual growth in the next two years
MALAYSIA : MARC maintains AAAIS(fg) rating on Antara Steel Mills US$98.67
million Sukuk
MALAYSIA : MARC affirms ratings on ANIHs US$822.29 million Sukuk Musharakah
program
KENYA : Gulf African Bank appoints Jamal Al-Hazeem as chairman
UK : Foot Anstey appoints Zahir Nayani as solicitor in Islamic finance team
Government attracts over US$8 billion in orders for debut sovereign Sukuk sale
Daily Cover
TURKEY: The government launched its much-anticipated debut sovereign Sukuk on
the 18th September, raising US$1.5 billion in an offering that attracted more than US$8
billion-worth of orders.
The Sukuk, which has a tenor of five-and-a-half years, offers a profit rate of 2.8%,
equivalent to just 185 basis points over mid-swaps.
The landmark sale follows the governments announcement on the 5th September of
its appointment of Citigroup, HSBC and Liquidity Management House for Investment to
arrange the US dollar-denominated notes, with roadshows for the issuance held in Asia
and the Middle East.
The maiden offering also marks a turning point in Turkeys Islamic finance market, which,
despite rapid growth, has been on an uphill journey towards the issuance of the countrys
first sovereign Sukuk, which was initially announced in 2003.
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Jason Kabel, the head of fixed income at the Bank of London and The Middle East
(BLME), noted that: It is encouraging that a country outside of Southeast Asia or the
GCC is issuing a Sukuk of this size in US dollars. The Sukuk was significantly oversubscribed,
with the book size closing at over US$8 billion despite being sub-investment grade and
offering a profit rate of approximately 2.8%.
He added that the strong interest in the Sukuk demonstrates huge global demand for
US dollar-denominated Islamic debt. We expect to see more governments and
institutions take advantage of this demand over the last quarter of 2012, he said.
The sovereign issuance comes after the first Turkish corporate Sukuk was issued just in
2010, by Kuveyt Trk Participation Bank. The issuance, worth US$100 million, actually
preceded Turkeys implementation of tax neutrality measures for Sukuk Ijarah, adopted
by parliament in February 2011.
With corporate Sukuk from Turkey remaining few and far between after Kuveyt Trks
sale, the countrys debut sovereign Sukuk may just provide a much-needed spark to
spur the further development of the local Sukuk market.
MALAYSIA : Malaysian Airline System issues second tranche of US$817.48 million
perpetual junior Sukuk
GLOBAL : Scholar calls for greater ties between AAOIFI and IFSB
GLOBAL : World Bank sees double-digit growth of Islamic finance assets up to
2015
GLOBAL : Regulators and standard-setting bodies call for greater oversight,
transparency and disclosure in Islamic capital markets
MALAYSIA : AIBIM sees 20% year-on-year growth in domestic issuance of
corporate Sukuk
MALAYSIA : OCBC Al-Amin Bank introduces unsecured term financing for business
customers
GLOBAL : Thomson Reuters unveils Global Sukuk Index
BAHRAIN : Bank Alkhair appoints Khalil Nooruddin as managing director and CEOs
76
UAE
Healthy markets and friends in high places to allay Dubai debt fears?
Daily Cover
UAE: There has been a prevailing gloom hanging over Dubais debt obligations due this
year; but with debt markets off to a good start in 2012, prospects for their repayment
now seem better than ever.
On top of this, banks such as HSBC, which has made a name for itself managing
transactions in the Middle East, have come out to show their continued support to
Dubai perhaps in a bid to be first in line for business should expected refinancings
come through.
Were not concerned with regards to Dubais ability to meet its debt obligations; thats
not only in the medium-term but certainly in the context of this year, Paul Skelton, the
regional co-head of global banking, Middle East North Africa, at HSBC was quoted as
saying.
With an estimated US$3.8 billion-worth of debt maturing this year, including Sukuk from
at least three government-related entities, markets have been jittery on prospects of
restructuring. However, market players have turned optimistic, looking towards a
refinancing of the debt instead.
According to Skelton, there will be more refinancing of maturities this year compared to
last; as there is still an ability for the debtors to refinance as and when required.
HSBC also believes that international banks appetite to refinance the debt will not be
impacted by the euro zone crisis.
There is sufficient liquidity and sufficient ways at the borrowers disposal to get things
done. International banks are still here and will continue to support Dubai, said Skelton.
With the current hive of activity in the Sukuk markets pointing to a positive 2012 and
Dubai having supporters in high places, it doesnt look like the emirate will have much to
worry about when its debt comes due this year.
INDONESIA : Government eyes US$223.59 million project-based Sukuk in the first
half of 2012
UAE : Majid al Futtaim to meet investors for debut Sukuk sale
INDONESIA : Bank Maybank Syariah Indonesia provides US$11.1 million financing
to Bess Finance
INDONESIA : Islamic banking assets almost double year-on-year in 2011
TURKEY : Albaraka Trk Katilim Bankasi to proceed with planned US$200 million
Sukuk sale
77
UAE banks in good market to refinance this year
Daily Cover
UAE: Banks in the UAE may opt to refinance more than US$3 billion-worth of bonds
due this year should pricing remain at current levels as they seek to extend the average
maturity of their debt, analysts said.
According to market data, bonds and Sukuk maturing this year from banks in the
emirates amount to US$3.49 billion.
Raj Madha, an analyst at Rasmala Investment Bank, was quoted as saying that the
amount due is a lot, especially to mature at the same time. However, recent Sukuk
sales show that deals can be done at the right price even in the current difficult
international environment, he said. This, in turn, could lead banks to choose to roll over
the debt and extend maturities.
Samer Mardini, the vice-president of fixed income and Islamic finance products at SJS
Markets in Dubai, noted that the current price for bond sales in the UAE market is
between 3-4%, suggesting that banks will not pay more than that to come to market
this year.
Meanwhile, speaking to Islamic Finance news, a Dubai-based analyst also said that the
outlook for profitability of banks in the Middle East, especially the UAE, remains mixed.
We expected a sharp improvement in provisioning but most banks guided negatively
on provisioning in the second half of 2011, showing not as big an improvement as
originally thought, he noted.
He added that the market still needs to see the end of the restructuring story on UAE
debt. Apart from that, banks in the region have not shown much momentum for growth,
although this may pick up in the second half of this year.
SAUDI ARABIA : General Authority for Civil Aviation to issue Sukuk on the 10th January
UAE : Emirates Islamic Bank sets initial pricing for Sukuk
PAKISTAN : Five banks in US$53 million syndicated Islamic financing facility for
Dawood Hercules Fertilizers
OMAN : Bank Sohar must prepare for arrival of Islamic banking
MALAYSIA : Takaful Ikhlas appointed main Takaful operator for Pahang state
government officers
MALAYSIA : AmBank Group and UKs Friends Life Group commence Family Takaful
business
MALAYSIA : Securities Commission Malaysia names three new executive directors
MALAYSIA : RHB Banking Group names Kellee Kam Chee Khiong as group managing
director
78
Absence of central Shariah banking supervisory body questioned
Daily Cover
UAE: The issue of the absence of a central Shariah banking supervisory body in the UAE
has been brought to the fore again with Obaid Humaid Al Tayyer, the emirates minister
of finance, questioned at the Federal National Council (FNC) level on the failure to set up
such an authority.
Ali Eissa Al Nuaimi, an appointed member for the emirate of Ajman at the FNC, the
federal authority of the UAE, has sent the finance minister a question on why a law
issued in 1985 for the establishment of a legal commissioning body to supervise Islamic
banks has yet to be implemented.
According to Article (5) of the UAEs Federal Law no- (6) of 1985, governing Islamic
banks, financial institutions and investment companies: A higher Shariah authority shall
be formed by a cabinet decision, incorporating Shariah, legal and banking personnel to
undertake higher supervision over Islamic banks, financial institutions and investment
companies to ensure legitimacy of their transactions according to the provisions of
Islamic Shariah law, and also to offer opinion on matters which these agencies may
come across while conducting their activities. The opinion of the said higher authority
shall be binding on the said agencies. This authority shall be attached to the Ministry of
Justice and Islamic Affairs.
Ali Eissa was quoted as saying that: The number of Islamic banks in the country through
past years has continued to increase. We want to know what has happened to this law
and the procedures that will be taken concerning it.
Unlike other thriving markets for Islamic finance such as Bahrain and Malaysia, whose
central banks have established a national Shariah board and a Shariah advisory council,
respectively, the Central Bank of the UAE has not set up a body of its own to govern the
emirates Islamic banking sector.
Scholars have long called for the creation of a central Shariah board; in an effort to
create neutrality, transparency and standardization.
It now remains to be seen what steps will be taken to address the absence of such a
board in the UAE.
INDONESIA : Finance ministrys debt management office to conduct 11 auctions of
rupiah-denominated conventional and Islamic bonds in the first quarter
of 2012
PAKISTAN : Pakistan International Airlines Corporation concludes US$100 million
Shariah compliant financing facility
UAE : Aldar repays US$1.18 billion convertible Sukuk on time
GLOBAL : Value of Sukuk from Arab region up 33% quarter-on-quarter in the
third quarter of 2011, says Arab Monetary Fund
MALAYSIA : Watershed quarter in store for Sukuk sales from PLUS Expressways
record issuance
79
SAUDI ARABIA : New laws vital to Makkah and Madinah real estate sector growth,
says Alpha1Estates International
UAE : Fitch assigns EIB Sukuk Companys US dollar fixed-rate senior
unsecured trust certificates A+ (exp) rating
MALAYSIA : MARC withdraws A+ID(cg) rating on KMCOB Capitals US$201 million
Murabahah medium-term notes program
MALAYSIA : BBN Development fully redeems US$27 million Murabahah commercial
papers/medium-term notes program
SAUDI ARABIA : Professor Dr Mohd Azmi Omar named as director general of Islamic
Research and Training Institute
Can EIB Sukuk beat global credit gloom?
Daily Cover
UAE: Emirates Islamic Bank (EIB), a unit of Emirates NBD (ENBD), has reportedly
mandated six banks for the potential sale of a benchmark-sized, US dollar-denominated
Sukuk.This follows news in December 2011 that ENBD decided to shelve its own plans
for a five-year Sukuk; with an Islamic bond sale being looked at by EIB instead.According
to reports, EIB has hired HSBC Holdings; Standard Chartered; Citigroup; The Royal
Bank of Scotland; Emirates NBD Capital and the National Bank of Abu Dhabi to manage
the possible issuance.The Sukuk is also set to be fully guaranteed by ENBD. A roadshow
for the potential sale is expected to begin in Malaysia on the 5th January, followed by
Singapore and Abu Dhabi, before concluding in the UK on the 10th January. An issuance
could follow the investor meetings, depending on market conditions.However, the outlook
for EIBs Sukuk sale could be weighed down by the prevailing weak economic and
financial markets. In a recent report, Malaysian rating agency MARC said that: The
economic and financial market theme going into 2012 will mainly center on the policies
to be drawn and implemented by the European leaders to end the debt crisis.The two
potential aspects on how the crisis can affect the rest of the world are via external trade
linkages and financial market confidence. MARC also noted that the effects of the crisis
appear more crucial on vulnerable market confidence.As what the global financial markets
experienced during the collapse of Lehman Brothers in 2008, even economies with solid
fundamentals (mostly emerging countries) witnessed funds flowing out aggressively at
the expense of local currencies. A more serious spillover effect from Europe increases
the risk of a shutdown of credit flows, it said.
SUDAN : Government launches Sukuk sale with 20% return
PAKISTAN : IDB gives nod to roll over countrys US$576 million debt for two
years
BANGLADESH : BPC to obtain US$2 billion-worth of financing from the IDB to purchase oil
GLOBAL : MENA IPOs down in 2011 as firms choose Sukuk to raise funds, says
Ernst & Young
UAE : Aldar Properties Sukuk rises to the highest level in eight months after
Abu Dhabi intervention
80
UAE : Yield for Dana Gas Sukuk rises the most in two weeks ahead of
planned board meeting
INDONESIA : Islamic banks must be vigilant with gold pawn broking business, says
central bank
QATAR : Al Khalij Commercial Bank shuts down Islamic branch
PAKISTAN : Sindh Enterprise Development Fund to consider Islamic financing for
project
GLOBAL : OIC to unveil Shariah compliant stock index
UAE : Christopher Aylward joins law firm Baker Botts as partner in Middle
East practice
UAE Sukuk market in for a resurgence?
Daily Cover
UAE: Investors will likely breathe a sigh of relief following Jebel Ali Free Zone (Jafza)s
announcement of early settlement of its AED7.5 billion (US$2 billion) Sukuk; as the UAE
market shows it has improved fundamentals since the 2008/2009 financial crisis.
Jafza will now repay its Sukuk at the end of this month, six months earlier than its
November maturity; marking the second early repayment by a Dubai government-
linked entity since Dubai Holdings Commercial Operations Group repaid a US$500 million
conventional bond in February this year, before its due date.
The market has lauded Dubais efforts at managing its debt, although a slew of maturities
loom in the coming years. One obligation which has dominated investors radar is Dana
Gas US$920 million Sukuk due in October this year. While not Dubai linked, the debt has
been under close watch as its approaching maturity could mark the first Sukuk
restructuring in the UAE.
Nonetheless, continued successful issuances, such as Dubai Islamic Banks recent US$500
million sale, suggest that investors remain hungry for Shariah compliant debt; leaving
room for more offerings going forward.
Another deal in the pipeline is a planned Sukuk from conglomerate Dubai Investments,
which seeks to raise AED1 billion (US$272 million) to fund the expansion of production
lines at its glass manufacturing factory.
With more companies successfully managing their debt obligations and reassuring
investors; and more issuers waiting in the wings to tap the market, the UAEs Sukuk
market may just be in for a resurgence.
GLOBAL : Gulf International Bank sets up US$1.11 billion ringgit-denominated
Sukuk program
MALAYSIA : Securities Commission Malaysia approves MAS Sukuk plan
SAUDI ARABIA : ICD subsidiary, Bidaya, to launch new financial firm
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INDONESIA : Indonesias Sukuk yields on the decline
OMAN : Bank Nizwas IPO attracts US$1.77 billion-worth of bids
MALAYSIA : AFFIN Holdings reports first quarter results
QATAR : HSBC Qatar launches MENA Sukuk and bond platform
BAHRAIN : Local Takaful profits down despite increased penetration in overall
insurance sector
GLOBAL : GCC Takaful market expected to grow faster than the rest of the
industry, says QFC Authority
UAE : Fajr Capital names Adib Abdullah Al-Zamil as new chairman
Noor Islamic Bank sacrifices cash for consent
Daily Cover
UAE: Dubai-based Noor Islamic Bank has limited all its business dealings with Iran, in
light of recent findings linking the bank as one of the largest lifelines to Irans foreign-
currency oil receipt returns. The bank has been accused by the US for ignoring American
and United Nations sanctions on Iran, with US authorities warning: Financial institutions
around the world should think hard about the risks of doing business with Iran.
The UN and western countries have imposed a series of economic sanctions on Iran
over the last five years, based on the perception that the country is actively developing
nuclear weapons which the Iranian government vehemently denies. Although it cannot
be confirmed if other UAE banks are currently under investigation for business dealings
with Iran, the National Bank of Abu Dhabi recently revealed that it is reducing banking
activities with the country amid mounting international sanctions. We dont have much
business with Iran. To the extent to which we do, we are reducing our activities with Iran
with the directions we are following, Michael Tomalin, the banks chief executive revealed.
It was recently reported that Noor Islamic Bank agreed in mid-December to close what
was said to be Irans single largest channel for repatriating foreign currency oil receipts.
It was estimated that the bank had facilitated as much as 60% of Irans foreign oil sales,
valued at US$80 billion, by late last year. A banking source familiar with the matter said
that the bank had been winding down its positions since December and suggested that
other local banks had also been dealing with Iran, although Noor Islamic appeared to
have carried the most volume.
The Central Bank of the UAE has recently been limiting letters of credit issued by the
UAE banks for Iranian businesses, while the worlds biggest electronic bank clearing
system, SWIFT, is also preparing to block the Iranian central bank from using its network
to transfer funds.
GLOBAL : Turkey, Dubai and Abu Dhabi ready for a joint index
QATAR : Doha Bank in discussions to become a fully fledged Islamic bank
INDONESIA : Government sets three-year retail Sukuk coupon at 6.25%
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UAE : Dubai Islamic Banks shares plummets further
BAHRAIN : Gulf Finance House posts profit of US$380,000 in 2011
UAE : First Gulf Bank plans to double paid-up capital through a bonus share
issue
UAE : Abu Dhabi National Takaful Company reports an increase of 16% in
net profit to US$6.6 million
MALAYSIA : TA Investment Management reports gross income distribution for
two of its Islamic funds
MALAYSIA : MAA Group to sell of its Indonesian subsidiary, MAA Life
MALAYSIA : Prudential BSN Takaful expects significant increase in Takaful market
share
BAHRAIN : Takaful International Companys 2011 insurance contributions up by
5%
MALAYSIA : Amanah Capital Group appoints Abas A Jalil as CEO
Emirates Islamic Bank and Dubai Bank move closer to merger
Daily Cover
UAE: Emirates Islamic Bank (EIB) and Dubai Bank, the two Shariah compliant subsidiaries
of Emirates NBD (ENBD), have announced the appointment of a unified top management
team and the establishment of an executive committee that will manage both banks.
The committee is said to be made up of representatives from the three banks.
The announcement comes on the back of speculation of a possible merger between the
two banks; seen as the next step necessary since ENBD took over the debt-laden
Dubai Bank from the Dubai government in October last year.
While ENBD has remained tight-lipped on a possible merger, the consolidation has
reportedly already been agreed upon by EIB and Dubai Bank; and is said to have been
endorsed by the Central Bank of the UAE.
According to reports, ENBD is currently fine-tuning the legalities of the merger. The bank
now needs official approvals from the UAE central bank, the finance ministry, as well as
the Dubai government if it wishes to go ahead with the merger.
The appointment of the integrated management team for EIB and Dubai Bank also
follows the recent appointment of Jamal Ghalaita, already CEO of EIB, as CEO of Dubai
Bank. Jamal is now said to also have been appointed head of the merged entity.
Latest available financial reports show both Islamic banks as loss-making. However, the
merger of the two will create a stronger balance sheet; seen as especially crucial in
turning around Dubai Bank.
83
EIBs total assets amounted to AED21.48 billion (US$5.85 billion) at the end of 2011,
while Dubai Bank last financial statement at the end of 2009 reported the banks total
assets at AED17.4 billion (US$4.75 billion).
UAE : Dubai Duty Free confirms mandates for US$1.1 billion multi-tranche
financing
TURKEY : Bank Asya to offer US$1.4 billion in SME financing
OMAN : Al Hilal Banking Services proposes the establishment of five Islamic
banking branches
MALAYSIA : Bank Muamalat Malaysia expects lower pre-tax profit for 2012 financial
year
BANGLADESH : ITFC provides Bangladesh Petroleum Corporation with US$855 million
in financing to buy oil
MALAYSIA : Bank Rakyat to expand pawn broking business to Brunei and Indonesia
SAUDI ARABIA : Dar Al-Arkan Real Estate Development Company settles periodic
coupon distribution for Daar Sukuk II
MALAYSIA : Maybank Islamic launches Maybank Islamic Ikhwan Visa Infinite Card-
i for the affluent
BAHRAIN : Capivest Islamic Investment Bank announces US$32.31 million net
profit for 2011
SAUDI ARABIA : Alinma Bank posts US$40 million in net income for first quarter of
2012
GLOBAL : Shortage of investment-grade Sukuk seen in Southeast Asia
BAHRAIN : CI affirms Investcorps long- and short-term ratings
MALAYSIA : MARC affirms AAAIS and AA+IS ratings on Tradewinds Plantation
Capitals Sukuk Ijarah
MALAYSIA : Ameer Ali Mohamed appointed as CEO and chief investment officer of
ASM Investment Services
GLOBAL : Dr Henry Azzam steps down as non-executive chairman of Deutsche
Banks MENA division
GLOBAL : Sandy Flockhart to step down as executive director of HSBC after 37
years
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UK
Shariah compliant investors to gain from UK property price upswing
Daily Cover
UK: For Shariah compliant investors, the UK has long represented an attractive location
to park their funds, providing opportunities mainly in property investments; and a new
report by real estate investment firm London Central Portfolio (LCP) shows why there
has been good reason to do so, especially in London.
According to LCP, property prices in England and Wales have risen 29% since the UK
made its Olympic bid in 2005, while prices in prime London central rose 112% and are
projected to rise further.
The second quarter of 2012 has seen property prices in prime London central continuing
to forge ahead, reaching record highs. At GBP1.3 million (US$2.05 million), they are
now five times higher than those in England and Wales, which stand at GBP238,638
(US$376,396). Prices in prime London central rose 10% in value over the year, pretty
much in line with long-term trends, said LCP, which is in the midst of acquiring properties
for a Shariah compliant investment portfolio.
Among Shariah compliant real estate investments in the UK include an acquisition in July
this year by Bahrains Tadhamon Capital and Apache Capital Partners, a London-based
Islamic real estate investment firm, of a student accommodation development in central
London. Additionally, Gatehouse Bank just announced its acquisition of a property in the
city of Leeds which houses retail chain Debenhams. According to Scott Nicol, the vice-
president of real estate at Gatehouse, major shopping centers in Leeds are continuing
to see high levels of demand; with the prime retail market remaining remarkably resilient.
UK properties have not just emerged as a prime investment for Shariah compliant
investors, but also presented an opportunity for Islamic financing. The Shard, one of
Londons newest skyscrapers, was financed with Islamic funds; as was the redevelopment
of the Chelsea Barracks.
Nonetheless, while Islamic funds seem to have found a safe haven in UK real estate investments,
investors should remain mindful of putting all their eggs in one basket; and ensure that their
portfolios remain diversified to avoid fallout from any property down cycles.
SAUDI ARABIA : Banks arrange US$750 million syndicated financing for Medina Airport
UAE : Nakheels US$1.03 billion Sukuk yields drop to all-time low
MALAYSIA : Malakoff Corporation to issue US$573.98 million Sukuk
GLOBAL : Merger on the cards for global law firms K&L Gates and Middletons
MALAYSIA : RAM assigns AA1 ratings on Kuala Lumpur Kepongs Sukuk
MALAYSIA : RAM reaffirms ratings on Danga Capitals US$3.19 billion Sukuk
program
KUWAIT : CI reaffirms ratings on National Industries Groups US$475 million
Sukuk at BBB
QATAR : Fitch affirms bbb ratings on Qatar Islamic Bank
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ISLAMIC FINANCE DEBUTS IN INDIA
Kausik Datta in Mumbai for Rediff.com, June 25, 2007
Srei Infrastructure Finance is set to be the first Indian company to go for Islamic
financing for over Rs 200 crore (Rs 2 billion) loan. The Kolkata-based company has
received the permission from the Reserve Bank of India for the proposed fund
collection.
Confirming the development, Sunil Kanoria, director, Srei Infrastructure Finance,
said the company would finalise the details of the instrument in a week. The instrument
is expected to have a five-and-a-half-year tenure.
HSBC is the banker for the fund collection.
Islamic financing does not permit the lender to charge interest against loan. Shariah
forbids any fixed return on capital, so charging or receiving interest is ruled out.
The financing or loan is provided on a risk-sharing basis, which is in compliance with
the Islamic laws. The returns on Shariah-compliant lending involve a share of profits
earned by a borrower.
Islamic financing is not allowed in some sectors such as wine, tobacco and
pornography.
Kanoria was reluctant to share the details of the instrument, but said that the the
cost of financing would be lower than any similar instrument in India. Industry
sources said it might be similar to a quasi-equity bond.
Kanoria said the fund would be deployed in the equipment financing business. Srei
has already announced infusion of Rs 25 crore (Rs 250 million) in the equipment
financing business, which is being spun off into a separate entity, towards its
equity contribution. BNP Paribas, France's largest bank, would pick up 50 per cent
stake in the equipment financing arm for Rs 775 crore (Rs 7.75 billion).
Sources said if Srei would have raised the funds to onlend, it would not have been
Shariah-compliant.
Infrastructure equipment finance market stands at around Rs 14,000 crore (Rs 140
billion). It is estimated to grow at a compounded annual rate of 40 per cent to over
Rs 31,000 crore (Rs 310 billion) in three years as the country needs to improve its
inadequate roads, ports and electricity generation.
Surprise Islamic welcome
Indias 2i Capital Group, along with Amwal Investment, is set to
offer a Shariah compliant infrastructure fund in the country. The
consortium has launched a US$300 million offshore Islamic Indian
Infrastructure Development Fund, registered with the Securities
and Exchange Board of India (SEBI). The fund will have a seven-
year tenure, and invest in energy, road and highway projects.
Investors unwilling to invest Islamically will be given an option to
invest through a parallel investment vehicle. This vehicle will invest
in projects and companies with the fund on a pro rata basis. The
Indian Infrastructure Development Fund aims to post net investor
returns of 30% a year throughout the seven years, with the first
returns expected within two years.
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The Deccan Chronicle, Hyderabad, India, dt. Thursday, 1st June, 2006
ISLAMIC BANKING RISES IN ASIA
Wealth from high oil prices and booming economies are starting to fuel a significant expansion in
Islamic banking services in the Middle East and Asia. But if new financial products compliant with
Shariah, or traditional Islamic law, are constantly being developed to cater to the demands of
wealthy Muslim investors, Islamic private banking remains a small niche in the global wealth
management market, though one with great potential.
The current demand for Islamic banking products among high-networth individuals is limited, but
we believe it will grow, said Akbar Shah, managing director and regional head for the Middle East
at Citigroup Private Bank.
The Shariah forbids usury, and hence the charging of interest on loans and deposits, as well as
commercial activities related to alcohol, tobacco and gambling. It is true that many Muslim
clients in the Gulf still prefer conventional products, as they are based in well-established
jurisdictions where the rule of law prevails and have good returns, said Daud Abdullah, managing
director of Hong Leong Islamic Bank in Malaysia. This is, however, starting to change as Islamic
finance gains momentum and credibility.
A report on the competitive strengths and weakness of Islamic banking, published in December
by McKinsey, the business consulting company, found that in Malaysia, Indonesia and the Gulf
States, 25 per cent of people were strongly committed to seeking financial services that were
fully compliant with Shariah, 25 per cent expressed indifference, and 50 percent were somewhere
in between, preferring Islamic products but not to the point of being ready to sacrifice return or
service. That assessment was based on interviews over a four- or five- year period with
institutional clients of McKinsey, Xavier Jopart, one of the reports authors said. Industry
sources, including the Monetary Authority of Singapore, estimate that Shariah-compliant assets
total $300 billion and are growing at 15 percent a year. But the potential for Islamic wealth
management is much greater, with the wealth of high-networth individuals in the Middle East
alone estimated by Merrill Lynch and Capgenini in their 2005 World Wealth Report at more than
$ 1.1 trillion, not including
Muslim countries like Malaysia and Indonesia. In Malaysia, the Islamic banking industry has been
growing at an average of 18 per cent a year in terms of assets since 2000, yet, according to the
ministry of finance, Islamic investments accounted for only 11 per cent of total banking assets
of more than $260 billion last year. The Malaysian government forecasts that this proportion will
rise to more than 15 per cent by 2007 and to 20 per cent by 2010.
In Indonesia, the country with the worlds largest Muslim population, demand for Shariah-com-
pliant banking has so far been tiny, with the market share of Shariah banking service providers
estimated by the Indonesian central bank at only 1.7 per cent of the countrys $153 billion in
banking assets this year. But professionals are confident that demand for Islamic financial
products is about to rise significantly. It is still very niche but Singapore is making a big effort to
leverage its existing infrastructure as a Switzerland of Asia to promote Islamic asset management
and private banking, Abdullah said. Afaq Khan, global head of Islamic finance at Standard
Chartered Bank, said the demand for Shariah-compliant products was almost infinite, because
if you can give the same risk-rewards returns to the investor and tell him its also compliant with
his belief, its not difficult.
That comment spotlights one of the biggest challenges - to develop Shariah-compliant investment
vehicles that provide clients, and investment managers, with competitive returns. Some of the
funds do give a slightly lower return for the simple reason that they cant include some investments
like the alcohol industry, khan said. While Islamic banks seem to deliver on growth expectations,
most still have a profitability gap to bridge, the McKinsey report said. Abdullah added: A lot of
work needs to be done to educate the public on Islamic finance. Products need to be competitive
with their conventional equivalents to perform better, and there is still a need for greater
diversification. Malaysia has been at the forefront of product development. In 1994 the authorities
created the first Islamic interbank monetary market, and in 2002 the first issues of an Islamic
global bond, or sukuk. Sukuk are asset-backed securities that pay investors a rent from the
revenue stream of the underlying assets, rather than interest.
In 2005, sukuk totalled about $40 billion, with a further $ 1 0 billion in the pipeline this year-
Dubai Ports Authority has issued $3.5 billion, Pakistan Water and Power Development Authority
has issued $2.1 billion and even non-Islamic borrowers like the German State of Saxony Anhalt
and the World Bank have issued Islamic bonds.
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90
91
Once the banks have
separate departments, sev-
eral NRIs in Arab and other
Muslim countries will not
have any problem in routing
their investments to India,
MA Majeed, dean of the insti-
tute of Islamic Banking and
Finance, said.
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93
94
95
96
Few people outside India recognise the countrys strength in Shariah-compliant
finance. yet Indias stock exchange are teeming with halal companies, and its
booking business and growing population are fertile ground for it to bloossom into
one of the worlds two largest economies by 2050, writes Zafar Sareshwala
India poised to bloossom in Fertile business climate
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100
101
102
103
FROM THE OFFICE OF PUBLIC AFFAIRS
Under Secretary of the Treasury John B. Taylor Key Note Address at the
Forum on Islamic Finance Harvard University
Understanding and Supporting Islamic Finance :
Product Differentiation and International Standards
I thank the Islamic Finance Project for inviting me and for, once again, leading efforts to
organize this excellent conference. I would also extend a warm welcome to all of you
here. I know you will enjoy hearing from my esteemed colleague, Dr. Ahmad Mohamed
Ali from the Islamic Development Bank. Harvard University continues its fine tradition
of providing a strong platform to generate critical thinking to inform academics and
policymakers on Islamic finance through its series of Islamic Finance Forums and through
the Islamic Finance Project here at Harvard Law School,
I appreciate the opportunity to speak to you today on a topic that is very important to
us in the Bush Administration, and, in particular, the U.S. Treasury. Islamic finance over
the last several years has expanded throughout the world, not just in the Middle East,
but in Asia, Europe and the United States. The global Islamic finance industry has
grown significantly over the last 10 years and today assets are in the range of $200-
$300 billion.
Though small compared to the whole global financial system, Islamic finance is growing
and is already playing a significant role in the financial systems in the Middle East. We
have seen a growth in product innovation, an increase in the number of financial
institutions offering Islamic finance products, and an expansion beyond the Islamic
countries to the UK, Switzerland, the United States, and elsewhere. Wth these
developments, we need to deepen our understanding and awareness of Islamic finance,
to protect its unique role to honor its traditions, and to ensure sound regulatory
frameworks and suitable jurisprudence that allow for efficient financial intermediation.
The Bush Administration places significant importance on promoting strong vibrant
financial sectors, including Islamic finance, as an integral component of advancing
economic growth in emerging markets. This year, for example, we in the U.S. Treasury
have been working with our G7 colleagues and Finance Ministers from the Middle East
and North Africa to advance economic growth and financial sector development. These
are key objectives for the G8 Summit which the United States is hosting in Sea Island,
Georgia, in June. We have created a Partnership for Financial Excellence, which represents
a hallmark bilateral initiative with the region that reinforces financial sector growth. This
initiative targets technical assistance and training on key needs in regional finance
ministries, central banks, and commercial banks. We are working with the Federal
Reserve and other U.S. financial regulatory bodies and counterparts in the Middle East
and North Africa to design a training program for regional bank supervisors on best
practices for bank regulation and supervision. We will also be providing targeted technical
assistance to governments in the areas of public finance, debt management, and financial
institution strengthening.
We at the U.S. Treasury have recently deepened our engagement in Islamic finance in a
number of ways.
104
In April 2002, inspired by a terrific briefing on Islamic finance at Citibanks facility in
Bahrain, I hosted the Islamic Finance 101 Conference in Washington, D.C., which was
the first conference on Islamic finance for U.S. government officials and financial
regulators to raise awareness of the global Islamic finance industry.
In September 2003, Randy Quarles, Assistant Secretary of the Treasury of
International Affairs, spoke about our involvement in Islamic finance at the First
International Islamic Finance Conference in Washington, D.C.
Also in September, Secretary Snow and I attended the Second International Islamic
Finance Conference in Dubai. We had a remarkable opportunity to sit down with
Islamic bankers to discuss the real issues they face.
And today, I am pleased to announce today that the U.S. Treasury is launching an
Islamic Finance Scholar-in-Residence program to generate more awareness and
catalyze deeper policy discussions on Islamic finance domestically and internationally.
We will be hiring as our first Scholar-in Residence a noted Islamic finance expert. We
intend for this scholar to work with us and others in Washington, D.C. on public
policy issues related to the role and importance of Islamic finance. This new position
will provide an opportunity to engage with key policymakers from the U.S. regulatory
bodies and members of Congress, on comparing and contrasting Islamic finance and
conventional banking, and promoting international standards. The first person to
occupy this new position will be Dr. Mahmoud El-Gamal of Rice University. We look
forward to his arrival in Washington, D.C. later this month.
In reviewing the agenda for todays conference, I was struck by some very interesting
new areas for further research in Islamic finance. As this industry evolves, a range of
new Sharia compliant products are emerging. Some examples are the government
and corporate bonds - so-called sukuks - which have seen an increase in issuances
over the last few years, and the development of repo facilities, which allow for open
market operations in Islamic finance banks and help in the development of a global
Islamic money market, The Islamic Development Bank (IDB) is also financing
infrastructure-development projects using new mechanisms that rely on the depth and
innovation in the sukuk market. Islamic finance securitization has also been growing
both in the United States and abroad. Freddie Mac has been offering mortgage backed-
securities as a financing option to the Muslim community in the United States.
As we all know, however, the process of replication or mimicking conventional banking
instruments certainly does not mean that the replicated Islamic products are identical
to their conventional counterparts. Dr. El-Gamal will be discussing this in his talk
tomorrow on the Limits of Sharia Arbitrage and the Unrealized Potential of Islamic
Finance. Deposit taking at fixed terms is a highly different business than taking equity
participations, leasing, or profit sharing. And it is simpler and relatively more
straightforward. Because of the transformation costs, complex Islamic financial products
appear to be inherently less transparent and less efficient than conventional ones. This
may have the undesirable effect of making Islamic finance a less attractive practice in
the longer run. Dr. El-Gamals calls for a fundamental paradigm shift in the development
of Islamic finance to reduce complexity and increase competitiveness are thought-
provoking and worthwhile to consider.
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The replication and transformation of conventional financial products into their
corresponding Islamic finance analogues have important implications for the regulation
and supervision of Islamic financial institutions.
First, the various lending structures generate different risk and balance sheet exposures
for Islamic banks that need to be carefully monitored and managed. For example,
while only a few Islamic financial products generate different liquidity profiles from
conventional products, the lack of uniformity of standards for Islamic banking practices
across Islamic countries makes it difficult to apply the same prudential regulatory
standards (e.g., capital adequacy requirements) across the board. This calls for more
harmonization of Islamic banking practices, which in turn calls for harmonization of
Sharia standards at the national and international levels.
Second, the treatment of profits and losses will have consequences for the balance
sheet structure and will require particular adjustments to meet minimal prudential
requirements. For example, in mudaraba transactions, the bank bears full financial
responsibility for any losses but shares relative profits with the client. Any losses
stemming from uncollateralized equity financing may require higher loan loss provisioning
and additional capital.
Third, disclosure requirements may need to be comprehensive and more frequent to
inform investors of the investment techniques, so they can make decisions based on
their risk preference. Maintaining clear transparency and ensuring adequate disclosure
of financing mechanisms are important steps towards building the necessary foundation
for Islamic finance. And with respect to firms in which financial institutions take stakes,
greater transparency, along with strengthened corporate governance, are necessary.
As part of the international effort to design a regulatory framework for Islamic finance,
regulators need to factor in the differences in these forms of finance and have at least
minimal standards or benchmarks to gauge compliance and assess risks. There needs
to be some level of consistency in regulatory treatment across the board, subject to
the particular countrys legal and regulatory regime. Malaysia and the GCC countries
have been making notable progress on developing Islamic banking laws. Recognition
and enforcement of these laws by the relevant national regulators would set the stage
for making true progress on establishing internationally-accepted regulatory standards.
Equally important is ensuring strong anti-money laundering oversight for these
transactions targeted mainly at preserving the integrity of and bolstering investor
confidence in Islamic finance.
Todays conference will set the stage for a lively exchange on these important issues.
Looking ahead, there is much that remains to be accomplished. We welcome the work
of the Islamic Financial Services Board (IFSB) in Malaysia and the Accounting and Auditing
Organization for Islamic Finance Institutions (AAOIFI) in Bahrain that is looking at
formulating standards for Islamic financial institutions, for example in corporate
governance, accounting and capital adequacy. We look to see how policy makers
mainstream their approach to Islamic finance in countries where this industry has grown
significantly. The IMF as part of its overall financial surveillance work - particularly in the
context of its Financial Sector Assessment Programs (FSAPS) and its Reports on
Standards and Codes (ROSCS) should explore what, if any, systemic implications
Islamic finance can have on the overall financial systems in the relevant countries, and
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it should also consider how its surveillance instruments can be better aligned with
monitoring Islamic Finance. The World Bank through its financial sector work can enhance
the effort to develop international regulatory frameworks and explore how Islamic
finance can have a positive development impact in communities. International standard-
setting bodies, such as IOSCO and BIS, have a role to play, first in understanding the
basic implications of Islamic finance, and secondly to take into account implications of
Islamic Finance on the implementation of existing standards. I hope that the international
institutions, like the IMF, WB and the ISDB, work closely with national authorities to
factor in a countrys monetary policy framework and the capacity of the countrys
regulators who will eventually have to implement the standards developed by those
bodies. These are but a few examples on the regulatory front.
In conclusion, developments in Islamic finance are of great interest to us at the U.S.
Treasury and we look forward to the lively discussions on new product development
and differentiation and on recent legal and regulatory issues that have emerged as the
Islamic finance industry grows. As with conventional financing, Islamic financing will
benefit from transparency, good governance and an internationally accepted regulatory
framework that will govern this important form of financing. I hope todays discussions
will help inform these debates and contribute to the overall effort to raise awareness
and promote action among key policy makers.
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Banking the Islamic Way!
The Sharia forbids Muslims from investing in companies, which charge interest (banks,
financial institutions, insurance firms) and companies dealing in alcohol, amusement,
media, 24 hour news channels and so on. It also restricts Muslims from earning interest
by keeping deposits in banks. But, Parsoli Corporation has developed an Islamic
investment model which identifies companies that are Sharia compliant and Muslims
can invest in their stocks. After targeting investments across India, the company is
going global now.
The booming stock market is now attracting Sharia - compliant Islamic investments,
which is being seen as a sign that India is becoming the next hub for Islamic investment
in South Asia. On June 2, Ahmedabad -based Islamic Investment firm Parsoli
Corporation will organize its first International Islamic Investor Opportunity Conference
at Srinagar where the company will showcase the investment potential in the stock
market to international investors.
As a first step, Germany-based Baader Service Bank, an Islamic Bank, is coming in with
a corpus amount of 30 million euros. Called the First India Islamic Fund, Germany. This
fund will be put in Sharia-compliant Indian companies verified by Parsoli.
The Baader Service Bank also has 24 per cent share in Parsoli Corporation. While
Baader Bank would sponsor the fund, its management and investment possibilities
would be looked after by Parsoli. The corporations chief finance officer Talha Sareshwala
said, post 9/11 has seen large number of Islamic investors withdrawing funds invested
in European and US banking and finance sectors. The Malaysian economy, because of
its small size too does not have the capacity to absorb more fund and provide more
opportunities. In India, with its democratic political model and an open market has
great potential to attract Sharia - complaint fund, said Sareshwala who puts the total
Islamic funds invested in world over to 500 billion US dollars.
The movement to project India as an investment destination has been moving parallel
both inside and overseas. The biggest proof that Indian Islamic investors are opening
up to the stock market is that Parsoli is all set to tap Jammu and Kashmir. On June 2, it
will organise the first Islamic investor opportunity conference at Srinagar. After
Ahmedabad, Mumbai and Aurangabad, this would be the fourth such conference in
India, Which have been conducted to attract the untapped funds of Islamic investors.
It would be an attempt to create awareness among Islamic investors, who have shied
away from the stock market because of Sharia its various reservation over investing
in the stock market.
According to Parsoli, the per capita income of Kashmiri Muslim is the highest in India.
The firm sees a huge potential to attract funds from here. With 30 trading terminals
already in place in Srinagar, it is confident about getting a tremendous response here.
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Gulf investors eyeing Shariat-compliant stocks
By
Sailesh Menon
Cash-rich partnership firms and public limited companies in the Arab world are planning
to land on Indian shores shortly. Most of them are waiting for to flooding the Indian
markets with billions of petrodollars. Gulf investments into India are on the rise and
many more are waiting on the sidelines to take a plunge. The Qatari Government
alone is planning to invest a considerable sum in India. Arab investors would be putting
their money in all Shariat law-compliant investment alternatives with focus on equities
and real estate, Mr Mohammed Talha, First Manager (international Banking Services),
Qatar International Islamic Bank, told Business Line.
Government stability and increasing investor-friendliness are the indirect reasons luring
Gulf investors, he added. Saturation of European markets, non-performance of the
bullion market and sliding crude prices are said to be the other reasons.
Arab investors only invest in a portfolio of clean stocks. They do not invest in stocks
of companies dealing in alcohol, conventional financial services (Banking and insurance),
entertainment (cinemas and hotels), tobacco, pork, Defence and weapons.
Inflow of funds from the Gulf was less than five per cent of total FII inflows in 2005.
This will go up considerably in 2006. Before the May crash, the Indian markets were
expecting an inflow of about $1 billion from that region. But it did not happen. This
time around we are expecting to see some good investment in Shariat stocks, said Mr
Alex K. Mathews, Head (Research), Geojit Financial Services.
According to market analysts, stocks of oil marketing companies, cement, textiles,
automobiles and pharmaceuticals would be among the best of Shariat stock picks.
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Now, How is this ?
Youre a pious Muslim with a few million in oil dollars to invest. So would the perfect
Islamic bank for you be Citigroup, perhaps? HSBC?
Actually, yes. Giant Western banks-or, rather, their Islamic subsidiaries-are leading the
market for financing that complies with Quranic laws forbidding lending money for
profit, or sponsoring un-Islamic activities such as gambling or smoking. Citigroups
Bahrain based Citi Islamic subsidiary was first into the market in 1996, and now leads
the pack with deposits of more than $6 billion. Citi and at least 10 other Western
majors dwarf the biggest locally owned rival, Al Baraka of Bahrain, worth a little more
than half a billion.
Westerners are drawn in by oil money. The Middle East is enjoying its fastest growth in
a generation. According to Islamic Banking and Finance magazine, there are $265
billion in deposits that comply with Sharia, the law that governs the behavior of Muslims,
finances included. Thats up 17 percent in the past year, and by almost 10 times in the
past decade, according to the U.A.E.s Sharjah Islamic Bank. Since 1996 Dow Jones
has offered indexes of stocks vetted by Sharia scholars. Now there are more than 40
Islamic indexes, and last year Islamic stocks on average outperformed the market by
5 percent.
How did Western banks come to dominate a market predicated on Islamic purity? A
generation ago, an Islamic bank was just a simple investment house that, instead of
paying interest on deposits, created dividends by buying and renting out property.
Islam forbids making money on money, says Alun Williams, marketing director of the
new Islamic Bank of Britain. But it does allow you to rent, and to trade. Now Western
banks are using that template to pioneer Islamic credit cards, Islamic mortgages and
Islamic bonds (known as sukuks) that during the past year have financed everything
from a $1 billion upgrade of Dubai airport to Pakistani government debt. As growth
picks up in the Middle East, more and more Muslim-run corporations find they need
sophisticated services, from bond issues to derivatives, that so far only Western banks
provide.
The Western banks gain Islamic credibility by hiring top-drawer Sharia scholars to sit on
their boards. The caliber of your scholars is the basis on which these [financial products]
are marketed, says Majid Dawood, a London-based consultant on Sharia compliance.
Because there are just a handful of financially literate Islamic scholars in the market,
most sit on the boards of many institutions and can, says Dawood, command salaries
of as much as $88,500 per year per bank. Sheik Mohammed Taqi Usmani, a former
Sharia judge on the Supreme Court of Pakistan, sits on the board of Citi Islamic, HSBC,
Al Baraka and eight others, and is chairman of the Dow Jones Islamic indexes Sharia
panel.
But the trend toward investing in Islamic funds really took off after 9/11, when many
Muslims began bringing their money home from America. Since then, international
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banks like Societe Generale, BNP Paribas, Deutsche Bank and Standard Chartered have
all entered the Islamic banking business. Accounting and consulting firms like Ernst
Young are now offering Islamic financial services. The recently opened Islamic Bank of
Britain, owned by leading Islamic banks and other institutions from the Middle East,
plans to create a retail-banking chain for average income Muslim Britons, says Williams.
Customers in Muslim nations are driven to Western banks in part by distrust of their
own banks. Prominent failures, such as the 2001 collapse of Turkeys Ilhas Finance
dented depositors faith. In Turkey, the Islamic worlds largest economy, the fledgling
Islamic banking sector is lobbying the state to guarantee deposits of up to $36,000,
which could in time make Turkey a major player. In Malaysia, where more than 11
percent of deposits are now Sharia-compliant, local houses like Bank Muamalat are
working to gain on the multinationals. Local Islamic banks lack sophistication, says
Humayun Dar, an Islamic economist. Customers are still more comfortable with an
international name. Even if the rules are strictly local.
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Mortgages
A new mortgage scheme complying with the sharia law has come into being in the U.K.
targeted at Islamic investors. The new buy-to-let mortgage is designed by Bristol &
West and the Arab Banking Corporation.
Sharia law does not allow earning money from money and as such payment of interest
is forbidden. All sharia compliant finance products operate without earning or charging
interest.
The new deal from both the banking organisations are based on the diminishing
musharaka principle, which allows the banks to buy the first property, then lease it to
the client, who then sub-lets it to a tenant. The client and the bank own the property
together, with the clients share increasing over a period of 25 years. The rent will be
charged at London inter-bank offered rate (Libor) (currently 4.55 per cent) plus 1.09
per cent, which is equivalent to the current buy-to-let mortgage charge of 5.64 per
cent levied by Bristol & West.
There is an increasing interest among muslim customers to invest in property, said
Bristol & West, and the Islamic buy-to-let mortgage is aimed at fulfilling this demand.
The specialised mortgage is also available at ABC, some branches of Lloyds TSB, Islamic
Bank of Britain and HSBC. .
Lloyds TSB had introduced some Islamic banking as a pilot scheme when it launched a
sharia-compliant current account in February 2005. Subsequently, it introduced a home
finance package too. The current account facility is now available in 18 branches.
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First UK Islamic bank opens doors
The UKs first Islamic law compliant stand-alone High Street bank opened in
London.
The Islamic Bank of Britains first branch is on Edgware Road, conveniently located for
Londons Arab community.
The venture was given the go-ahead by City regulator the Financial Services Authority
in August.
The bank will be run according to Islamic law, or Sharia, which forbids interest payments
and stipulates that charges should be agreed in advance.
Expert checks
All banking services will be overseen by a Sharia Supervisory Committee - experts in
the interpretation of Islamic law and how it can be applied to personal finance products
- the bank said.
PRINCIPLES OF ISLAMIC BANKING
All money must be invested in purely ethical industries
The giving or receiving of interest is forbidden
Money cannot be simply traded for money
Money can be used to buy goods or services, which can then be sold for a profit
The committee will meet on a regular basis to review all contracts and agreements
relating to transactions, as well as to advise and sanction any new products or services.
The bank will offer savings accounts at its Edgware branch and also nationally via postal
and telephone banking. The savings account will not offer interest on savers funds;
instead the bank will trade in Sharia compliant investments and share the profits with
savers.
Expansion plans
Current accounts and finance products, such as loans, will be available in November,
with mortgages, credit and charge cards and small business banking accounts available
in 2005. The bank plans on setting up other branches around the country, in Birmingham
and Leicester in November 2004, with a further eight branches planned in 2005.
Internet banking will be launched in April 2005.
We are delighted to be opening our first branch, said Michael Hanlon, managing director.
It marks a new era in Islamic banking in the UK and the beginning of our work to
broaden our product offering and branch network.
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CIMB Islamics Badlisyah Comments on Islamic Finance
Badlisyah Abdul Ghani, the head of Kuala Lumpur based CIMB Islamic, comments on
the growth of Islamic finance and the Malaysian market. CIMB Islamic is a unit of CIMB
Bhd., Malaysias biggest investment bank.
Islamic law, or Shariah, prohibits the payment and receipt of interest and bans investment
in businesses such as tobacco, alcohol and gaming. Badlisyah, who will be addressing a
conference on Islamic banking and finance in Kuala Lumpur Sept. 20, spoke in an
interview today.
On Islamic Finance Growth:
The Malaysian Islamic financial market is a very important component of the global
growth for the industry. CIMB as a group is now present in places such as Indonesia.
Brunei, Thailand, Singapore and Hong Kong. Because of the group-wide regional
expansion, if s only logical that CIMB Islamic is also going regional. As far as our Islamic
banking and finance outside of Malaysia is concerned, we are fairly active in Brunei. We
offer wealth management, corporate advisory and other banking services. We are
marketing ourselves there.
In Indonesia, the Islamic components is done by Bank Shariah Niaga, which is under
the management of PT Bank Niaga. It is a new outfit and we hope eventually we can
roll out more products and services, both Islamic and conventional. We offer Islamic
deposits and are looking to develop car financing and home financing. Jakarta-based
Bank Niaga is 64.5 percent owned by Commerce Asset-holding Bhd., Malaysias second
largest lender by assets.
On Singapore:
The Islamic industry needs competition to give momentum to the development of the
industry. As you have more competition, you have more people becoming more
innovative. At the end of the day the customer will benefit.
CIMB as a group does have a presence in Singapore. We have plans to develop
Islamic banking products and services for the Singapore market Its really logical because
Singapore was the missing link within ASEAN when it comes to Islamic banking and
finance. You have Indonesia, Brunei, Malaysia, Thailand having Islamic banking and
finance with Singapore the odd one out Now that they are coming on board, we think
the regional Islamic banking and finance market will definitely grow. There are discussions
on rolling out specific Islamic products in Singapore. CIMB on June 28 completed the
purchase of the stock broking business of Singapores G.K. Goh Holdings Ltd.
On Malaysias Bond Market :
Outstanding bonds sold by Malaysian companies amount to 104 billion ringgit ($27.6
billion), of which 51 percent is Islamic debt, Badlisyah said. In terms of growth it will
depend on the economic outlook of the country, and if theres no impact from rising oil
prices, we can see about 20 billion ringgit to 25 trillion ringgit of Islamic corporate bonds
next year.
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Islamic financing gaining ground in Asia
Before the September 11, 2001 terror attacks on the United States, few in Asia had
heard of Islamic financing. Now, the centuries old concept based on Islamic law is
gaining ground in the region.
The global Islamic banking market is estimated to be worth $250 billion, and to be
growing between 15 and 20 percent annually. Middle Eastern financial institutions have
long dominated the market, with money primarily invested there, in the United States
and Europe.
Now Asia is getting a slice of the pie
After the September 2001 tenor attacks in the United States, Middle Easterners -
many of whom insist on adhering to strict Islamic law even in their business dealings -
began to seek new markets for their cash. With its lively economies, well developed
banking systems and large Muslim populations, Asia was well positioned to capture the
cash flow.
Mohamed Ross is a director of the Islamic banking unit in Malaysia of British bank
HSBC.
Theres a lot of liquidity in the Middle Eastern market with oil at about $56 a barrel, Mr.
Ross said. Where does ail these liquidity go? It has to look for a home.
The key to attracting this cash was the presence of a banking system compliant with
Islamic law, or Shariah. Islamic law prohibits the charging of interest, called riba. Unlike
conventional banking, where the lending risk is reflected in the amount of interest the
borrower pays, in Islamic banking the borrower and tender share both risk and profit.
Typically, instead of lending money to homebuyers, an Islamic bank purchases the
house and sells it to the buyer at a profit. The client then pays off the marked-up price
over a set period of time, like a mortgage. No interest is involved. In addition, Islamic
investors only buy into businesses whose activities and products are not haram, or
against the teachings of the Koran. Prohibited industries include gambling, pornography,
arms and defense, tobacco, and businesses dealing with pork products.
Demand for shariah-complaint investments in Asia has been growing. When the
government of Pakistan decided to seek $600 million from the international market in
January, it issued an Islamic bond, which paid investors with revenue from a toll highway
instead of normal interest. The government received offers worth more than $1 billion,
about half of which came from the Middle East.
Badlisyah Abdul Ghani, head of the Islamic unit of Malaysian investment bank CIMB,
says there is still a lot of cash chasing few investment possibilities. Mr. Badlisyah says
this could help Asian companies raise money to expand their businesses.
The demand for Islamic finance has been increasing for the last few years, said Badlisyah
Abdul Ghani. As a result, it has basically encouraged a lot more issuers and corporates
to top the market to meet their demand. In compensation, Asian companies are providing
generous returns to their investors. The Dow Jones Islamic stock index for the Asia-
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Pacific region, composed of 783 companies, rose 11.5 percent last year. As of the end
of May, market capitalization for those stocks stood at nearly $2 trillion.
Predominantly Muslim countries are going after these funds in a big way. Malaysias
CIMB for instance, has joined a major Saudi financial company and currently manages
millions of dollars of Middle Eastern money. But non-Muslim countries like Singapore
are scrambling to catch up. Over the past year, Singapore has been forging closer
relations with countries in the Persian Gulf and building up its expertise in Islamic finance.
Speaking after a recent visit to Saudi Arabia, Singapores former prime minister, Goh
Chok Tong - now the citys top monetary authority - said the Saudis appear to be
eager to do business in his country.
Naturally they want good returns for their funds and they may be looking toward Asia
to see if they ran increase the return on their funds, said Goh Chok Tong. so Im trying
to catch their eye.
Islamic banking operations are more mature in Malaysia, Indonesia, Pakistan, Bangladesh
and Brunei, all predominantly Muslim counties. Malaysia has by far the most advanced
system in the region. From only $97 million in assets in 1983, Islamic banking there
grew to $21 billion by 2003. About 10 percent of Malaysian banking assets are now
Islamic, and bankers expect this to rise to 20 percent in five years. About half of local
bonds issued are Islamic. HSBCs Mr. Mohamed says the government warts to make
Malaysia an Islamic financing hub.
The Malaysian government, by making a good legal framework, tax treatment,
encourage business to be done on par with conventional Financing, he said. I think
we [Malaysia] would like to be the regional hub if not the global hub for Islamic finance.
As Malaysia faces greater competition, Mr. Badlisyah of CIMB says the countrys strong
inks with Middle Eastern financial institutions will make a difference. Malaysia currently
chairs the Orgarinization of Islamic Conference, the largest grouping of Muslim nations.
You must have strong counterparties, you must have good relationsip even with your
competitors, he said. The Southeast Asian market and the Middle Eastern market are
very important markets for the Islamic business. It does make sense to have a good
bridge between the two markets. While Middle Eastern cash is jump-starting the regions
Islamic banking, bankers predict Asias millions of Muslims - who are not yet utilizing
Islamic financial products - will ultimately fuel its long-term growth.
In Indonesia, which has the worlds largest Muslim population, Islamic banking is estimated
at only two percent of total banking assets. But global banking giants like HSBC and
Standard Chartered see a huge potential, and are opening fully Islamic branches in
predominantly Muslim countries.
The short-term challenge, bankers say, is for Islamic financial products to appeal not
only to Muslim customers ethics, but to be competitive with conventional, interest-
based financing. Mr. Mohamed of HSBC says that as the concept spreads through the
industry and more sophisticated products are offered, he is optimistic Islamic banking
will become part of mainstream finance in Asia.
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Islamic finance becomes growth market for banks
By
Phillips Day and S. Jayasankaran
Most investment bankers dont spend a lot of time worrying about the religious
implications of their work. But Western banks seeking to tap a blossoming market for
Islamic financial instruments are adapting to a system where religious law is as important
as anything written in an economics textbook. Religious law goes all the way we have
to make sure all the features and concepts involved in what the banks are trying to do
are acceptable, says Mohammed Daud Bakar, deputy rector of Malaysias International
Islamic University.
Malaysias central bank and some Western bankers estimate that Muslims currently
hold about $180 billion in funds in international Banks around the world money that
could be lured into Islamic financial product. But first Muslim Scholars must decide what
banks can offer and what Muslim Investors can buy. Thats no small task considering
that Islam prohibits some key elements of Western banking, notably interest payments.
So big Western banks that want to market Islamic mortgages or savings accounts or
set up mutual funds that invest in companies that comply with Islamic law, are hiring or
consulting experts such as Dr. Daud to guide them.
As revenues from traditional deal-making dwindle, Western investment banks - including
Citi group Inc., HSBC Holdings PLC, Standard Chartered PLC and Deutsche Bank AG -
are all listening to religious scholars to reach a market that some bankers expect to
grow 12% to 15% a year over the next few years. You cant go wrong with over a
billion Muslims says Zarir Cama, who set up HSBCs Global Islamic department in
Dubai and is now the banks chief executive in Malaysia.
But reaching those custom requires leaping a few hurdles. In addition to banning
interest, Islamic laws prohibits Muslims from investing directly or indirectly - in companies
with interests in gambling, pornography or liquor, or that are involved in the production
or sale of pork products. Islamic law also frowns on deals that have an element of
uncertainty in their returns, since such investments can be viewed as akin to gambling.
You dont want to go and finalize a structure and spend $250,000 or whatever
setting it up, only to find out what youve done isnt compliant, says London based
Saad Ashraf, a Senior Islamic Banker at Citi Group.
Malayasia, a majority-muslim nation with ambitions become a global hub for Islamic
finance, has been particularly aggressive in promoting itself as a banking base for the
Muslim world. To help banks - local and foreign win religious approval for their products,
the government has set up a Standards board with international Islamic experts. It is
also pushing local companies to arrange their financing through Islamic instruments.
Most of the corporate debt issued in Malaysia last year was arranged in compliance
with Islamic rules.
Malaysias effort to go global has required more coordination between Malaysian Muslim
scholars and their counterparts in the Middle East. In the past, some efforts in Malaysia
and else-where to sell products throughout the Muslim world failed because of
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disagreements between scholars in different countries over what is and isnt proper. It
used to get very, very heated, says Dr. Daud, who has worked as a consultant to
HSBC and other Western banks. Four or five years ago people in one place just wouldnt
listen to what the people elsewhere were saying. Nowadays, people want to get to
know each other and work toward harmony of the laws.
So when HSBC won the mandate last year to lead a $600 million Malaysian government
global Islamic bond issue, the bank was careful to get approval in advance for the
complex arrangement it had in mind. HBSC proposed a lease-type structure that called
for Malaysias federal land commission to sell property (including the building housing
the Ministry of Finance) to a special-purpose company, which would then lease the
property back to the government. Investors in the bond would buy the land from the
special purpose company and were to be paid the lease proceeds every six months.
The lease payment was to correspond to the interest rate London banks use to lend
each other money, a common benchmark for interest bearing bonds. Upon the bonds
maturity, the bond investors would sell the land back to the special purpose company
and get back their principal, while the special-purpose company would sell the land back
to the government.
Because of the link between lease payments and London lending rates, HSBCs proposed
structure came very close to involving an interest payment, which Islamic law forbids.
It appeared for a time that the link could be a sticking point for the deal. But the Islamic
scholars who ruled on the bond (were very pragmatic about it) says a banker involved
in the deal. They took the view that too strict a perspective could throttle Islamic
finance at birth.
In all, four groups of scholars - one each in Dubai and Bahrain and two in Malaysia -
were asked to approve the bonds structure before it was finally cleared to market
internationally.
The Malaysian bond met the approval of most of the Muslim investors targeted and
was two times subscribed. But there are still financial instruments used some places in
the Muslim world that arent accepted in others. There are times then weve gone
through significant refinements, says Mr. Ashraf, Unit head for Citigroups global Islamic
finance team. They do say no.
To minimize such rejections Citigroup set up Citi Islamic Investment Bank in Baharain in
1996-the first Islamic bank founded by a Western investment bank - and recruited a
board of Islamic scholars to oversee its operations. Now, each of the scholars who sit
on the banks religious board also advises other companies, including the same investors
that Citigroup hopes will buy its Islamic products. If he can get a product approved by
Citigroups In-house religious board, acceptance by big Middle Eastern investors is almost
guaranteed, says Mr. Ashraf.
Citigroup has found that, once financial products are approved by the religious scholars,
it opens up a Whole range of Muslim investors for companies that arent Muslim-
owned.
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Now, cover for the believers
Business Standard
After Islamic banking, its the turn of Islamic insurance. Even as the Reserve Bank of
India (RBI) is exploring Islamic banking opportunities for Indian banks, the Life Insurance
Corporation of India (UC) has set the ball rolling on takaful (Islamic insurance).
LICs new international joint venture company - Indo-Saudi Insurance Company-will be
the first to introduce takaful. This Arabic word means guaranteeing each other or
joint guarantee.
The entire pricing will be different as the benefits differ from conventional insurance
policies, UC Managing Director K. Mehrotra told Business Standard. Its actuarial team
has started working on the pricing mechanism and senior officials have been sent to
Saudi Arabia to took into the product, he added.
Takaful can be described as cooperative insurance where policyholders contribute a
certain amount of money to - a common pool. Each member pays his subscription
(premium) to help those that need assistance. To some extent, it resembles the chit
funds that operate mainly in southern India.
The purpose of takaful is not to profit, but to support the belief of bearing each others
burden. Losses are divided while liabilities spread across the community pooling system.
The idea is not to derive any benefits at the cost of others. Instead, it eliminates
uncertainty in terms of premium and compensation.
Takaful is a Shariah compliant product, said Mehrotra. It is necessary for LIC to
comply with local laws of the land when it starts operations in Saudi Arabia.
While LIC will offer a range of insurance products like endowment, money-back, single
premium policies, among others, the returns would need to be inbuilt into the pricing,
and cannot be called bonus or profits, said the managing director.
Today LIC announces annual bonuses depending on its investment performance. Under
Takaful plans, it would need to build in the possible profits, Mehrotra pointed out.
According to reports, it is unlawful for a Muslim living in a country where there is such a
cooperative insurance company to buy a policy from a commercial insurance entity.
In the event of there not being a cooperative insurance company, individuals may enter
into a contract with a commercial insurance company.
119
NBS launches worlds first dedicated Islamic card
for university students
The National Bank of Sharjah (NBS) has launched the worlds first Shariah compliant
card for university students, the NBS Affinity card. Launched with Visa International
and the American University of Shadah (AUS), the Affinity card is designed to provide
university students with the experience of managing their own finances. Hussein Al
Qemzi, NBS general manager, said: We have noticed that most graduating students
have little understanding of how banking products work and how to handle their own
finances while being savvy bank customers.
At NBS, we want to educate students financially. We want to help students think
analytically about their finances and how to successfully use and manage banking
products, said Mr. Al Qemzi. The NBS AUS Visa card is designed to increase financial
awareness among university students. To that end, the card has no entry fee, easy
application process and convenient payback schemes that allow students to carry the
balance forward, paying it off in monthly instalments. Additionally, the card has value-
added leading Islamic economist Dr Humayon Dar features and privileges specifically
chosen to meet the needs of students. All full-time students of the American University
of Sharjah are eligible to apply for the card, which will be Kamran Siddiqui, general
manager Middle East Visa International, said: This will allow students to track their
payments more effectively and develop a greater understanding of how card payments
can help them manage their finance. We believe this is a great opportunity for us to
introduce the convenience, security and efficiency of electronic payments to a young
audience. We often find that, while students leave university with a sound academic
grounding, they may lack understanding of how electronic payments can help them
manage their personal finances more efficiently. Visa is committed to working closely
with member banks to promote education and awareness in this respect, Mr. Siddiqui
said.
NBS is now focusing on regional expansion and development strategies in the GCC.
Mr. Al Qemzi said: We aim to be the bank of choice for customers looking for Shariah
products and provide Shariah-compliant alternatives to conventional products. We are
committed to developing additional cutting edge banking products and raise the bar for
Islamic banking in the region.
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E-Session 1. Islamic Finance Product Evolution
E-Session 2. Islamic Finance Country Profile Bahrain, Dubai
E-Session 3. Miscellaneous
E-Session 4. News Makers
E-Session 5. Expert Opinion Islamic Philanthropy
E-Session 6. Additional Reading Material Global financial crisis
The student is advised to shift over to
E-Sessions 1 to 6 in the CD and continue studying
CHAPTER - I
CONTENTS
Chapter - I ................................................................................................ 134 - 139
Global financial crisis
134
CHAPTER-I
Global financial crisis and Islamic finance
135
136
137
138
139
CHAPTER - II
CONTENTS
Chapter - II .............................................................................................. 140 - 163
Islamic Finance Sector: Education, Training and Human Resource
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CHAPTER-II
Islamic Finance Sector:
Education, Training and Human Resource
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CHAPTER - III
CONTENTS
Chapter - III ............................................................................................. 164 - 172
Religious Perspective - Background with socio-ethical aspects of
Islamic Economics, Banking and Finance
164
CHAPTER - III
RELIGIOUS PERSPECTIVE -
BACKGROUND WITH SOCIO-ETHICAL
ASPECTS OF ISLAMIC ECONOMICS, BANKING
AND FINANCE
Words to get acquainted with :
RIBA - Usury - Interest (unjustified addition to principal)
HADITH - Also pronounced as Hadees, Savings of the Holy Prophet
(PBUH) as narrated by his companions
PBUH - Peace Be Upon Him - A suffix attached as a salutation where
ever the name of the Holy Prophet is mentioned.
FIQH - Islamic jurisprudence - interpretation of the text of the Holy
Quran in the light of Hadith and Sunnah by Scholars.
FUQAHA - Multiple of Faquih or experts in Fiqh.
SHARIAH
COMPLIANCE - Strict adherence to the norms and principles laid down by
Islamic law and jurisprudence.
165
RIBA IN THE QURAN, HADITH & FIQH
Among the most important teachings of Islam for establishing justice and
eliminating exploitation in business transactions is the prohibition of all sources
of Unjustified enrichment. (akl amwal al nas bi al batil). The Quran and the
sunnah have given principles whereby muslim society can know or deduce what
constitutes a wrongful or rightful and justified or unjustified source of earning
or acquisition of property from others. One of the important sources of unjustified
earning is receiving any monetary advantage in business transaction without
giving a just counter value. Riba represents, in the Islamic value system, a
prominent source of unjustified advantage.
The following verses from the Quran and Hadith throw light on Riba as a source of
unjustified advantage in business transactions.
1.1 RIBA IN THE QURAN
1. First Revelation (Surah al-Rum, verse
39)
That which you give as interest to
increase the peoples wealth increases
not with God; but that which you give
in charity, seeking the goodwill of God,
multiplies manifold (30:39)
2. Second Revelation (surah al-Nisa,
Verse 161)
And for their taking interest even though
it was forbidden for them, and their
wrongful appropriation of other peoples
property. We have prepared for those
among them who reject faith a grievous
punishment (4.161).
3. Third Revelation (surah Al Imran,
verses 130-2)
O believers, take not doubled and
redoubled interest, and fear God so that
you may prosper. Fear the fire which
has been prepared for those who reject
faith, and obey God and the Prophet
so that you may receive mercy
(3: 130-2).
4. Fourth Revelation (Surah al-
Baqarah, verses 275-81).
Those who benefit from interest shall
be raised like those who have been
driven to madness by the touch of the
Devil, this is because they say. Trade
is like interest while God has permitted
trade and forbidden interest. Hence
those who have received the admonition
from their Lord and desist, may have
what has already passed, their case
being entrusted to God, but those who
revert shall be the inhabitants of the fire
and abide therein for ever (2.75).
God deprives interest of all blessing but
blesses charity; He loves not the
ungrateful sinner. (276).
These who believe, perform good deeds,
establish prayer and pay the zakat, their
reward is with their Lord; neither should
they have any fear, nor shall they grieve
(277).
O believers, fear God, and give up the
interest that remains outstanding if you
are believers. (278).
If you do not do so, then be sure of
being at war with God and His
Messenger. But, if you repent, you can
166
have your principal. Neither should you
commit injustice nor should you be
subjected to it. (279).
If the debtor is in difficulty, let him have
respite until it is easier, but if you forego
out of charity, it is better for you if you
realise (280).
And fear the Day when you shall be
returned to the Lord and every soul shall
be paid in full what it has earned and no
one shall be wronged. (281).
(2:275-81)
1.2 RIBA IN HADITH
A. General
1. From Jabir : The Prohet, may peace be
on him, cursed the receiver and the
payer of interest, the one who records
it and the two witnesses to the
transaction and said: They are all alike
[in guilt] (Muslim, Kitab al-Musaqat, Bab
lani akili al-riba wamu kilihi; also in
Trimidhi and Musnad Ahmad).
2. Jabir ibn Abdallah, giving a report on the
Prophets Farewell Pilgrimage, said : The
Prophet, peace be on him, addressed
the people and said All of the riba of
Jahiliyyah is annulled. The first riba that
I annul is our riba, that accruing to Abbas
ibn Abd al-Muttalib [The Prophets
uncle]; it is being cancelled completely.
(Muslim, Kitab al-Hajj, Bab Hajjati al-
Nabi, may peace be on him; also in
Musnad Ahmad).
3. From Abdallah ibn Hanzalah: The
Prohet, peace be on him, said: A
dirham of riba which a man receives
knowingly is worse than committing
adultery thirty-six times (Mishkat al-
Masabih, Kitab al-Buyu Bab al-riba, on
the authority of Ahmed and Daraqutni).
Bayhaqi has also reported the above
hadith in Shuab al-iman with the
addition that Hell befits him whose flesh
has been nourished by the unlawful
(ibid).
4. From Abu Hurayrah : The Prophet,
peace be on him, said : On the night of
Ascension I came upon people whose
stomachs were like houses with snakes
visible from the outside. I asked Gabriel
who they were. He replied that they
were people who had received interest.
(Ibn Majah, Kitab al-Tijarat, Bab al-
taghlizifial-riba, also in Musnad Ahmad).
5. From Abu Hurayrah : The Prophet,
peace be on him, said: Riba has seventy
segments, the least serious being
equivalent to a man committing adultery
with his own mother. (Ibn Majah, Ibid).
6. From Abu Hurayrah : The Prophet,
peace be on him, said: There will
certainly come a time for mankind when
everyone will take riba and it he does
not do so, its dust will reach him. (Abu
Dawud, Kitab al-Buyu, Bab fi ijtinabi
alshubuhat; also in Ibn Majah).
7. From Abu Hurayrah : The Prophet,
peace be on him said: God would be
justified in not allowing four persons to
enter paradise or to taste its blessings:
he who drinks habitually, he who takes
riba he who usurps an orphans property
without right, and he who is undutiful to
his parents. (Mustadrak al-Hakim, Kitab
al-Buyu).
B. RIBA al-Nasiah
1. From Usamah ibn Zayd: The Prophet,
peace be on him, said: There is no riba
except in nasiah [Waiting] (Bukhari,
Kitab al-Buyu, Bab Bay ai-dinari bi al-
dinar nasaan; also Muslim and Musnad
Ahmad). There is no riba in hand-to-
hand [spot] transactions (Muslim,
Kitab al-Musaqat, Bab bayI al-taami
mithlan bi mithin; also in Nasai).
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2. From Ibn Masud : The Prophet, peace
be on him, said: Even when interest is
much, it is bound to end up into
paltriness (Ibn Majah Kitab Al Tijarat,
Babal taghlizi fi alriba, also in Musnad
Ahmad)
3. From Anas ibn Malik: The Prophet,
peace be on him, said: When one of
you grants a loan and the borrower
offers him a dish, he should not accept
it; and if the borrower offers a ride on
an animal, he should not ride, unless
the two of them have been previously
accustomed to exchanging such
favours mutually. (Sunan al-Bayhaqi,
Kitab al-Buyu, Bab kulli qardin jarra
manfaatan fa huwa riban).
4. From Anas ibn Malik. The Prophet,
peace be on him, said. If a man
extends a loan to someone he should
not accept a gift, (Mishkat, op. Cit.,
on the authority of Bukharis Tarikh and
ibn Taymiyyahs al-Muntaqa).
5. From Abu Burdah ibh Abi Musa: I came
to Madinah and met Abdallah ibn Salam
who said, You live in a country where
riba is rampant; hence if anyone owes
you something and presents you with
a load of hay, or a load of barley, or a
rope of straw, do not accept it for it is
riba (Mishkat, op.cit., reported on the
authority of Bukhari).
6. Fadalah ibn Ubayd said that The benefit
derived from any loan is one of the
different aspects of riba. (Sunan al-
Bayhaqi, op.cit). This hadith is mawquf
implying that it is not necessarily from
the Prophet; it could be an explanation
provided by Fadalah himself, a
companion of the Prophet, peace be
on him.
C. Riba al-Fadl
1. From Umar ibn al-Khattab: The last
verse to be revealed was on riba and
the Prophet, peace be on him, was
taken without explaining it to us; so give
up not only riba but also ribah [Whatever
raises doubts in the mind about its
rightfulness]. (Ibn Majah, op.cit).
2. From Abu Said al-Khudri: The Prophet,
peace be on him, said: Do not sell gold
for gold except when it is like for like,
and do not increase one over the other;
do not sell silver for silver except when
it is like for like, and do not increase one
over the other; and do not sell what is
away from among these] for what is
ready. (Bukhari, Kitab al-Buyu, Bab
bayI al-fiddati bi al-fiddah; also Muslim,
Tirmidhi, NasaI and Musnad Ahmad).
3. From Ubada ibn al-Samit: The Prophet,
peace be on him, said: Gold for gold,
silver for silver, wheat for wheat, barley
for barley, dates for dates, and salt for
salt like for like, equal for equal, and
hand-to-hand; if the commodities differ,
then you may sell as you, wish, provided
that the exchange is hand-to-hand.
(Muslim, Kitab al-Musaqat, Babal-sarfi wa
bayI al-dhahabi bi al-waraqi naqdan;
also in Tirmidhi).
4. From Abu Sajid al-Khudri: The Prophet,
peace be on him, said: Gold for gold,
silver for silver, wheat for wheat, barley
ffor barley, dates for dates, and salt for
salt like for like, and hand-to-hand.
Whoever pays more or takes more has
indulged in riba. The taker and the giver
are alike [in guilt]. (Muslim, ibid, and
Musnad Ahmad).
5. From Abu Said and Abu Hurayrah : A
man employed by the Prophet, peace
be on him, in Khaybar brought for him
janibs (dates of very fine quality]. Upon
the Prophets asking him whether all the
dates of Khybar were such, the man
replied that this was not the case and
added that they exchanged a sa [a
measure] of this kind for two or three
168
[of the other kind]. The Prophet, peace
be on him, replied, Do not do so. Sell
[the lower quality dates] for dirhams
and then use the dirhams to buy janibs.
[When dates are exchanged against
dates] they should be equal in weight.
(Bukhari, Kitab al-Buyu; Bab idha arada
baya tamrin bi tamrin khayrun minhu;
also Muslim and NasaI).
6. From Abu Said Bilai brought to the
Prophet, peace be on him, some bami
[good quality] dates whereupon the
Peophet asked him where these were
from. Bilal replied, I had some inferior
dates which I exchanged for these
two sas for a sa. The Prophet said,
Oh no, this is exactly riba. Do not do
so, but when you wish to buy, sell the
inferior dates against something [cash]
and then buy the better dates with the
price you receive. (Muslim, Kitab al-
Musaqat, Bab al-taami mithlan bi mithlin,
also Musnad Ahmad).
7. From Fadalah ibn Ubayd al-Ansari: On
the day of Khaybar he bought a necklace
of gold and pearls for twelve dinars. On
separating the two, he found that the
gold itself was equal to more than
twelve dinars. So he mentioned this to
the Prophet, peace be on him, who
replied, It [Jewellery] must not be sold
until the contents have been valued
separately. (Muslim, Kitab al-Musaqat,
Bab bayI al-qiladah fiha kharazun wa
dhahab; also in Trimidhi and NasaI).
8. From Abu Umamah: The Prophet, peace
be an him, said: Whoever makes a
recommendation for his brother and
accepts a gift offered by him has
entered riba through one of its large
gates. (Bulugh al-Maram, Kitab al-
Buyu, Bab al-riba, reported on the
authority of Ahmad and Abu Dawud).
9. From Anas ibn Malik: The Prophet,
peace be on him, said: Deceiving a
mustarsal [an unknowing entrant into
the market] is riba. (Suyuti, al-jam al-
saghir, under the word ghabn Kanz
al-Ummal, Kitab al-Buyu, al-Bab al-
thnal, al-fasl al-thani, on the authoirty
of Sunan al-Bayhaqi).
10. From Abdullah in ibn Awfa: The
Prophet, peace be on him, said: A
najish [one who serves as an agent to
bid up the price in an auction] is a cursed
taker of riba. (Cited by ibn Hajar al-
Asqalani in his commentary on al-
Bukhari called Fath al-Bari, Kitab al-
Buyu; Bab al-najsh; also in Suyuti, al-
Jami al-Saghir, under the word al-najish
and Kanz al-Ummal, op. Cit, both on
the authority of tabaranis al-Kabir)
1.3 RIBA IN FIQH (Jurisprudence)
1. The Four Schools
Abd al-Rahman al-Jaziris al-Fiqh
ala al-Mad-hahib al-arbaah, is a
compendium on the juristic opinions
of the four predominant schools of
Muslim jurisprudence. It is held in
high esteem and considered to be
an authority on the subject. Given
below are some relevant excerpts
from this book on the subject of riba.
Definition and classification
Riba is one of those unsound (fasid)
transactions which have been severely
prohibited (nahyan mughallazan). It
literally means increase..
However, in fiqh terminology, riba
means an increase in one of two
homogeneous equivalents being
accompanied by a return. It is classifed
into two categories.
1
First, riba al-
nasiah where the specified increase is
in return for postponement of, or waiting
for, the payment; for example, buying
an irdab (a specific measure) of wheat
169
in winter against an irdab and a half of
wheat to be paid in summer. As the
half irdab which has been added to the
price was not accompanied by an
equivalent value in the commodity sold
and was merely in return for the waiting,
it is called riba al-nasiah. The second
category is riba al-fadl which means
that the increase mentioned is
irrespective of the postponement and
is not offset by something in return. This
happens when an irdab of wheat is
exchanged hand to hand for an irdab
and a kilah (another measure) of its
own counterpart, the buyer and the
seller both taking reciprocal possession;
or when ten carats of gold produce are
exchanged for twelve carats of similar
gold produce.
1. The Shafiiyyah divide riba into three
categories. First, riba al-fadl which includes riba
on loans, as the lender extending a loan of
twenty guineas on condition that he will receive
in return an advantage, like the borrower
purchasing a commodity from the lender, or
marrying the lenders daughter or receiving a
monetary benefit as discussed under void
transactions, (al-bayal-fasid), second, riba al-
nasiah as mentioned; and third, hand-to-hand
riba which means selling two homogeneous
commodities like wheat, without reciprocal
possession on spot. (This footnote is also a
part of the quotation.).
Riba al-Nasiah
There is no difference among Muslim
jurists about the prohibition of riba al-
nasiah. It is indisputably one of the
major sins. This is established by the
Book of God, the Sunnah of His Prophet,
and the consensus of the ummah. The
Quran says:.. (Verses 2:275-9).
This is the Book of God which has
prohibited riba vehemently and has
reprimanded the taker so severely that
it makes those who believe in their Lord
and dread. His punishment tremble with
fear. Can any reprimand be harsher than
God equating the takers of riba with
those who have risen in revolt against
Him and are at war with Him and His
Prophet? What will be the state of that
feeble human being who fights with the
Almighty and Overpowering God, Whom
nothing on earth or in the Heaven can
frustrate. There is no doubt that by
resorting to riba such a person has
adopted the course of self-destruction
and deprivation.
The obvious meaning of riba to be
understood from this noble verse of the
Quran is the riba known by the Arabs in
the Jahiliyyah period as explained by the
commentators of the Quran. More than
one of them has mentioned that when
a loan extended by an Arab matured,
he would ask the borrower for the
return of the principal or for an increase
in return for the postponement. This is
also the increase that is known to us.
This increase was either in quantity, like
postponing the return of a camel now
for two in the future, or in age, like
postponing the return of a camel aged
one year agaisnt a camel aged two or
three years in the future. Similarly, the
Arabs were familiar with situations where
a lender would advance money for a
period and take a specified amount of
riba every month. If the borrower was
unable to repay the principal when the
loan matured, he would be allowed an
extension in the time of repayment
[rescheduling] with the continuation of
the riba he has been receiving from the
borrower. This is the riba which is
prevalent now and charged by banks
and other institutions in our countries.
God has prohibited it for Muslims.
The noble, verses have decisively
prohibited riba al-nasiah which involves,
what is generally understood in our
times, as the giving of a principal amount
170
on loan for a given period against the
payment of interest in percentage terms
on a monthly or annual basis. Some
people try to justify the kind of riba in
spite of its conflict with Islam. It is far
removed from Islam and is in discord
with its basic philosophy in form as well
as meaning. Some of them claim that
what is prohibited is the charging of riba
many times the principal amount as
stated by the Quran: O belivers!
Charge not doubled and redoubled
interest, and fear God so that you may
prosper (3:130). This claim is however
absolutely wrong because the objective
of the verse is to express a repulsion
against interest..
Riba al-Fadl: its Legal Position
Riba al-Fadl.. is prohibited according
to the four schools of jurisprudence. But
of the Prophets companions, among
them Sayyid Abdallah ibn Abbas (may
God be pleased with him), allowed it.
Nevertheless, it is reported that he
recanted his opinion afterwards and
talked about its prohibition Riba al-Fadl
does not have substantial effect on
transactions because of the rarity of its
occurrence; it is not the objective of
people to buy or sell one thing in
exchange for the same thing unless
there is something extra from which
each of the parties may benefit.
Notwithstanding this, it has been
prohibited because it might lead to the
defrauding or deception of less
sophisticated persons. For example, a
shrewd trader may claim that the irdab
of a specific brand of wheat is equivalent
to three irdabs of the other kind because
of the excellence of its quality, or this
unique piece of gold arnament is
equivalent in value to twice its weight in
gold, in such transactions there
undoubtedly is defrauding of people and
harm to them.
The authority for the prohibition of riba
al-fadl lies in what the Prophet, peace
be on him, said.
Gold for gold, silver for silver, wheat for
wheat, barley for barely, dates for dates,
and salt for salt like for like, equal for
equal, and hand-to-hand, if the
commodities differ, then you may sell
as you wish, provided that the exchange
is hand-to-hand.
This hadith indicates that it is neither
proper to sell these homogeneous
commodities against themselves with
addition nor is it proper to delay the
reciprocal taking of possession. Hence
it is not proper to sell a gold guinea
against a gold guinea and ten qurush,
neither on a hand-to-hand, nor on a
deferred basis, just as it is not right to
sell a gold bar weighing ten carats against
a gold bar weighing twelve carats.
Similar is the case with wheat and barley
and other items mentioned in the hadith.
And if such is the case, then does riba
enter into every commodity or is it
confined to just the commodities
mentioned in the hadith, namely, gold,
silver, wheat, barely, dates and salt?
There is no difference of opinion among
the four schools of jurisprudence that
analogically riba enters into other
commodites not mentioned in the
hadith. If there is any difference it is in
the analog (illat) used to arrive at the
conclusion that the addition [riba al-
fadl] is prohibited for all commodities
wherever. The analogy holds. Only the
Zahiriyyah (a juristic school which was
opposed to analogical reasoning)
confined ri ba al -fadl to only the
commodities specified in the hadith.
(Abd al-Rahman al-Jaziri, Al-fiqh Ala al-
Madhahib al -Arba ah, Cairo: Al-
Maktabah al-Tijariyyah al-Kubra, 5
th
ed,
n.d., vol.2, pp. 245-8).
171
Even though the above excerpt is
sufficient to convey the views of the four
schools of jurisprudence, the reader
may wish to go through the following
sample of opinions from prominent
Quran commentators and/or jurists of
the various schools, particularly the
Jafari school, which is not covered in
the above-quoted book. It may be seen
that there is hardiy any difference of
opinion on the subject except in
presentation and in certain minor details.
2. Fakhr al-Din al-Razi (Quran
commentator and philosopher).
Riba is of two kinds: Riba al-nasiah and
riba al-fadl.
Riba al-nasiah is what was well known
and conventional among the the Arabs
in JahiliyyaIh. They used to give loans
on the condition that every month they
will receive a stipulated amount with the
whole principal remaining outstanding.
Then, when the loan matured and the
borrower was unable to clear his
obligation, the amount was raised and
the period was extended. This is the
riba that was practiced in the Jahiliyyah.
Riba al-naqd [al-fadl], is however, the
selling of one maund [a unit of weight]
of wheat, or anything similar to it,
against two maunds (Al-Tafsir al-kabir,
Tehran: Dar al-Kutub al-Li-Miyyah, 2
nd
ed, n.d., vol. 7, p.85).
3. Abu Bakr al-Jassas (Quran
commentator and Hanafi Jurist)
The literal meaning of riba is increase.
But in the Shariah it has acquired a
connotation that its literal meaning does
not convey. The Prophet, peace be on
him, termed the increase, [which is a
condition] to waiting, as riba as is
evident from the hadith narrated by
Usamah ibn Zayd in which the Prophet
said: Riba is in waiting. Hence God
abolished the riba which was being
practised at that time. He also
invalidated some other trade
transactions and called them riba.
Accordingly, the Quranic verse God has
prohibited riba covers all transactions
to which the connotation applies in the
Sharial even though the indulgence of
the Arabs in riba, as mentioned above,
related to loans in dirhams and dinars
for a specified period with the increase
as a condition. The term riba hence
signifies different meanings. One is the
riba prevalent in Jahiliyyah; the second
is the disparity or differential (tafadul)
in the volume or weight of a commodity
[in spot transactions], and the third is
postponing (al-nasa ]; this implies that
it is not permitted to sell a commodity
against future delivery of the same
volume, weight or other measure of the
given commodity. (Ahkam al-Quran,
Cairo: Al-Matbaah al-Bahiyyah al-
Misriyyah, 1347 AH, Vol.1, pp. 551-2).
4. Muhammad ibn Abdallah ibn al-
Arabi (Quran commentator and
Maliki jurist).
Riba literally means increase, and in the
Quranic verse (2:275) it stands for
every increase not justified by the
return. (Ahkam al-Quran, Cairo: Isaal-
Babi al-halabi, 1957, p.242).
It may be clarified here that the waiting
involved in a loan is not considered by
the jurists to be a return justifying the
increase (interest) on the principal
amount.
5. Ibn Qayyim al-Jawziyyah
Riba is of two kinds; Jali and Khafi. The
Jali has been prohibited because of the
great harm it carries and the Khafi has
172
been prohibited because it is an
instrument for the Jal i . Hence
prohibition of the former is deliberate
while that of the latter is precautionary.
The Jali is Riba al-nasiah and this is what
was engaged in during the Jahiliyyah,
like allowing the postponement of
repayment of principal against an
increase, and every time there was a
postponement, there was an increase.
However, ri ba al -fadl has been
prohibited to close the access to riba
al-nasiah. (Aalam al-Muwaqqiin,
Cairo: Maktabah al-kuliyyat al-
Azhariyyah, 1968, vol.2, pp, 154-5).
6. Shah Wali-Allah Dihlawi
Remember that riba is of two kinds;
One is primary (haqiqi,
1
the other is
subject to it. Primary riba is only on
loans. The other riba is called riba al-
fadl and is akin to primary riba. (Hujjat
Allah al-B alighah, Lahore: Qawmi Kutub
Khana, 1953, tr. Mawlana Abdul Rahim,
Vol2, pp.474-5).
7. Abdallah ibn AHMAD Ibn Qudamah al-
miqdasi (a Hanbali jurist).
Riba is of two kinds: riba al-fadl and
riba al-nasiah. The prohibition of riba
al-fadl involves the exchange of one
commodity against itself and covers all
commodities which are exchanged by
volume or by weight regardless of
whether the quantity exchanged is
small, like one date for two dates or
one grain for two grains (p.64).
Riba al-nasiah is involved in the
exchange of two commdoities one of
which is not the price. (p.73) (Al-Muqni,
Qatar: Matabi Qatar al-Wataniyyah,
1973, Vol.2. pp.64-77).
8. Hasan ibn al-Mutahhar (Jafari
jurist)
Riba literally means increase and,
technically, it refers to the increase in
the exchange of two commodities, one
against its own kindRiba is of two
kinds: Riba al-fadl and Riba al-nasiah
and the jurists are agreed on their
prohibition. (Tadhkirah al-Fuqaha,
Najaf: Matbaah al-Najaf, 1955, Vol.7,
p.84).
1. The actual transaction of haqiqi should be real.
This has, however, been avoided because of the
possi bl e confussion wi th real i nterest whi ch
technically means nominal interest adjusted for
price intiation.
Note :
Our acknowledgements are due to Dr. Umar
M.Chapra for his kind assistance in
compiling this valuable information.
CHAPTER - IV
CONTENTS
Chapter - IV............................................................................................. 173 - 187
Principles and Practice of Islamic Financing
173
Chapter - IV
Principles & Practices of Islamic Financing
A Historial Perspective
Financing in the early period of Islam
This section deals with early Islamic literature which refers to the principles of
financing. The discussion will focus on the interpretations of Islamic financing techniques
by Muslim scholars. These interpretations indirectly discuss and rationalize the principles
underlying individual modes of finance. However, since each Islamic financing technique
could be dealt with separately, in this section the following four general points are discussed
financing during the Prophet's (pbuh) era, the need for credit as seen in Islamic
jurisprudence, encouragement of lending in Islam and benevolent postponement of
debt repayment and its implications. It is hoped that this discussion will shed some light
on the principles of financing as understood by early Islamic writers.
Financing During the Prophet's (Pbuh) Era
As trade was the main economic activity of the tribe of Quraish, a good deal of its
caravans were financed by persons who did not accompany the caravans. Homoud
quotes Al Razi as saying that in financing the battle of 'Uhud, the Quraish used funds
accumulated by means of riba. Furthermore, in commenting on verses 275-280 of
Surah II of the Qur'an, almost all writers make reference to the deep-rooted practice of
riba in pre-Islamic Arabia, especially among members of the tribes of Quraish and Thaqif
and by the Jewish communities. They usually mention Al Abbas, the uncle of the Prophet
(pbuh), and several major families of Thaif as prominent financiers in the Makkan economic
life of that period. Moreover, with respect to the Qur'anic reference to the Jewish practice
of riba (IV:160), Homoud again quoting early writers, argues that many Jews were
working as moneylenders in Madinah and that they used to lend at a rate of 12% per
annum. Therefore, one may conclude that the most dominant mode of financing during
the pre-Islamic era was riba based borrowing and that mudarabah may perhaps have
ranked second in terms of practical importance.
While discussing the legitimacy of mudarabah, the fuqaha' usually call attention to
the mudarabah enterprise the Prophet (pbuh) had with Khadijah which started more
than fifteen years before the beginning of the revelation. They also mention the common
practice of mudarabah in the Makkan society. It should be noted that mudarabah implies
that the net profit of trade is shared between the owner (rab al mal) and the worker
(mudarib) after it is actually realized at the end of the transaction.
Additionally, the agricultural society of Al Madinah used to practice crop sharing
which was called muzara'ah and musaqah with the former applying to open fields used
for crops and the latter to orchards of trees especially palm. Land in muzara'ah and land
and trees together in musaqah are fixed assets put at the disposal of the working
partner. These arrangements ensure the use of assets without actually paying for them
which is tantamount to financing. Both muzara'ah and musaqah require sharing the
gross output and allow for limited flexibility in the contractual distribution of operational
expenses.
174
On the other hand, sale on credit also existed in the Prophet's (pbuh) time. There
are many sayings about the Prophet's (pubh) buying on credit, taking loans and sometimes
giving personal property as a security or lien. For instance, Abdullah Ibn Abi Rabi'ah
said :
Aishah reported that :
The Prophet (pbuh) bought some food on credit from a Jew and he the Prophet
(pbuh) gave him (the Jew) his mail (armor iron cloth) as a security (in another version
she said : thirty sa'' of barely instead of saying some food). Al Bukhari, V 3, pp. 15 and
231 (our translation from Arabic)
and Abu Hurairah also reported :
That the Prophet (pbuh) borrowed (once) a male camel. Ahmad, V2, p. 509 (our
translation from Arabic).
In the above mentioned saying, credit is used to finance consumption. It is also
used to finance production whereby the producer is paid cash for future delivery. The
latter form of credit creates an in kind debt and is called salam.
As Arabs depended on seasonal trade and agriculture for their livelihood, the
practice of salam sale with forward delivery must have been common in their life. Al
Bukhari reports from Al Bara' Bin 'Azib: (when) The Prophet (pbuh) came (to Al Madinah)
we used to do salam sell forward against cash payment until the season. al Bukhari, V
4, p. 269. (our translation from Arabic).
The fuqaha' elaborate more on this point with respect to the discussion of riba al
fadl. They argue that the Arabs used to sell gold for silver and other items on a salam
basis and that the Prophet (pbuh) mentioned that gold and silver can be exchanged on
a spot basis only. The same applies also to a few food items which are mentioned in the
well known Hadith regarding riba al fadl.
Also, bai' al salam, was made lawful by the Prophet (pbuh) in order to make
economic relations easy and responsive to the variety of financing needs people have,
although it is said to be in violation of the general rule of prohibiting the sale of things
which are not in one's possession at the time of contract. Thus, bai' al salam is a form
of financing which provides the producer with funds that can be used for working capital
including payments to labor and the purchase of raw materials. It was practised in the
agricultural sector of Madinah at the time of the Prophet (pbuh).
Riba-ridden lending is forbidden and was generally eliminated from the Muslim
society of the Prophet's (pbuh) era. Other forms of financing (e.g., mudarabah, benevolent
lending, sale on credit, muzara'ah, musaqah and bai' al salam) dominated the financing
practices of that period.
The need for Financing
According to prominent Muslim scholars, the need for financing arises because of
the natural differences in resource endowments. This justification for the need for financing
is found in the books of all scholars of fiqh. For instance the fuqaha' argue that mudarabah
175
is needed because not everyone who owns money has trading skills and not everyone
who is skillful in trading possesses money. Al Marghinani puts it more explicitly by saying
that :
People are either rich in money terms but feeble - minded in disposition, or well
guided in disposition but empty - handed money wise. This makes legalization of this
kind of transaction (mudarabah) very much needed in order to render proper the interests
of both the inarticulate and the intelligent, and the poor and the wealthy. Al Hidayah,
(our translation from Arabic).
Therefore, according to the fuqaha', differences in resource endowments along
with the necessity of matching financial resources with business skills may be the most
important reason behind the need for financing. However, fiqh scholars consider two
other points in the process of their rationalization of mudarabah.
The first point is derived from the fact that exchange or trade is indispensable for
all societies. Indeed, trade was the backbone of the Makkan economy at the time of the
Prophet (pbuh). According to Ibn Hazam all those Makkans who could not afford the
mental and physical strain and hardship of trading had to rely on some kind of financing
in order to earn their livelihood. This means that Ibn Hazam looked at financing not only
as a means of cooperation necessitated by the absence of compatibility in endowment
distribution, but also as a source of income, i.e., an occupation of its own. The income
earning motive underlying financing is further emphasized by several narrations from
the Companions about extending orphans' funds as finance. Al Qasim Ibn Muhammad
(who together with his orphan nephews were under the supervision of 'A'ishah) says :
We had funds in the custody of A' ishah and she used to give them on mudarabah
basis. Al Mabsut, V. 22 p. 18 (our translation from Arabic).
'Umar, the second Khalifah, also used to give funds of orphans on a mudarabah
basis (ibid).
The second motive for financing mentioned by the fuqaha' is the human desire to
make one's wealth grow. Ibn Qudamah argues that unlike certain forms of wealth such
as, plants, trees and livestock which have a natural process of growth or certain assets
whose value increases due to an increase in demand or to changes in other market
conditions, money can only grow by means of exchange and turnover (Al Mughni, V.5,
p. 135). On the basis of this desire of growth, Ibn Qudamah validates a sort of financing
in which an owner supplies a real productive asset instead of cash. He argues that
although this kind of relationship is definitely not mudarabah, it is very similar to musaqah
in which productive assets (capital goods) are furnished to the working party on the
basis of gross output sharing. Within this context of growth. Al Sarakhsi points out that
profit can only be generated from the combination of skills and material resources.
Apparently, these two motives of financing along with the motive of matching
resources with business skills portray productive financing, i.e., the use of financing in
the process of producing marketable goods and services. This process is always
associated with the expectation of profit or return which will be distributed between the
financier and the entrepreneur according to an agreed formula.
176
However, there are still other needs for financing especially those emerging out of
unforeseen circumstances. In this regard Muslim writers usually quote two famous sayings
of the Prophet (pbuh) promising an ample reward for benevolent loans (see below).
Commenting on these sayings, Ibn Qudamah argues that the purpose of lending is to
relieve and assist a person who is under pressure and is facing adversity. In fact as the
text of the Hadith shows, the Prophet (pbuh) himself indicates that a loan seeker would
only ask for a loan as a result of necessity and financial despair. It should be noted that
needs which require borrowing may pertain to either consumption or production. Hence
bai' al salam was looked upon as a means of providing financial facilities to producers.
Experts have suggested that it may be made by the Zakah fund or by the banking
system as practiced by most commercial banks in the area of loans to students and
other needy segments of society. The same is also suggested by Siddiqi and Chapra.
However, one may add that institutional lending may also be carried out by general or
specialized cooperative organizations as in the case of credit cooperatives which exist
in several Muslim communities.
Postponement of debt repayment
The Qur'an tells about rescheduling the payment of debts : If the debtor is in a
difficulty, grant him time till it is easy for him to repay ... (II:280).
As may be observed from the preceding and following verses, the context of this
verse is mainly the issue of business lending and the elimination of riba. In his
Commentary al Qurtubi contends that the above verse was revealed in connection with
the debts owed to the Thaqif tribe by the tribe of Bani Al Mughirah. These debts were
interest-bearing and the preceding verses (II:278 - 279) prohibted any increase above
the principal of debts. As a result, the Thaqif asked for their principal to be paid back and
the Bani Al Mughirah complained to the Prophet (pbuh) that they lacked liquidity. Then,
the verse ordering postponing of the repayment of these debts was revealed.
Al Qurtubi, however, contends that despite the specific circumstances of the
revelation of this verse, its meaning is general and it applies to all debts regardless of
their source or origin adding that :
The best thing said about the application of this verse is the statement of 'Ata', Al
Dahhak and Al Rabi' Ibn Khaitham that : it is for any debtor who is in difficulty, he must
be granted time (free of charge) whether the debt was originally based on riba or not
(ibid p. 372, our translation from Arabic).
The postponement of debts, as prescribed by the verse above, is done without
any financial compensation. This applies regardless of the causes of default - involuntary
or deliberate. However, according to the majority of the fuqaha', deliberate default is
punishable in the Islamic penal code by imprisonment and/or fines payable to the state
treasury. But it should be noted that none of the classical writers permits any financial
compensation to be paid to the creditor.
To sum up the important points of this section, it should be noted that in early
Islamic society, financing was provided with the motives of help (lending) and the
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expectation of profit. Although lending serves the financial purpose of the borrower, it is
not dependent upon market factors. Therefore, for all economic purposes, financing
was based on the following principles :
i) The principle of sharing the net outcome of an enterprise or business transaction by
the financier and the user of funds as in mudarabah.
ii) The principle of sharing the gross output while operating costs are borne by one
party and are naturally considered in the distribution of shares in the agreement,
and
iii) The principle of financing through sale, i.e. credit sale which used to take two forms
viz., mua'jjal (immediate delivery with deferred payment with the price of the object
of the sale being due as debt) and salam (immediate payment with deferred delivery
with the object of the sale being due as debt).
The modes of financing covered by the first two principles imply a continuous
relationship between the concerned parties. Therefore, the results of the enterprise or
transaction can only be known ex post.
On the other hand, in the modes of financing covered by the third principle, the
transaction is concluded once and for all and the price of the merchandise or the
merchandise itself, respectively in mua'jjal and salam sales, is transformed into fixed
debt.
If debt is in terms of money as in mua'jjal, the return on financing is known at the
time of the delivery of the objects of the sale.
If the debt is in kind, as in the case of salam, depending on the purpose of the
purchase, two different situations can arise with respect to the return on financing :
a) If the purpose of the salam purchase is simply the acquisition of merchandise (in the
future) rather than its resale, the operation ends with the delivery on the due date.
As in the case of mua'jjal, the return on financing will also be known at the time of
the conclusion of the sale contract.The risk of the failure to deliver the goods or of
any damage is insurable. Therefore, taking this and the price paid together, the
return on this financing is known and fixed at the time of the conclusion of the sale
contract and the payment of the price of the goods.
b) But if the objective of the salam purchase is resale rather than simple acquisition,
then the final outcome of the operation and the return can only be known when the
resale actually takes place. Therefore, unless there is an order from an ultimate
purchaser, a financial institution can hardly be expected to involve itself in such a
risky operation.
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Recent developments in Islamic financing principles
The abolition of interest is the fundamental issue in contemporary discussions on
Islamic financing. In modern Islamic literature, riba and interest are treated synonymously
and, thus, in the following, the two terms are used interchangeably.
The views of contemporary Muslim scholars on the principles of financing are
related to their studies of rationalizing the prohibition of interest and evolving efficient
alternative institutions to the riba-based system. This subject has dominated
contemporary Islamic economic thinking. Moreover, during the last few decades Muslim
societies have also witnessed, for the first time, the emergence of public as well as
private sector applications of Islamic financing principles. In the following, major academic
and policy oriented works related to important developments in the area of Islamic
financing principles are briefly reviewed.
Review of Theoretical Contributions
The views of Muslim scholars who effectively contributed to contemporary thinking
in this area may be summarized by concentrating on two major issues : the difference
between sale and interest-based transactions and the rejection of the idea of a fixed
rate of return on financial capital.
The Difference Between Sale and Interest
In order to understand the principle of financing in Islam, the distinction between
riba (interest) and bai' (sale) is of crucial importance as God explicitly permitted sale
and prohibited interest. Maududi (1950) and Quraishi (1947) have discussed this issue.
Maududi looked into the difference between bai' and interest in the context of the
equitable distribution and efficient management of risk. In interest-based transactions,
risk is transferred to the borrower so that all interest-bearing assets become risk free.
This is socially inequitable and economically inefficient. On the other hand, trade by
conforming to natural uncertainty is not only equitable but also efficient. This is generally
used as a criterion to differentiate riba-based transactions from sale/trade.
In differentiating trade from riba, it is said : One, who sells clothes worth Rs. 10
for Rs. 20 does so believing that the clothes are equivalent to that sum. When mutual
agreement has been arrived at, the exchanges value become equal, with the result that
the parties to the transactions all benefit. But if a person were to acquire Rs. 20 for Rs.
10, the additional Rs. 10 does not represent any real benefit. It will not be then admissible
for him to say that he obtained the additional sum in exchange nor any such thing which
could be pointed out as an exchangeable wealth.
From this comparison it is clear that in riba-based transactions the object of sale
is time and its price is riba. This point has recently been reemphasized in the context of
the time value of money. Al Abji (1986) and Al Masri (1986) hold the view that since a
higher deferred price of an object of sale, compared to its spot price is legitimate, it
implies a recognition of the time value of money in Islam. This value may be determined
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exante. However, arguing that a fixed rent, or a fixed price in a deferred sale does not
mean a fixed return on capital because of the uncertainty and risk incorporated in these
transactions, rejects the above proposition and suggests that the time value of money
can only be determined ex post. Saadallah also identifies the acceptance of the value of
time by Shari'ah scholars but only in relation to real transactions.
Therefore, the value of time is related to its being needed for the completion of a
real transaction. Under riba-based transactions, the postponement of liability justifies a
return to capital. However, in real transactions, the return to capital is linked to owning
real goods which are subject to uncertainty by virtue of their nature. Time is one of
several factors that effect profit and loss because it is required to complete real
transactions.
In the context of the above discussion, two important points are worth mentioning :
i) As far as the difference between sale/trade and riba transactions is concerned, the
first category of transactions is subject to the natural conditions of uncertainty and
risk in relation to time and the second is not. As a result, the capital involved in trade
may grow or decline through time, while in riba-based transactions, capital
automatically increases over time, and
ii) The difference between debt created by loan (qard) and debt created by credit sale
was not clearly discussed. As a result, the liability creating potential of trade (i.e., its
financing potential) did not attract the attention of these earlier scholars. The financing
aspect of the differences between sale and riba was also not discussed by them.
Objection to Fixed Return on Financial Capital
Technically, riba is a contractual increment received by a lender from a borrower
over and above the principal. This implies that riba essentially applies to money lending
as this is a predominant source of debt/liability creation. Therefore, the presence of an
advance contract on the return on capital is considered the distinctive and unique
characteristic of interest. The rationale of charging interest has been strongly challenged
by Muslim scholars on grounds of ethics and efficiency. Maududi says :
Which rational principle, which logic, which cannon of justice and which sound
economic principle can justify that those who spend their time, energy, capacity and
resources, and whose efforts and skills make a business thrive, are not guaranteed a
profit at any fixed rate, whereas those who merely lend out their funds are fully secured
against all risk of loss and are guaranteed a profit at a fixed rate?
There is an almost complete consensus among Muslim scholars that the answer
to these and similar questions is negative. However, it must be pointed out that the
difference between contractual return on lending and contractual return on sale based
financing was not spelled out in the literature under review. Thus, charging any guaranteed
return on financing was considered illogical, irrational and unjust.
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Evolution of Financial Principles during the Period
As a result of the line of thinking briefly reviewed above, many Muslim scholars
held the view that the Islamic financing approach should primarily be based upon a
principle whereby the rate of return on financial capital should vary in accordance with
the variations in the return of the whole enterprise. The application of this kind of
variable rate of return principle in Islamic financing can take the form of the Profit
Sharing Principle (PSP) or the Profit and Loss Sharing Principle (PLSP). These
and other principles of financing emerging from the literature under review are discussed
in the following.
Profit Sharing Principle (PSP)
PSP is based on the mudarabah principle i.e., profits will be shared between the
owner of capital and the entrepreneur on the basis of a contractual agreement whereas
losses under normal circumstances would be written on capital. The first indication of
this principle in the literature under review was given by Quraishi in his notion of
partnership. But his concept is ambiguous as he suggests that capital will be provided by
one party and work by another and profit or loss will be shared by the two parties. More
specifically, as far as the provision of capital and the division of work are concerned,
Quraishi's partnership follows the mudarabah principle, while in regard to liabilities, it is
closer to musharakah.
Profit and Loss Sharing Principle (PLSP)
The PLSP is related to the musharaka principle. Profits are distributed according
to contractually agreed shares, but the liability of loss is proportionate to the capital
contribution. The principle was first mentioned by Quraishi but formally discussed by
Ahmad (1947). According to Ahmad, Islamic financing may take one of two forms :
shares may be floated by ordinary joint stock companies in accordance with the
mudarabah principle, or banking institutions may mobilize resources on the basis of the
mudarabah principle.
Among Muslim economists, Chapra (1985) assigns an important role to the
mudarabah principle for two important reasons. First, he does not present any model
of a typical financial intermediation system as do Siddiqi or Uzair. Second, his emphasis
is on institutional arrangements which characterize the Islamic financing institutions
more as investment institutions than as typical financial intermediaries. Ahmad (1947)
and several other scholars are in line with this approach. The natural outcome of such
arrangements is expected to provide a much more fertile ground for mudarabah. On
the other hand due to its nature, the two-tier-mudarabah was found suitable as a basis
of the intermediation system.
Principles of financing in the perspective of Islamic banks
With the rise of Islamic banks pioneered by the Dubai Islamic Bank, UAE, 1974 and the
Islamic Development Bank, Jeddah, 1975, the practice of Islamic financing principles
was initiated. In starting their operations, these banks naturally faced tough innovative
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challenges. Data of early operations undertaken under the Islamic financing principles
are available in the case of the IDB.Sale-based financing (i.e., murabahah) is shown for
the first time in IDB operations in the year 1976. The quantitative value of this operation
was US $ 50.52 million, which was substantially high when compared to other modes
of operation. This operational mode became so popular among Islamic banks that in
1984 it covered, on an average, 85% of the operations of five Islamic banks. The
operational needs of Islamic banks attracted the attention of several scholars and led to
a number of policy related studies, which are briefly discussed in the following :
Critique of Profit Sharing Principle
Banking finance based on the classical mudarabah principle has been challenged by
some scholars. According to the classical mudarabah principle has the following limitations
when applied to the modern needs of financing :
Firstly, the most important characteristic of classical mudarabah is its bilateral nature.
This characteristic does not allow the classical form of mudarabah to satisfy the needs
of financial intermediation. The bank deals with a large number of depositors and has to
combine their funds, thus sacrificing this bilateral characteristic. According to Homoud, it
requires a multilateral or collective mudarabah which does not exist in classical writings.
To evolve a collective mudarabah, he suggests benefiting from the concept of al, amil al
mushtarak (collective employee). An example of this is a barber whose services are
utilized by many customers on the basis of ujra (wage). The barber works for an
unspecified number of people upon the payment of a wage for his service. The payment,
however, takes place when the work is rendered. On the same principle a collective
entrepreneur can be visualized in mudarabah. With the "collective mudarabah", unlike
the "mudarabah" the depositor is not liable to any loss and the intermediary is entitled
to profit only for assuming the liability of loss :
That a party would not be entitled to receive profit unless he has contributed money,
work or liability. In the case under review (collective mudarabah), neither money nor
work is involved, there remains only liability as a cause for entitlement to profit.
This is in contrast to the "mudarabah" where depositors bear the liability of loss. Therefore,
many writers object to the proposal questioning the depositor's entitlement to profits if
he is not liable to losses.
Secondly, in the bilateral mudarabah, profits are distributed after accomplishing and
completing the transaction. As the entire transaction concludes, the principal is recovered,
then the remaining surplus is treated as mudarabah profit. In a modern financial
intermediation system, retiring the investment and distributing profits is an extraordinary
exception as it is done on the basis of the evaluation of the present value of a pool of
investment instead of the liquidation of bilateral mudarabah.
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Thirdly, in some cases where mudarabah is incapable of providing financing e.g.,
durable or nondurable consumer goods, goods supplied to government and industry,
etc.
Sale-based Principle
Although sale-based liability creating finance has been widely used by Islamic
banks, the general principle has only recently been dealt with in the literature. By studying
the differences between the terms riba, bai' and dayn (debt) as they appear in the Holy
Qur'an, Ismail (1989) attempts to show that sale-based liability-creating financing is
the Islamic alternative to interest. He selects three prominent commentaries on the
Holy Qur'an by Ibn Al Arabi, Al Qurtubi and al Jassas respectively to determine the
meaning of the two verses of the Holy Qur'an which mention these terms. The Qur'an
(II:275) says : ..... That is because they say : Trade (bai') is only like interest (riba), but
God has permitted trade and forbidden interest ....
At the time of revelation, the Arabs had two very common transactions : bai'
and riba. Based on the commentaries of the above mentioned scholars, Ismail rightly
concludes that as bai' can be spot or deferred, the term used in the verse must refer to
deferred sale as it is used in contrast to another form of financing - riba. Ibn Al Arabi and
Al Qurtubi specifically mentioned that bai' in this verse covers all permissible deferred
sales.
Ismail concludes that the fuqaha' usually mention the following five forms of
permissible deferred sales which create deferred obligations :
i) Salam sale (the price is paid at the time of contract but the object of sale becomes
due as debt in kind).
ii) Mua'jjal sale (the object of sale is delivered at the contract and the object of sale is
manufactured and delivered later).
iii) Istisna' sale(the price is paid at the time of contract and the object of sale is
manufactured and delivered later).
iv) Ijarah (the sale of the use rights of assets where assets are delivered to the user,
who in turn pays periodic rentals) and
v) Murabahah li al'amer bi al shira' (sale with a known profit which may or may not
create debt).
In the present context, riba applies only to liabilities (debts) whether they result
from lending or deferred trade. Riba is an increment taken over and above the principal
of debt (whether caused by lending or deferred trade) against granting time for
repayment. In the above mentioned verse, the three commentaries support this assertion
of Ismail.
As far as the exact meaning of dayn is concerned, the Holy Qur'an (11:282)
says : O Ye who believe ! When ye deal with each other in transactions involving dayn
(debt) in a fixed period of time put them in writing...
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The three commentators agree that dayn, in this verse must be the result of
deferred sales which have been mentioned is the previous verse.
Mark-up Principle
The mark-up principle of finance results from incorporating deferred payment in
murabahah. In the mark-up principle, the financier benefits from the difference between
the immediate and deferred prices of the goods. The mark-up principle is justified on the
basis of a generally accepted axiom that time may be valued provided it is incorporated
in a sale transaction. As such, the financier's claim for return derives its fiqhi legitimacy
from the fact that the financier has owned the object of sale for at least some period of
time. Such ownership implies carrying risk and uncertainty. Thus, a return is justified on
the grounds of ownership as well as on the grounds of risk in accordance with the
principle of al kharaj bi al daman.
The markup creates a fixed, predetermined and secure indebtedness. This has
made the mark-up principle attractive for Islamic banks as an alternative to interest
based transactions. It should, however, be noted that in contrast to interest based
lending, the final return to the financier is not fixed in markup based financing. In fact the
final return to the financier is lower than the markup price because of the element of
risk carried by the financier while the merchandise is in his possession. By the same
token, the mark-up principle saves the user of the funds the risks which he would have
otherwise borne had he owned the goods for the same period of time. Thus, the final
cost of the finance for the finance user may be less than the markup price.
Renting Principle (Ijarah)
By separating an asset's ownership rights from its use rights, the renting principle Ijarah
makes the use of an asset independent from its financing. The owner of the asset bears
all the risks associated with ownership and the user of the asset pays a fixed price
(rent) for the benefits of the asset. One can, thus, use an asset without owning it.
Therefore, Ijarah plays an important financial role.
Although in the early sixties Al Sadr suggested the relevance of the Ijarah principle in the
management of the bank's assets, this principle remained insignificant until the emergence
of Islamic banks. In recent literature the principle has been discussed. However, it has
not been widely used by Islamic financial institutions except by the IDB.
Two variants of the Ijarah principle have been used in some countries : hire purchase
and rent-sharing.
In a hire-purchase form of finance, the client (the purchaser of an asset) knows the
price of the asset, the bank's profits in the underlying sale transaction and the amount
of rent to be paid. After paying the principle plus the profit and rents for the relevant
period, the client assumes the ownership refraining from the use of the hire-purchase
principle unless appropriate care is taken with regard to the provision of the extension
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of the lease period, the termination of the lease contract, the return of the asset to its
owner, the purchase of the asset at the end of the lease contract, etc.
In a rent sharing contract, in addition to the principle, the client pays a known share of
the market rent of the building until such time as he completes all payments. It is
understood that the bank's profits in the operation are incorporated into the agreed
rent.
In the conventional literature of economics and finance, a comparison of the renting
principle (i.e., leasing and interst bearing finance) is frequently undertaken and the
superiority of the former is highlighted.
POLICY ORIENTED STUDIES
The most important document in this regard is the report of The Council of Islamic
Ideology on the elimination of riba from the economy. This report, jointly prepared by
economists, bankers and Shari'ah scholars is an exhaustive document which deals with
the elimination of interest from the contemporary economy. In preparing this report,
the Council benefitted from the sources of Shari'ah, the views of Islamic economists
and the experience of Islamic banks which had already been operating for some time
when the report was prepared. Although in preparing the report the Council aims at
providing a blueprint for transforming the banking system, its general validity is widely
acknowledged. The sailent features of the report are reviewed below.
The report provides a comprehensive package of interest-free financing. The authors of
the report had several considerations in addition to the primary objective of the elimination
of interest, including: bank safety, sectoral resource allocation, suitability of the proposed
modes for different users, etc.
The report classifies the Islamic instruments of financing into PLS, sale and service
based modes.
Among the PLS-based modes, musharakah and mudarabah have a wide variety of uses
as they can be the basis of such financing instruments as rent sharing, equity participation
and mudarabah certificates.
According to the report, variants of sale-based financing modes include murabahah,
bai'salam, hire-purchase, leasing, etc., while service based financing includes loans on
the basis of actual administrative cost of service and benevolent loans. However, the
report gave priority and preference to the PLS modes. Sale-based financing was suggested
only in those cases where the PLS system does not work. On the other hand, service-
based modes were considered exceptional and of a non-economic nature.
While implementing the recommendations of the Council, the modes of financing have
been reclassified as :
Investment-based financing which comprises musharakah and mudarabah. Sale-based
financing comprises purchase of trade bills, mark-up and buy-back arrangements. Rent-
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based financing which includes hire-purchase, rent-sharing and leasing. Actual service
cost based financing and ju'alah are classified service-based financing.
Finally, the Shari'ah Councils of private sector Islamic banks played an important role in
developing new Islamic financing techniques by means of issuing their opinions (fatawa).
In the past decade or so, these fatawa have guided Islamic banks in understanding the
different modes of Islamic financing in contemporary banking.
Difference between Profit, Rent, Wage and Interest
In conventional economics, profit, rent, wage and interest are considered to be factors
of production. In one way or another, all are fixed in relation to time except profit. Profit
is an uncertain amount whereas wage, rent and interest are fixed and known. Islamic
economic literature dismisses interest as it is prohibited by the Holy Qur'an. Rent and
wage are treated as one and the same as the term ujrah is used for the price of both
human resources per unit of time (wage) as well as the usufruct rights of fixed assets
(rent). Therefore, the question can be asked : what is profit and how is it different from
ujrah (rent/wage) and interest ?
In the Holy Qur'an, the term profit is used only once :
These are they who have purchased error in exchange for guidance.
Their trade has brought them profit (II : 16)
In Islamic jurisprudence literature, profit is defined as the increase in the value of assets
(fixed or mobile) actually realized in exchange.
Profit may be the result of a natural process of growth without any effort or cost on the
part of the owner, e.g., pastures growing on privately owned land or the increase in
water of a privately owned well. Profit may also result from mere changes in the
conditions of supply and demand rather than an effort on the part of the asset owner,
e.g., an increase in the number of people or a decline in the amount of production were
cited by Ibn Taymiyah as factors which raise the exchange value of an asset (Kahf
1978). Profit may also arise out of human action applied to an asset which increaes its
exchange value. Such a human action may transform an asset to a higher valued one
as in the case of manufacturing steel into machines.
In both Islamic economics and fiqh literature, physical capital and labor may enter the
production process either on ujrah or on a profit basis depending on the different
combinations of management and ownership. Managerial (or entrepreneurial)
responsibilities may be carried out by the owner of capital or by labor (i.e., an entrepreneur
or a working partner/entrepreneur). Profit in Islamic economic thinking is inherently
associated with the responsibility of decision making. In a market economy this
responsibility exposes the decision maker to an uncertain outcome. Hence, when the
capital owner becomes also the decision maker of the firm, his earning is called profit
i.e., the residual after paying a known and fixed return ujrah (wage) to labor.
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A working partner, without any share in capital, can also be the decision maker of the
firm and can share in profit once payment of a fixed and known return ujrah (rent) is
made to physical capital and possibly to other workers who have made a human input.
By the same token, labor or physical capital may select to enter the production process
without any decision making responsibility. i.e. either of them can dispose of every bit of
uncertainty and risk involved in the production process and restrict the return to ujrah
(wage/rent) per unit of time sold to the entrepreneur.
Human and physical capital (e.g., working hours, plants, machines and equipment) can
be rented out because they have lasting substance and a flow of definite services. In
contrast, the nature of monetary capital is such that it can only grow through exchange
and does not, in isolation, generate a flow of services over a period of time. Therefore,
from the point of view of Islamic economics, interest is a fictitious and unjust convention.
It is always described as oppressive because it is taken in exchange for nothing.
In the same manner, debts regardless of their origin share with money the incapability
of growing independently. But while money is readily usable in exchange, debts need to
be liquidated (i.e., they should be transformed into money, commodities or physical
capital) before being invested - a utilization which permits growth. Debts are mere
personal obligations; they cannot grow.
Since money has what the Fuqaha' call the potentiality of growth only through the
process of exchange, it is needed in the production process for making payments to
physical capital, labor and intermediate inputs. As money does not posses a flow of
services of its own, it can only enter the production process on the basis of sharing the
outcome of exchange. In other words, it can enter production only on the basis of
sharing the uncertainty and risk inherent in a market economy.
Basis of Entitlement to return
The above discussion helps to clarify the basic axioms for the justification of return in
Islamic economic thinking. In the following, these axioms are summarized in order to
highlight their implications for wage/rent and profit.
i) The first and foremost axiom for the justification of return is the ownership of an
asset. If the nature of the owned asset is such that it can produce a flow of services
without being depleted (e.g., a machine or a plot of land), the asset can be rented or
otherwise given on a profit sharing basis.
ii) Like privately owned natural resources and other forms of capital produced by any
combination of human and natural resources, human resources are a special form
of asset which can also be given away on ujrah (wage) or on a profit basis.
iii) Earning ujrah (wage/rent) is based on selling a flow of definite services of the assets
owned. Human resources are in this sense a form of owned asset. This means that
ujrah (wage/rent) earners are in fact owners of lasting resources who enter the
market offering their services and become subject to the law of supply and demand.
Accordingly, ujrah earners are subject to market risk and uncertainty as are profit
earners. The essential difference between the two categories however, is the extent
of risk taking which is inherently associated with the extent of the decision making
authority.
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Conclusion
In the light of historical evidence from the early period of Islam and contemporary
literature, a comparative review of Islamic financing principles has been presented in this
section.
The fixed nature of return on capital is considered the unique characteristic of interest
by most contemporary Muslim economists. As a corollary, therefore, the Islamic principle
of financing is considered to be based on the variable rate of return (i.e., profit sharing).
Therefore, mudarabah has been treated by these scholars as a synonym for Islamic
finance and the need for finance has been discussed in this context. This is perhaps the
reason for neglecting the financing potential of the sale-based principle of finance and
for the difference in this regard between interest and sale. As a result, Islamic economists
tend to describe the Islamic economy as debt free.
However, the emergence of Islamic financial institutions has highlighted the immense
financing potential of the sale-based principle where financing results in debt creation.
This clarifies the point that there is a difference between the fixed nature of return on
capital invested in real transactions (sale) and on capital invested in pure finance (interest).
It is, therefore, clear that profit sharing is the only Islamic principle of earning a return on
capital invested in pure finance (where ownership is separated from management).
However, as sale on a deferred basis serves the financial needs of the buyer and seller,
it is no wonder that mark-up and renting principles became the dominant practice of
contemporary Islamic financial institutions.
Recently, by emphasizing the characteristics of ownership in Islam and its combination
with different forms of property management, it has been concluded that mudarabah is
a principle of pure finance whereas musharakah, like trading, is investment in real
transactions.
Debt (dayn), has two primary sources : a nonmarket source (i.e., loan) and a market
source (i.e., sale). The question of a return on nonmarket debt does not arise because
the cause of the debt is a humanitarian consideration and the question of a return on
debt created by sale does not arise because the return has already been incorporated
into the price of the assets traded. Thus, once the debt is created, irrespective of its
origin, the extension of its repayment period can only be non-economic in nature. A
debt default does not improve the quality or quantity of the debt. Therefore, claiming a
return for extending the repayment period is unnatural and illogical.
The diversified nature of the principles of Islamic financing makes it capable of meeting
the numerous financial needs of the society.
Module - II
CAUTION : No part or parts of this material including title design should be transmitted, copied or reproduced in any form without written
permission of the Institute. Any unauthorised use by individuals/organisations will be liable for appropriate legal action.
CONTENTS
Chapter - I ................................................................................................ 188 - 202
Islamic Economics
Chapter - II ............................................................................................. 203 - 205
Conventional Economics
Chapter - III ............................................................................................ 206 - 218
Distributive Justice in Islam
Chapter - IV............................................................................................ 219 - 222
Fiqh - Islamic Financial Jurisprudence
Chapter - V ............................................................................................. 223 - 231
Profit Vs. Bank Interest - An analysis
CHAPTER - I
CONTENTS
Chapter - I ................................................................................................ 188 - 202
Islamic Economics
188
CHAPTER - I
ISLAMIC ECONOMICS
Introduction
Every social system has its own economic system. Islam being a comprehensive
and distinct social system, possesses a corresponding economic system. Islam being
an eternal way of life for all times and places, its system should be flexible. Usually,
textbooks on economic systems explain Western economic systems such as capitalism,
socialism, etc. This is so because contemporary economics evolved in the West. The
backwardness of Muslim communities since the 16th or 17th centuries led to two
things. First, the lack of proper attention to Islamic systems and values. Second, lack of
dynamic development of economic thought in conformity with Islamic principles. With
the present revival in Muslim countries, and the awareness of the wealth of knowledge
in Islam, there are ever increasing studies on Islamic economics. This trend is reinforced
by the failure of Western economics to bring about happiness to human beings or
stability to societies.
Definition of the Economic System
The economic system is part and parcel of the social system. It cannot be regarded
as a separate entity. The main factors that affect the economic system in any country
are :
a) The historical and ideological background
b) The size and geographical location.
c) The level of development.
d) The degree of openness.
e) The political system.
The success of the system will depend on its consistency with all aspects of life.
What is the definition of an economic system ? Schumpeter says "By a system of
political economy I mean an exposition of a comprehensive set of economic policies
that its author advocates on the strength of certain unifying (normative) principles such
as the principle of economic liberalism, of socialism, and so on".
On the basis of the second definition, the basic organizations or institutions which
distinguish one economic system from the other relate to three basic areas. These
are : types of ownership, motivation, and decision making process. The role of the
government in the economic life is also one of the elements which differentiates the
various economic systems. Finally, on a microeconomic level, the economic system
should have a say in the four classifications of consumption, production, exchange, and
distribution.
As far as ownership is concerned, three forms can be identified. These are : private,
public, and mixed ownership. The motivation of the various agents in the society could
be private profit or public good and welfare. Two main forms of decision making processes
could be cited; market mechanism and planning policies. The role of the government in
economic life can be either minimal or overwhelming. The organization of the four
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compartments of microeconomics will differ depending on the type of choice between
various institutions cited above. One can make several combinations of the various
elements in these institutions. (See figure 1). Consequently, the formal capitalist system
is characterized by :
a) private ownership of the means of production.
b) profit motive.
c) decisions are taken in the market place.
d) a minimal role for the government.
Hence, consumer preferences are matched with the assortment of goods produced,
and occupational preferences are matched with employment opportunities. On the other
hand, the socialist economic system will be composed of :
i) public ownership of means of production
ii) public good is the motive
iii) decisions are taken through planning
iv) government is the center of all economic activities
Ownership Motivation
Private Mixed Public Profit Public Good
Decision Marketing Process Role Government
Democratic Dictatorial Minimal Focal
Activities
Market Directives (Planning)
Fig. 1. Elements of Economic Systems
The organic definition of the Islamic economic system will determine the elements
of the various components. This will be done in the following section.
Elements of an Islamic Economic System
Due to the universality of Islam over time and space, its economic system should
be flexible. It should allow for the differences in the socio-political factors of the various
Muslim countries. The main sources which determine the basic elements of the Islamic
system are the Qur'an and Sunnah. The thoughts of Muslim scholars and the experience
during the past 14 centuries would give an important guidance. These latter sources,
however, should be taken with care and greater flexibility. This is due to the drastic
changes which took place in the organization of societies during the past 14 centuries,
and the fact that economic organization to a large extent falls in the category of
transactions (Mu-amal-at). That is, Muslim communities could be either rural or urban,
self sufficient, subsistence or highly specialized economy, underpopulated or
overpopulated, small or very big, and so on. The type of organization required for one
will be different in some details from that required for another, while still maintaining its
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Islamic characteristics. This remark is very important in our analysis. Bearing it in mind
will save us lots of unnecessary debate over some details.
Having said this, we shall specify the main elements of an Islamic economic system
in the light of the adopted definition.
Ownership
Muslim scholars dealt with the question of ownership in a detailed and comprehensive
manner. There is a consensus that it plays a social function. This is true of everything in
Islam since all matters in the final analysis pertain to God Almighty. In determining the
forms of ownership, Islam recognizes private ownership and preserves it. The Qur'an
states "To men is allocated what they earn, and to women what they earn". (4:32).
The Prophet (pbuh) said "A Muslim is not allowed to transgress on another Muslim his
life, honor and wealth".
Islam may allow some public ownership of the means of production, as far as
private ownership serves the society better. However, some conditions and restrictions
on private property are imposed.
a) The owner should always try to invest his wealth in order to develop the society,
and not keep it idle, for it will be reduced through the payment of Zakah.
b) The owner should spend in the way of God, which will help achieve social solidarity.
c) The use of wealth should not harm other individuals or the society at large.
d) The sources of wealth be Halal. It should not be realized from Riba, cheating, or
monopoly. In the latter cases it could be confiscated for the benefit of the treasury
(Bayt al Mal).
e) Wealth should not be used to corrupt the society or to exercise political power.
It could be stated that Islam imposes the general principle of Wasat (balance).
"Thus have We made of you an Ummah justly balanced". (2:143). Consequently,
ownership in an Islamic economic system is mixed. Both forms of ownership, private
and public are allowed.
Motivation
Islam, as a way of life, gives due importance for both lives, this world and the
hereafter. It does not allow the individual to consider himself the centre of all his activities.
The individual in an Islamic society should give due consideration to his relations, towards
God Almighty, family, society as well as to himself. This is illustrated by a verse in
Qur'an. "But seek, with the (wealth) which God has bestowed on thee, the home of the
Hereafter, nor forget thy portion in this World" (28:77). This motivation would give
enough incentive for man to work and develop his society, at the same time would save
the society from the evils of excessive concentration on the selfish profit motive alone.
The value Islam assigns to work would ensure a better utilization of available resources.
The Qur'an says "And Say : work (righteousness) : soon will God observe your work
and His Apostle, and the Believers: (9:105). The Prophet, (pbuh) said, "The best that
man can earn is that resulting from his work".
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Decision making process
Market forces as the sole mechanism for decision making is consistent with private
ownership. This is also true of planning in the case of public ownership. Since, Islam
allows both forms of ownership, it is only logical to find both methods of decision
making in it. The Shura (consultation) principle governs public issues. In case a decision
in required about a debatable issue, consultation would rule. The general principle,
however, is that economic decisions should be taken in the market place. This stems
from the fact that in general administrative pricing (Tas-ir) is not allowed. The evils
which might result from the imperfections of the market would also be minimized through
the observance of Islamic values such as : forbidding cheating "(Whoever cheats is not
among our nation)", illegality of excessive rates of profits, moderate consumption
patterns, even when consumers have the ability to pay "Squander not (your wealth) in
the manner of a spendthrift. Verily spendthrifts are brothers of the Evil Ones:
(17:26-27).
On the other hand, the Islamic State should be concerned with the economic
welfare of both generations, the present and the future. Coupled with the existence of
some public enterprises, a sort of planning should be adopted. With the existence of
mixed ownership, indicative planning as it is known should be applied.
The role of the state
In Islam the role of the State is neither the guarding state as in capitalism, nor is it
totalitarian as in socialism. The state in an Islamic economic system has the role of
guidance and supervision. It has to create a congenial atmosphere for the progress of
the society. Through Zakah and other fiscal tools it has to assure a better distribution of
income. The Public sector is allowed to exist, though it should not embrace all the
activities in the society. The Government should intervene to strike a balance between
private and public interests whenever a conflict arises. This need not be through producing
goods by Government, other forms ought to be more efficient. Justice as a general
tenet of Islam should be guiding principle for all government activities.
The organization of economic activity
The organization of production and exchange should be competitive. Monopoly is
generally forbidden. The Prophet, (pbuh) says, "The monopolist is condemned". And
"Whoever monopolizes food stuffs for forty days to raise prices will go out of God's
mercy".
Hence, consumers will not be exploited.
Distribution
Islam gives a great importance to social solidarity. True belief depends on the
application of this principle. The Prophet (pbuh) said, "One does not believe if his neighbor
does not find what to eat".
The sufficiency limit (Hadd al-Kifayah) should be assured for every individual living
in the Muslim society. The question which would be raised here is : will income distribution
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in an Islamic system be more equitable or otherwise ? Many Muslim scholars argue that
income distribution would be more equitable. This is because of the fiscal tools (Zakah,
Sadaqah and public expenditures, etc.) We tend to support this view. Some inequality
nonetheless would exist. This is a required motive for better work and more efforts
which cause growth and development. Hence inequality of income distribution has some
advantages provided that it does not become flagrant. Such inequality does exist in
both capitalism and socialism even if it is denied in the latter. [We shall deal with this
point later in this paper]
The emphasis on equality of income distribution should not lead us to neglect the
level of income in the Society. Equality of distribution is not a target in itself. If this were
so, we would opt for it regardless of the level of per capita income in the society. That
is, if we were to compare between two situations : The first, a more equitable distribution
of income, at a very low level of per capita income. The second, a less equitable distribution
of income, at a much higher level of per capita income with assurance that Hadd-al-
kifayah will be satisfied for all individuals of the society. Definitely, the second alternative
would be preferred, although on the basis of equality alone the first will be chosen. The
principle of realizing the greater benefits or avoiding the worse harm would be followed
in the process of choosing between alternative, i.e. between equity and growth in this
case. The trade-offs among objectives should be carefully assessed since Islamic decisions
should be rational.
The transition
It is regrettable to note that the Muslim countries now a days are among the
developing countries. The state of science and technology in these countries is backward.
Their economic conditions are depressed. These conditions inflict a great loss not on
Muslims alone, but on all humanity. It is only normal, that people like strength and
success. The situation presently prevailing in Muslim countries : economic, social and
political, leads non-Muslims to blame Islam for it. At best, they will not give due attention
to the perfect principles of the Islamic economic system. Therefore, the responsibility of
the Muslim communities is great. The purification of their economic system would arouse
enthusiasm in their people, which would lead to harder and better work and progress.
One would claim that the pure economic changes which are required are easy to
introduce. What is needed most, is a strong belief in setting the society on Islamic
principles. This would present to the World a perfect model which would realize the lost
balance between material abundance and spiritual comfort.
The Paradigm
Islamic economics is based on a paradigm which has socio-economic justice as its
primary objective (Qur'an, 57:25), This objective takes its roots in the belief that human
beings are the viceregents of the One God, Who is the Creator of the Universe and
everything in it. They are brothers unto each other and all resources at their disposal are
a trust from Him to be used in a just manner for the well-being of all (repeat all). They
are accountable to Him in the Hereafter and will be rewarded or punished for how they
acquire and use these resources.
Unlike the secularist market paradigm, human well-being is not considered to be
dependent primarily on maximizing wealth and consumption ; it requires a balanced
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satisfaction of both the material and the spiritual needs of the human personality. The
spiritual need is not satisfied merely by offering prayers; it also requires the moulding of
individual and social behaviour in accordance with the Shari'ah (Islamic teachings), which
is designed to ensure the realization of the maqasid al-Sharl-ah (the goals of the Sharl-
ah hereafter referred to as the maqasid), two of the most important of which are
socio-economic justice and the well-being of all God's creatures. Negligence of either
the spiritual or the materials needs would frustrate the realization of true well-being and
exacerbate the symptoms of anomie, such as frustration, crime, alcoholism, drug addiction,
divorce, mental illness and suicide, all indicating lack of inner contentment in the life of
individuals. Within this paradigm, more may not necessarily be better than less under all
circumstances, as conventional economics would have us believe. Much would depend
on how the additional wealth is acquired, who uses it and how, and what is the impact of
this increase on the overall well-being of society. More may be better than less, if the
increase can be attained without weakening the moral fibre of society, raising anomie,
and harming the ecological balance.
In spite of its emphasis on morals, Islam does not recognize any watertight
distinction between the material and the spiritual. All human effort, irrespective of whether
it is for 'material', 'social', 'educational', or 'scientific' goals, is spiritual in character as
long as it conforms to the value system of Islam. Working hard for the material well-
being of one's own self, family and society is as spiritual as the offering of prayers,
provided that the material effort is guided by moral values and does not take the
individual away from the fulfillment of his social and spiritual obligations. Ideal behaviour
within the framework of this paradigm does not thus mean self-denial; it only means
pursuing one's self-interest within the constraint of social interest by passing all claims
on scarce resources through the filter of moral values. These values constitute an
inseparable part of the Shari-ah and wee continually provided to all people at different
times in history, by a chain of God's prophets (who were all human beings), including
Abraham, Moses, Jesus and Muhammad, the last of them. Thus, according to Islam,
there is a continuity and similarity in the value system of all revealed religions to the
extent that the message has not been lost or distorted over the ages.
It is presumed within this paradigm that morally-oriented individual behaviour in an
appropriate socio-economic justice and overall human well-being, just as it is presumed
within the market system's paradigm that self-interested behaviour in a competitive
market would ensure social interest. However, while mainstream economics assumes
the prevalence of self-interested behaviour on the part of all individuals. Islam does not
assume the prevalence of ideal behaviour. It adopts the more realistic position that
while some people may normally act in a purely ideal or self-interested manner, the
behaviour of most people may tend to be anywhere between the two extremes.
However, since ideal behaviour is considered to be more conducive to goal realization,
Islam tries to bring individual behaviour as close to the ideal as possible. This it does not
do by coercion and regimentation. It rather tries to create an enabling environment
through social engineering based on moral values, effective motivating system, and
socio-economic reform. It also emphasizes the building of enabling institutions, and the
playing of an effective goal-oriented role by the government.
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Socio-economic restructuring
Both the filter mechanism and the motivating system may become blunted if the
socio-economic environment is not geared to goal realization. Hence the first two
ingredients of the strategy need to be reinforced by a third ingredient - socio - economic
and financial restructuring - to create a proper socio-economic environment. Such an
environment may be created by properly educating the public, creating an effective
framework of checks and balances, and reforming the existing socio-economic, legal
and political institutions or building new ones. Congregational prayers, fasting in Ramadan
pilgrimage and zakat are a part, but not the whole, of the Islamic programme to create
such an environment. They tend to make the individuals and groups conscious of their
social obligations and more motivated towards the observance of values even when
these tend to hurt their short-term self-interest. The existence of a proper enabling
environment may help complement the price system in creating greater efficiency in the
use of human and material resources, promoting simple living, and reducing wasteful
and conspicuous consumption. This may help realize higher saving, investment,
employment and growth. The absence of such restructuring may not only frustrate goal
realization, but also exacerbate the existing macroeconomic and external imbalances
through greater resort to deficit financing, credit expansion, and external debt.
The role of the state
Such a comprehensive socio-economic restructuring designed to help in the
actualization of desired goals and minimizing the existing imbalances may not be possible
without the playing of an active role in the economy by the state. This is because, even
in a morally-charged environment, it may be possible for individuals to be simply unaware
of the urgent and unsatisfied needs of others or to be oblivious to the problems of
scarcity and to social priorities in resource use. Under such conditions the double layer
of filters suggested above, even though indispensable, may not be sufficient.
The Islamic state may, therefore, have to play an effective role in the economy. It
may have to go beyond the generally recognized roles of providing internal and external
security and removing market imperfections and market failure. It may have to help
create a proper environment for removing injustice in all different forms and for realizing
the society's normative goals. This may have to be done without resorting to
regimentation and the use of force, or the owning and operating of a substantial part of
the economy. The state may have to determine social priorities in the use of resources
and to educate, motivate and help the private sector to play a role which is consistent
with goal realization. This it may accomplish by helping internalize moral values among
individuals, accelerating social, institutional and political reform, and providing incentives
and facilities. It may have to create a proper framework for the interaction of human
beings, values, institutions, and markets for the realization of goals without excessive
government intervention.
The role of the state in an Islamic economy is not, however, in the nature of an
'intervention', which is an unsavoury term and smacks of an underlying commitment to
laissez-faire capitalism. It is also not in the nature of the secularist welfare state which,
through its anathema to value judgements, accentuates claims on resources and leads
to macroeconomic imbalances. It is also not in the nature of collectivization and
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regimentation, which suppress freedom and sap individual initiative and enterprise. It is,
rather, a positive role - a moral obligation to perform a mission in compliance with the
divinely-bestowed filter mechanism - to help keep the economic train on the agreed
track and to prevent its diversion by powerful vested interests. The test of the Islamic
state would lie in its performing the desired role effectively in a way that allows maximum
possible freedom and initiative for the private sector. The greater the motivation people
have in implementing Islamic values, and the more effective socio-economic institutions
and financial intermediation are in creating the proper environment for a just equilibrium
between resources and claims, the lesser will be the role that the state may be required
to play in realizing its desired goals. Moreover, the greater the accountability of the
political leadership before the people, and the greater the freedom of expression and
the success of the news media and the courts in exposing and penalizing inequities and
corruption, the more effective the Islamic state may be in fulfilling its obligations.
Islamic Economics defined
In keeping with a prayer of the Prophet, may the peace and the blessings of God
be on him, seeking the refuge of God from knowledge that is of no benefit, the primary
function of Islamic economics, like that of any other body of knowledge, should be the
realization of human well-being through the actualization of the maqasid. Within this
perspective Islamic economics may be defined as that branch of knowledge which
helps realize human well-being through an allocation and distribution of scarce
resources that is in conformity with Islamic teachings without unduly curbing
individual freedom or creating continued macroeconomic and ecological
imbalances.
Hence, while the "classics looked at the economic system primarily from the
production angle, "and" the catallactists [marginalists] looked at it primarily from the
side of exchange, Islamic economics may have to look at it from the point of view of
goal realization. It may accordingly have to study all those factors that affect the
realization of these goals through their impact on the allocation and distribution of
resources. Since human beings constitute the ends of, as well as the most crucial factor
influencing the allocation and distribution of resources, they may have to become, along
with the values and institutions (social, economic and political) that influence their
behaviour, a part of the economic model and received due attention. This may not
allow economics to concentrate only on the nature of the market and prices in its
analysis and to take human behaviour as given. It may also have to take into account
all the relevant aspects of human behaviour and other factors that affect allocation and
distribution of resources and thereby human well-being.
If economics takes into account the whole relevant spectrum of human behaviour,
then it may not be able to confine itself merely to self-interested behaviour on the part
of individuals. Individuals do not always behave in a purely self-interested manner. Similarly,
36
The Prophet, peace and blessings of God be on him, said : "Seek knowledge even though it may be in China
because the seeking of knowledge is the duty of a Muslim." (Reported from Anas ibn Malik by Suyuti in his al-Jami'
al-Saghir on the authority of al-Bayhqi's Shu'ab al-Iman. This is a weak hadith. Nevertheless, it is quoted here
because it indicates the importance of acquiring knowledge irrespective of where it is available. This was in fact
the practice of Muslims during their period of ascendance in the early centuries.
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they do not always behave in an ideal or altruistic manner. Their behaviour generally
tends to fluctuate between these two extremes.
35
This is in principle the same as
markets, which may not be either perfectly competitive or perfectly monopolistic.
Therefore, while conventional economics studies consumer and firm behaviour under
perfect competition as well as under imperfect competition and monopoly, there seems
to be no reason why the impact of self-interested as well as ideal behaviour may also
not be studied. It may be necessary to analyze the effect of both of these types of
behaviour on the allocations and distribution of resources.
The task that Islamic economics may need to perform is, therefore, significantly
greater than that of conventional economics. Its first task may be to study the actual
behaviour of individuals and groups, firms, markets, and governments. This is what
conventional economics tries to do, but has been unable to do adequately because of
its assumption of self-interested behaviour, defining self-interest in its peculiar this-wordly
sense of maximizing material wealth and want satisfaction, as already discussed. Actual
behaviour may or may not be necessarily self-interested. Therefore, the first task of
Islamic economics is to study human behaviour as it actually is, without restricting itself
to only a specific aspect of it through an unrealistic assumption. Moreover, actual behaviour
may or may not be conducive to goal realization. Therefore, the second task of Islamic
economics is to indicate the kind of behaviour that is needed for goal realization. Since
moral values are by their very nature oriented towards goal realization, Islamic economics
need to take into consideration Islamic values and institutions and scientifically analyze
their impact on goal realization. Thirdly, since there is a divergence between actual and
ideal behaviour, Islamic economics must explain why the different economic agents do
not behave the way they ought to. Fourthly, since one of the primary purposes of
seeking knowledge is to help improve the human condition, Islamic economics must
suggest measures which may help bring the behaviour of all market players that influence
allocation and distribution of resources as close to the ideal as possible.
The rise of Islamic Economics
Islamic economics had been developing gradually as an interdisciplinary subject in
the writings of Qur'an commentators, jurists, historians, and social, political and moral
philosophers. A large number of scholars including Abu Yusuf (d. 182/798), al-Mas'udi
(d. 346/957), al-Mawardi (d. 450/1058), Ibn Hazm (d. 456/1064), al-Sarakshi (d.
483/1090), al-Tusi (d. 485/1093), al-Ghazali (d. 505/1111), Ibn Taymiyyah (d. 728/
1328), Ibn al-Ukhuwwah (d. 729/1329), Ibn al-Qayyim (d. 751/1350), al-Shatibi (d.
790/1388), Ibn Khaldun (d. 808/1406), al-Maqrizi (d. 845/1442), al-Dawwani (d. 906/
1501), and Shah Waliyullah al-Maqrizi (d. 845/1442), al-Dawwani (d. 906/1501), and
Shah Waliyullah (d. 1176/1762) made valuable contributions over the centuries. These
contributions are spread over a vast literature covering different intellectual disciplines".
It was perhaps because of this interdisciplinary contribution that human well-being never
got conceived as an isolated phenomenon dependent primarily on economic variables.
It was seen as the end-product of a number of economic as well as moral, intellectual,
social, and political factors in such an integrated manner that it was not possible to
realize overall human well-being without an optimum contribution from all. Justice
occupied a pivotal place in this whole framework. This was to be expected because of
its crucial importance within the Islamic paradigm.
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These diverse contributions over the centuries seem to have reached their
consummation in Ibn Khaldun's Muqaddimah or "Introduction to History". The
Muqaddimah analyses the closely inter-related role of moral, political, economic, social
and demographic factors in the well-being or misery of the poeple, which ultimately
leads to the rise and fall of governments and civilizations. His analysis is not static and is
not based on only economic variables. It is rather in the nature of socio-economic
dynamics. The Muqaddimah contains a considerable discussion of economic principles, a
significant part of which is undoubtedly Ibn Khaldun's original contribution to economic
thought. However, he also deserves credit for the clearer and more elegant expression
of the contributions made by his predecessors and contemporaries in the Muslim world.
Ibn Khaldun's insight into some economic principles was so deep and far-sighted that a
number of the theories propounded by him nearly six centuries ago could easily match
some of the most modern theories on the subject.
Ibn Khaldun, however, lived at a time when the political and socio-economic decline
of the Muslim world was already underway. He rightly theorized that sciences progress
only when a society is itself progressing. This theory is clearly upheld by Muslim history.
Sciences progressed rapidly in the Muslim world upto the fourth century Hijrah. The
development continued at a decelerated pace for a few more centuries, tapering off
gradually thereafter. Only once in a while there appeared a brilliant star on an otherwise
unexciting firmament. Economics was no exception. It also continued to be in a state of
limbo in the Muslim world. No major contributions were made after Ibn Khaldun except
by a few isolated luminaries like al-Maqrizi, al-Dawwani and Shah Waliyullah.
Consequently, while conventional economics became a separate scientific discipline
in the West in the 1890s after the publication of Alfred Marshall's great treatise, Principles
of Economics, in 1890, and continued to develop since then, Islamic economics remained
primarily an integral part of the unified social and moral philosophy of Islam until the
Second World War. The independence of most Muslim countries after the War and the
need to develop their economies in the light of Islamic teachings has given boost to the
development of Islamic economics.
However, the valuable contributions made by some scholars in their individual
capacities, could not provide the thrust needed to establish the separate identity of the
subject. It was the First International Conference on Islamic Economics held at Makkah
in February 1976, which served as a catalyst at an international level and led to an
exponential growth of literature on the subject. Dr. Muhamad Omar Zubair and Prof.
Khurshid Ahmad played a pioneering role in the holding of this Conference as well as a
number of other conferences and seminars that have helped provide momentum to the
discipline. Dr. M. Nejatullah Siddiqi's survey article on Muslim economic thinking presented
at this Conference served as a foundation for discussions and a catalyst for later
development of Islamic economics.
A number of institutions have also played a crucial role. The most important of
these are : the Association of Muslim Social Scientists, U.S.A. (established in 1972); the
Islamic Foundation, Leicester, U.K. (1973); Islamic Economics Research Bureau, Dhaka,
Bangladesh (1976); the Centre for Research in Islamic Economics at the King Abdulaziz
University, Jiddah (1977); the International Institute of Islamic Thought, Herndon, Virginia,
U.S.A. (1981); the Islamic Research and Training Institute (IRTI) of the Islamic
Development Bank (IDB), (1983); the International Institute of Islamic Economics,
Islamabad (1983); the College (Kulliyyah) of Economics at the International Islamic
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University, Kuala Lumpur (1983); and the International Association of Islamic Economics
(1984). Out of these the Centre for Research in Islamic Economics at the King Abdul
Aziz University and the Islamic Research and Training Institute at the IDB deserve a
special credit for their outstanding contributions. The Centre's contribution has been
already recognized by the IDB award in Islamic Economics in 1993.
The field where maximum, though still far from adequate, literature has become
available is money and banking and Islamic finance. The goals that it may be possible to
realize through the abolition of interest and the operation of an equity-based system
have by how become quite well identified through the writings of a number of scholars.
However, adequate data are not available to evaluate the actual performance of Islamic
banks against these goals, to know the problems they are facing, and to explain why
the ideal modes of financing have not become fully actualized. Moreover, there is hardly
any information available on the perceptions and apprehensions of the general public,
policy makers, shareholders and depositors about Islamisation of the financial system.
It may not be possible to work out an effective strategy for changing these perceptions
or removing these apprehensions without the availability of actual data.
The available literature is preoccupied mainly with elaborating the different techniques
of Islamic financial institutions. This may perhaps have been responsible for the false
impression that the primary difference between conventional and islamic economics lies
in the mechanism through which financial intermediation takes place. It may not be
possible to remove this false impression without a substantial theoretical advance in
both microeconomics and macroeconomics. This would help identify the different variables
that influence individual behaviour and goal realization, only one of which is interest, and
specify the reforms needed in individual behaviour, institutional framework and
environment for the Islamisation of the economies of Muslim countries.
Some progress has undoubtedly been made in macroeconomics. There has been
a substantial discussion of the maqasid. There is, however, no theoretical model which
would show how these goals may be realized. The attempts made so far "simply replace
interest rate by profit-sharing ratio and introduce Zakat as a tax without assuming any
substantial change in the behaviour of the economic agents. An appropriate
macroeconomic policy structure in the light of Islamic economics has hence not developed
and the maqasid remain unrealized in the Muslim world. This is probably one of the
primary reasons for the tension and turmoil in the Muslim world. However, there are
very few Muslim countries where the needed data are available to indicate the extent of
the gap between the maqasid and the prevailing situation. Few Muslim countries have
adequate data on the distribution of income and wealth and the nature and quality of
life, particularly of the downtrodden people, to enable us to know the degree of equity
prevailing in the allocation and distribution of resources, which is considered to be the
most crucial criterion for judging the Islamisation of a Muslim economy. There are also
inadequate data about the extent of need-fulfillment in different sectors of the population,
their saving and investment behaviour, employment and unemployment, child labour,
wages and salaries, working conditions, work habits, and productivity, along with a
convincing scientific explanation for the deviation from Islamic norms. There is very little
information available on the socio-economic condition of women, along with a
comparison with the high status that Islam assigns to them in its value system. Unless
we know the actual position as well as the reasons for it, it may not be possible to
prepare a well conceived program for social, economic and political change, and the
measures that need to be adopted to actualize this change.
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The field where very little progress has been made is microeconomics. Conventional
economics has built its microeconomics on some hypothetical assumptions about the
behaviour of individuals and firms. There assumptions have proved to be unrealistic.
Nevertheless, the assumptions continue unperturbed. Moreover, conventional economics
does not discuss the change needed in individual and social behaviour to realize its
macroeconomic goals.
Islamic economics, however has the advantage of benefiting from the tools of
analysis developed by conventional economics. These tools, along with a consistent
worldview for both microeconomics and macroeconomics, and empirical data about
the extent of deviation from goal realization, may help identify the enabling social,
political and economic environment needed for the actualization of the maqasid.
Economists may also have to explain why and when individuals do not behave in an
ideal manner, why the existing institutions are unable to provide the enabling environment,
and how individuals, households and firms could be made to behave in an ideal manner
so as to remove the prevailing distortions. All aspects of human behaviour, including
individual tastes and preferences and the socio-oriented efficiency and equity in the
allocation and distribution of resources, may have to be taken into consideration, not
just in their existing state but also in their ideal and enabling framework.
Islamic economics may not, in this case, be able to operate in water-tight
compartment. It may have to adopt a multidisciplinary approach. Though this maybe
more difficult, it may enable economists to have a more meaningful analysis of all
important economic variables, including consumption, saving, investment, work
production and employment, and to suggest policy measures - a task which conventional
economics is unable to perform effectively now because of an inadequate set of tools
for filtering, motivation and restructuring. This may help prevent the driving away of
Islamic economics from reality as has happened in the case of conventional economics.
Islamic economics thus has a long way to go before it may be able to become a
distinct economic discipline. It has so far scratched only the surface. Its theoretical core
has, as rightly indicated by Seyyed Vali Reza Nasr, "failed to escape the centripetal pull of
western economic thought, and has in many regards been caught in the intellectual web
of the very system it set out to replace" The result is that its practical wisdom has been
unable to come to a grip with the task of analyzing even the problems faced by Muslim
countries. It has thus been unable to suggest a balanced package of policy proposals in
the light of Islamic teachings to enable Muslim countries to perform the difficult task of
actualizing their normative goals while simultaneously reducing their imbalances.
Islamic economics has been defined differently by different scholars. Some of these definitions, arranged chronogically, are :
S.M. Hasanuz Zaman
"Islamic economics is the knowledge and application of injunctions and rules of the Shari-ah that prevent injustice in the
acquisition and disposal of material resources in order to provide satisfaction to human beings and enable them to perform their
obligations to Allah and the society." (Hasanuzzaman, 1984, p.52).
M.A. Mannan
"Islamic economics is a social science which studies the economic problems of a people imbued with the values of Islam." (Manan,
1986, p. 18).
Khurshid Ahmad
Islamic economics is "a systematic effort to thy to understand the economic problem and man's behaviour in relation to that
problem from an Islamic perspective." (Ahmad, 1992, p. 19).
M. Nejatullah Siddiqi
Islamic economics is "the Muslim thinkers' response to the economic challenges of their times. In this endeavour they were aided
by the Qur'an and the Sunnah as well as by reason and experience." (Siddiqui, 1992.p. 69).
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201
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CHAPTER - II
CONTENTS
Chapter - II .............................................................................................. 203 - 205
Conventional Economics
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CHAPTER II
CONVENTIONAL ECONOMICS
Conflict between goals and world view
Conventional economics has set before itself two different sets of goals. One of
these is what may be termed positive, and relates to the realization of 'efficiency' and
'equity' in the allocation and distribution of scarce resources. The other is what may be
called normative, and is expressed in terms of the universally-desired socio-economic
goals of need-fulfillment, full employment, optimum rate of economic growth, equitable
distribution of income and wealth, economic stability, and ecological balance, all of which
are generally considered indispensable for actualizing human well-being.
The use of scarce resources in a way that both the positive and the normative
goals are realized brings into focus the need for three indispensable mechanisms :
filtering, motivation, and socio-economic restructuring. Firstly, the unlimited claims on
resources need to be passed through a filter in such a way that not only a balance is
attained between supply and demand but also all those claims are eliminated that are in
conflict with goal realization. Secondly, if coercion is ruled out, then such filtering needs
to be brought about by motivating all individuals sufficiently to put in their best
performance and to abstain from the use of resources in a way that frustrates goal
realization.
Whether or not conventional economics has been able to realize its positive
goals is not possible to say because of the difficulty of defining and measuring both
efficiency and equity in a dynamic economy. However, it is generally agreed that even
the rich industrial countries have been unable to realize their normative goals in spite of
substantial resources at their disposal.
The three basic concepts
The secularist worldview gave rise to a number of concepts which constitute the
paradigm of conventional economics. One of these was that of rational 'economic
man'. Given the materialist and social Darwinist outlook of this worldview, rational
behaviour did not get identified with what was necessary to serve the social interest or
to realize the normative goals. It rather became equated with unhindered freedom of
the individual to pursue his self-interest. Individual self-interest in turn became identified
with the maximization of wealth and want satisfaction, independent of its impact on the
well-being of others. Such an emphasis on the pursuit of self-interest had a social
stigma attached to it because of its apparent conflict with the prevalent social vision.
Adam Smith helped remove this stigma by arguing that if everyone pursued his self-
interest, the 'invisible hand' of market forces would, through the restraint imposed by
competition, promote the interest of the whole society.
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The second concept was that of 'positivism'. 'Positiveness' did not, however,
become defined in terms of the impact on normative goals. It rather became defined in
terms of unrestrained individual freedom.
The third concept, which was essentially a derivative of the assumed harmony
between individual and social interests, was that of the efficacy of market forces. It was
asserted that the economy will run efficiently if left to itself. Any effort on the part of the
government to intervene in the self-adjusting market on the basis of society's normative
goals could not but lead to distortions and inefficiency. The government should hence
abstain from intervening. Market forces would themselves create 'order' and 'harmony',
and lead to 'efficiency' and 'equity'.
The background conditions
Keynes effectively demolished the belief that every market equilibrium was consistent
with full employment. Since full employment is only one of the normative goals, it is
important to see whether it is possible for every market equilibrium to be in harmony
with the other normative goals. Such harmony may be expected to prevail, give the
complete freedom on the part of individuals to pursue their self-interest and the absence
of a socially-agreed moral filter, if certain background conditions were satisfied. Some
of the most indispensable of these conditions are : (a) harmony between individual
preferences and social interest; (b) equal distribution of income and wealth; (c) reflection
of the urgency of wants by prices; and (d) perfect competition.
Adam Smith assumed that condition (a) was automatically satisfied in a competitive
free-market economy, and this assumption has become a part of the economics
paradigm. However, while there is undoubtedly a harmony between individual and social
interests in some cases, there is also a conflict in other cases. It is possibility of this
conflict which may make the realization of normative goals difficult unless the conflict is
removed. This may be better appreciated if one were to examine the need for reducing
domestic absorption (aggregate consumption and investment by both the public and
the private sectors) to remove the macroeconomic imbalances that a number of countries
are now encountering.
Satisfaction of condition (b), equal distribution of income and wealth, would give all
consumers an equal weight in influencing the decision-making process of the market.
Producers, being assumed to be passive suppliers, would automatically fall in line. Thus,
assuming that everyone would give priority to need-fulfillment, there would be no
distortion in resources allocation against need-fulfillment. However, since there are
substantial inequalities of income and wealth and since the rich are also able to have a
far greater access to credit, they have the ability to buy whatever they wish at the
prevailing prices. Primary reliance on prices may not create any significant dent in their
demand for status symbols and other inessential and unproductive goods and services.
They may tend to divert scarce national resources, by the sheer weight of their votes,
into products which may tend to command a lower priority on a social preference scale
which has general need fulfillment as one of its primary objectives.
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The value-neutral price system may not even be concerned with how many
votes an individual has and how he uses them. It evaluates the urgency of wants of
different consumers on the basis of their ability to pay the price. However, although the
urgency for milk may be the same for all children, irrespective of whether they were
poor or rich, the number of dollar votes that a poor family is able to cast for milk is not
the same as those that a rich family is able to cast for status symbols. If the ability to
pay prices does not necessarily reflect the urgency of wants, condition (c) does not get
satisfied. Hence Arthur Okun has rightly observed that markets tend to "award prizes
that allow the big winners to feed their pets better than the losers can feed their children."
Coming now to condition (d), it is well-recognized that even though perfectly
competitive markets are a theoretical construct of great analytical value, they constitute
an unrealized dream in the real world, and are likely to remain so in the future. The
innumerable imperfections that exist in the market thwart the efficient operation of
market forces and produce deviations from ideally competitive marginal cost pricing,
thus leading to prices that do not reflect real costs or benefits. Hence, while jurices may
not, be themselves, be capable of bringing about a socially-desired allocation and
distribution of resources, they may tend to be more so if they do not even reflect real
costs and benefits.
Since no real world market is likely to satisfy the background conditions even
approximately, there is a considerable distortion in the expression of priorities in the
market place. This introduces a built-in bias against the realization of normative goals if
reliance is placed primarily on prices for the allocation and distribution of resources.
*****
CHAPTER - III
CONTENTS
Chapter - III ............................................................................................. 206 - 218
Distributive Justice in Islam
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Chapter - III
DISTRIBUTIVE JUSTICE IN ISLAM
- AN IMPORTANT ASPECT OF ISLAMIC ECONOMY
Introduction
Distributive justice has always been extremely important in all human societies and
a lot of social problems and strife has taken place through out history because of
distributive injustice. Islam being a religion sent by Allah as a Rahmah and Huda (as a
mercy and guidance) to people, provides numerous goals and means for dealing with
this thorny and controversial issue of distributive justice.
To begin with, a clear distinction has to be made between two concepts of distribution
which economists talk about. One is called the functional distribution of income. By this
is meant a distribution of income according to the productive agent who receives the
income. In this scheme the division of income is between rent, wages, profits, etc.
However, the functional distribution of income is not the only theme. The focus here is
on the personal distribution of income.
In the personal distribution of income, one is looking at how income is distributed
among individuals in a society, regardless of how any individual receives his share of
income. Moreover, in discussing personal income, one is referring directly to the welfare
of individuals. A person is poor when his income is very low, regardless of the fact,
whether this low income is in the form of profits, wages or rent. If his income is high, by
the same token, regardless of the type of income, he is said to be rich. So the personal
distribution of income has a direct connection with the economic welfare of the individual.
Another analytical distinction between distribution and redistribution is as follows :
The allocation of income that takes place through mutually agreed transactions among
individuals in the market is referred to as distribution, and when society uses extra
market or other non-market processes to modify that particular distribution it is called
redistribution.
Major goals of distributive justice in Islam
What are the major goals of distributive justice in Islam ? Justice is a complex
phenomenon and is subject to various interpretations. It may not be useful here to
discuss the concept of justice in its abstract form. Hence, in order to focus the discussion,
it would be better to specify the particular aspects of justice being discussed. So let us
directly consider Shari'ah's stand on distribution. The major Islamic goals of distributive
justice may be described as follows :
(i) Guarantee of fulfillment of basic needs for all
The guarantee of fulfilment of basic needs of all people in society is a fundamental
Islamic objective of distribution and redistribution. It is supported by over whelming
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rules explicitly stated in the texts in Qur'an and Hadith, and there is no doubt as to its
importance and primacy in the Islamic concept of distributive justice.
(ii) Reduction of inequalities in income and wealth
The second goal is the reduction of inequality in income and wealth. This goal, is
also stated explicit in the Qur'an. Many of the Islamic rules of distribution and redistribution
clearly aim to achieve the objective of reducing the inequalities in income and wealth.
(iii) Purification of the donor's inner self and his wealth
The third rule for redistribution is the purification of the donor's inner self and the
purification of his wealth. This is also explicitly stated in the Qur'an and in Hadith.
(iv) Generation of goodwill among people
The final goal is the generation of goodwill among people, which is also explicitly
stated in the texts as one of the goals of redistribution in Islam.
The constraints on redistribution
What are the main constraints on redistribution in any human society ? If the
constraints are kept in mind the rationale of so many of Shari'ah rules can be
comprehended. What prevents society from doing whatever it would like to do in
redistribution ? What are the barriers, natural and psychological, to implement any
redistribution scheme though to be desirable ?
The major influence of extensive redistribution of income and wealth is the affect
on incentives and ultimately on production. To illustrate, consider a situation in which
students are told that they will receive predetermined grades in an examination but for
university records, only the average of their total grades will be awarded to everybody.
This will have a devastating effect on the incentive of the students to study, because
whatever (better) results they might achieve, will be give away to those who did not
exert themselves as much. Same is true for production. Thus, redistribution, even if it is
considered to be desirable otherwise, may destroy incentive to produce and ultimately
end up making everybody poorer than they were before. This psychological barrier is
clearly recognized by Islam; explicitly in some texts and implicitly in its strategy for
redistribution.
Another barrier or hurdle in the way of extensive redistribution is the effect on the
incentive of the recipients. If a poor person is helped too much or too often, there is
always the potential danger that he may give up exerting himself and working hard for
his own living; knowing fully well that there is someone on whom he can fall back for
help all the time. If redistribution is done on a large scale and unwisely, both the recipients
and the donors will reduce their productive efforts, with the end result society may have
more inequality and poverty instead of equality and well being.
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Islamic schemes for distribution and redistribution
Islam uses many tools and schemes for redistribution. These are briefly surveyed
below and the analysis also focuses on how Islam deals with the incentive effect of
redistribution.
1. Prohibition of interest and promotion of profit sharing
These may be considered as measures operating through the market process,
thus they can be classified as distributive schemes. How does prohibition of interest
promote better distribution of income ? Let us examine the case of a loan. A commercial
bank has two applications for financing - one form a poor man and the other form a rich
person. Let us assume that the two projects present their prospects of profit and loss
as similar. If the bank is financing on the basis of interest-based system, it is mainly
concerned about getting back its principle plus interest (Riba) as stipulated in the contract.
Now what guarantee is there that the principal will come back plus the stipulated Riba ?
In the traditional banking setup confidence is generated by the wealth of the borrowers.
If the borrower is wealthy, he has a number of other commercial assets such as land,
buildings and other businesses. The bank may assume that if he fails in this particular
project, it may claim part of his wealth and get back its loan and the interest. So the
existence of prior wealth of the applicant is a guarantee for the financier that he will get
back the principal plus the interest. The other person who has an equally good project
but does not have sufficient wealth, has almost no chance of getting financed. In fact,
this is not a hypothetical possibility. Several studies of distribution of financing in industrial
countries have shown that this effect is magnified many times over. A recent study
showed that small enterprises which provide 40 per cent of employment in England
received a tiny fraction, less than 10 per cent of the total financing done in the British
economy. Whereas the big business receive the largest proportion of financing. This
process usually goes on for generation after generation. The very nature of loan financing
on the basis of interest allocates more resources to the rich and deprives the poor of
finance.
Compare this with financing based on profit sharing. In profit sharing the financier is
not sure that the principal and his share of profit will materialize unless the project is
successful. He cannot go and take the property of the receiver if the project fails. So his
attention is devoted to scrutinizing the project itself. If it succeeds, he gains, if it does
not, he looses. So the banker in the Islamic system has no personal interest to seek the
rich particularly and give them money. He will seek the best project. This is not only
more efficient for society as a whole but also more just because the distribution of
honesty and good projects is not confined to the rich alone. If the financing is done on
the basis of profit sharing the poor will have a much better chance of getting some
amount of financing as compared to the interest - based system.
Prohibition of monopoly
Monopolies have many forms; some are natural, some contrived and some are
administratively created by society. Islam clearly prohibits monopoly except in those
cases where monopoly has to be tolerated because of peculiarities in the processes of
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production. Shari'ah and Fuqaha' have clearly stated that if monopoly for some reason
is inevitable or unavoidable (by giving the examples and monopolies existing in their
own times) the government must intervene and control the price of the product. The
elimination of monopoly helps considerably in eliminating a reason for the creation of
disparities of income and wealth. Following measures discussed below, are redistributive
measures which work from outside the market process.
Measures for distributing natural wealth
This feature is unique in Islam specifically when compared with all known systems
at the time when Islam was revealed. Islam has specific rules regarding the distribution
of natural wealth among the population, some of them are mentioned here.
Partnership of all citizens in certain kinds of wealth
There is an authentic Had i th of Prophet (pbuh) "The Muslims are partners in three
things, in water, pastures and fire. Other types of natural wealth could be covered, by
Qiyas (analogy) under the same Hadith. Imam Shaf'ei has a long list of items such as
salt, sulphur, naphtha, etc. falling under the same category. Natural wealth has two
characteristics in common. The first is that natural resources should be easily accessible
to all people, and second they should not have to pay excessive costs for reaching
them. There are also some other rules and conditions with the same implications. In
brief, there are certain types of natural resources that Islam stipulates to be freely
accessible to all citizens of the country. Imam Sharakhsi the well-known Hanafi jurist
says that non-Muslims in an Islamic society also have similar access to these natural
resources on an equal footing with Muslims. So there are some types of wealth in which
all people are partners or they have free access to it.
Why and how does this affect distribution of income and wealth ? Suppose
elementary education is provided free to all citizens. It means that all people can have
access to free elementary education regardless of their wealth. Consequently, the real
value of education becomes equal or nearly so among all people. So, the more equal
opportunity to natural resources decreases the chances of differences arising out of
prior wealth, abilities, etc.
Prohibition of private preserves (enclosures)
Another rule of Shari'ah leads to the same result. Al-hima means keeping people
away from land which was earlier treated as Mubah (useable by all) so as to restrict to
the beneficiary all outward benefits, which do not require significant efforts or expenditure
on his part. The most important outward benefits of such land are herbage, water and
hunting.
Private preserves have been prohibited by the saying of the Prophet (pbuh); "There
is no enclosure except for Allah and His Prophet". Enclosure directly contradicts the
principle of partnership of Muslims in the outward natural wealth of unowned lands. The
prohibition of private preserves confirms the principle of partnership.
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The far-reaching economic wisdom of this prohibition and of the partnership become
apparent when one considers the grave economic injustices against the small tenants in
England as a result of the permissibility of private preserves. This led to the Enclosure
Movement by the large landholders (for rearing the swelling number of their livestock)
by usurping the right of use of the small tenants for their meager stocks. This, in turn,
led to lack of livelihood for small tenants and their ejectment from their land, leading to
rebellion more than once. However, the movement continued pushing them towards
the cities in search of work.
Islam allows the creation of a preserve for the benefits of the community at large.
The Prophet (pbuh) made some preserve for the effect of Zakah and for the horses of
the army. But no one, neither the Imam, nor any other influential persons can make
preserves for their own personal use. This emphasizes the same principle that some
natural resources may be accessible and free to all and cannot be confined to particular
persons. There are more details and exceptions to these rules which are indicated in
relevant Fiqh literature.
Obligation of granting surplus water and renewable natural resources
The majority of the jurists are of the opinion that water which is underground (like
the one contained in a spring or well even if that well has been excavated through the
cost and effort of the owner of the land) is not owned by the owner of the land. All
people are partners in it. However, the owner of the land has the first right to it. There
are some experts who say that it is owned by the owner of the land.
Even those scholars who said that the owner of land owns the water in it agree,
relying on a number of traditions, that the right of Shirb (drinking) for other people and
their animals, and the right of Shuff'a (irrigation of crops and trees by other people) are
to be granted, if the water is in excess of the needs of the owner.
Whether these rights are to be granted free or on a charge basis is controversial.
Imam Ahmad is of the view that it is not permitted to take remuneration for surplus
water even when it is for irrigation of crops while the other three schools of Fiqh permit
the charging of a price but recommend that it be waived.
It appears that economic reasoning supports the opinion of Imran Ahmad in the
obligation of giving away surplus water without compensation, even when it is for irrigation
of crops. consider the example of a spring or well. Although it may have been excavated
originally by the owner, the marginal cost of its water is negligible (zero). The costs of
maintenance are fixed as long as the well is being used. After the owner of the well has
met his own needs, the marginal utility of the surplus water becomes zero for him. Thus
excess water resembles 'public goods' in economic terminology, preventing people other
than the owner from using surplus water, or demanding a price for it will lead to a pure
loss for the society.
The Hambali school came close to this concept when they justified the obligation
of giving away surplus water without compensation (not only for the drinking of men
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and animals but also for irrigation) by saying that "not giving it away is a waste of
wealth (res in commercio) as it leads to the destruction of crops, which is prohibited".
The destruction of wealth here can mean destruction of standing crops or not sowing
them due to lack of water.
If we generalize the earlier conclusions in the form of an economic principle, it
may be said that any one who owns automatically renewable natural resources (like
water and vegetation), is obliged to give away what is surplus to his own needs, without
compensation, to those who demand the surplus and can benefit from it. Surplus may
be defined as that quantity whose marginal utility and marginal cost to the owner is
zero or close to it. This ethical principle would lead to the realization of the maximum
efficiency in the allocation of those natural resources in which Shari'ah has permitted
private rights of ownership.
It may be observed that insistence on the right of private property as a basis for
refusal "to grant surplus water without charge" creates an artificial scarcity and leads to
adverse effects on the allocation of resources. The solution to this is possible in one of
two ways: either by refusing to acknowledge ab initio the right of private ownership
over such natural resources (and this is the stand taken by the majority of the jurists as
regards water and vegetation), or by the obligation of granting the surplus inspite of the
acknowledgment of individual ownership (this is the view of Abu 'Ubayd and those who
agreed with him). We prefer the latter solution due to following reasons, among others
: (i) It agrees completely with the Islamic view point, that rights are not absolute. They
have some social functions. Thus Islam does not abolish the right; but restricts it. (ii)
Such a stand, inspite of its being apparently moderate, has far-reaching effects (in
comparison to the first stand), due to its suitability for generalization to many kinds of
productive wealth, besides natural resources, in which the legal right of private ownership
cannot be disputed.
Inheritance
The inheritance system leads to the redistribution of the total wealth of the
deceased. The impact of inheritance on distribution differs according to the system of
inheritance itself. For example : "Under primogeniture the eldest son inherits almost
everything which leads to concentration of wealth".
The system of inheritance in Islam gives rise to a number of heirs. It does not
concede a bequest (was i yah) in excess of one-third, or a bequest for any of the heirs,
its impact on the dispersion of wealth is well known and we shall not go into details.
The system of marriage interacts to a great extent with the system of inheritance
in generating distributive effects. It is accepted by those who have studied this topic in
some detail that if the coefficient of correlation between the levels of wealth of husband
and wife is weak, the impact on the redistribution of wealth increases for the system of
inheritance with all the children inheriting. Conversely, if the rich marry only the rich and
the poor marry only the poor (i.e. the correlation is high between the wealth of the
spouses), the impact of inheritance on latent redistribution is weakened.
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The economic importance of the redistribution arising from the system of
inheritance cannot be ignored. As pointed out by Bounding, if we assume a society in
which life expectancy is, say, 70 years and the wealth is evenly distributed among
different ages, then approximately 1/70th of the wealth will be transferred by death and
inheritance each. If the output-capital ratio is 3, then the wealth transferred by inheritance
generates about 3/70 i.e. approximately 4 percent of the income each year. As the
aged are usually more wealthy than the new born, the ratio is likely to reach 8 to 10
percent.
Some economists are of the view that the dispersion of wealth through inheritance
of agricultural land may give rise to small agricultural holdings which may hinder their
efficient utilization. It appears here that the aim of efficient production clashes with the
objective of an equitable distribution.
This apprehension may not be sound as the system of inheritance splits wealth in
the sense of splitting the rights of ownership. Therefore, it will not necessarily lead to
disintegration of agricultural holdings unless we also assume :
(a) Prohibition of sale between the heirs and other OR
(b) Absence of any consolidation scheme which enables the consolidation of small
holdings for management and investment, inspite of splitting up of ownership.
The Islamic system permits sale and opens a wide door for partnerships. At the
same time there are other specific provisions which enhance the consolidation of
ownership such as the right of preemption between adjacent properties. All this permits
the control of disintegration effects.
Zakah
Zakah is the third pillar of Islam, and is a long term measure with widespread
effects, Zakah is in fact a collection of redistributive measures and not a single measure,
as its beneficiaries have different economic characteristics.
The most important distinguishing feature of Zakah as a compulsory religious
financial duty is that it transfers some of the income and wealth from the rich to the
poor, whereas the duties resembling it in other religions are basically meant for financing
either the functions of religious intermediaries or for the living expenses of clergymen or
for the construction and maintenance of places of worship.
Another distinction of Zakah derives from the role of the state in its collection and
expenditure, that is, the use of the social authority for redistribution whereas this was
unusual before the advent of Islam.
Lastly, Shari'ah has made obligatory the complete separation of the Zakah budget
from the general budget of the state to protect the rights of the poor and other
beneficiaries of Zakah.
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Zakah al Fitr
Zakah al Fitr is obligatory, according to majority of the jurists, on each Muslim,
male or female, minor or major, slave or free. Each individual pays it for himself and for
all his dependents as long as he has more than one day's food for himself and his
dependents on the night of 'Id al Fitr. Zakah al Fitr then is obligatory on those who may
themselves be legally reckoned as poor but they pay to those who are poorer. Thus,
Zakah al Fitr is directed towards the poorest of the poor.
The amount of Zakah al Fitr obligatory on each individual, according to majority
of the jurists, is one Sa' (2.75 liters) of the staple food of the country. This is equivalent,
for example, to 2.175 kg. of wheat.
In order to arrive at a reasonable estimate of possible yield of Zakah al Fitr we
may assume a country in which poverty is spread to the extent that 20% of the
population does not possess more than one day's food on the night of 'id-al-fitr. This
means that amongst each ten citizens there are two on whom Zakah al Fitr is not
obligatory and eight on whom it is. We can, for the sake of simplicity say : that there are
four persons paying Zakah al Fitr for each person receiving it. Hence the average share
of receiving individual is 8 kg. of food (4x2.175 = 8.7).
Al-Waqf
The Waqf or charitable trust is a way of transferring income from one generation
to another for welfare purposes. Of course, a Waqf can be created while a person is
alive. Anyone can give some of his wealth as Waqf and the income generated by this, in
the form of services or money, may be distributed to deserving persons. The Waqf in
the final analysis has to be a charitable Waqf, the ultimate beneficiary must be deserving
people. So, Waqf usually will be something durable e.g. real estate. It goes on giving
benefits to the needy or the poor over several years. Most Waqf in Islamic history have
been voluntary, not mandatory. The Shari'ah does not ask anyone to make Waqf
compulsorily. There is a hadith of Prophet (pubh) that when a person dies all his actions
stop except for three things and one of them in Sadaqah Jar i yah i.e. an ongoing
charity. This has a tremendous attraction to every Muslim who has wealth, to devote
some part of his wealth as Waqf even though it is absolutely voluntary. Throughout
Islamic history, the institution of Waqf has done tremendous service to Muslim society.
In general, most Waqf were related to education, medical service and help for the poor.
In a nutshell, Awqaf are significant distributive tools even though they are completely
voluntary.
Share of debtors (al-gharim in) in Zakah
Zakah has eight categories of recipients (even more than eighty because the
category known as in the way of God fi-Sab il-Allah i.e. has wider scope). The economic
characteristics of each category are quite different from the others. We will concentrate
on two categories of recipients. The debtor (al-gharim) is a person who incurred debt
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which he cannot pay back. Now under certain condition, if the debt was made for good
reasons, not out of cheating nor misbehaviour, a share of Zakah can be used to repay
the debt.
Quardwi in his well known book about Zakah, points out a very interesting impact
of this rule:
If society provides extra protection for the creditor it means people will be more
willing to finance interest free loans (Qard-Hasan) because of the knowledge that Zakah
is liable to reimburse the lender if the debt was incurred in good faith.
Share of the wayfarer (Ibn al-Sab il) in Zakah
If a traveller does not belong to the community through which he is passing and
gets stranded, Zakah collected from the Muslims will be given to this man to help him
reach his place of residence. Fuqaha' say that even if a traveller is rich in his own
country or community, he may be helped. The wayfarer (ibn-sab il) who has received
help Zakah funds, does not have to pay it back even if he goes to his country where he
is well to do.
System of 'Aqilah (Indemnity for Blood Money)
Diyah (blood money) for accidental homicide is to be shared by the 'aqilah of the
killer. Diyah (in Shar i'ah is extremely large. As an estimate at the present it should be
the equivalent in value of 2000 sheep or 10 camels or 4.5 kilograms of gold. At current
exchange rate one American dollar is equal to SR 3.75, it will amount to nearly five and
a half million Saudi Riyals (approximately one and a half million US Dollars). This large
amount shows that Islam does not allow the blood of the deceased to go unaccounted
for, even though the killing may have been done by mistake. The system of 'aqilah also
distributes the blood money over the whole tribe of the offender, over several years, so
that they collaborate in paying it. It is a mutual insurance imposed by Shari'ah on the
people of the tribe. This system ensures the transfer to the family of the deceased
without over burdening the offender.
Obligatory maintenance by relatives
There are a number of arrangements in the Islamic system whose function as
determined by the Shari'ah is to guarantee for every individual a minimum level of living
when he becomes poor or incapacitated. The most important of these arrangements
are :
- Zakah fund,
- System of obligatory maintenance by relatives,
- Public treasury.
The Islamic system makes it obligatory on each wealthy person, to provide sufficient
(customary) maintenance for his poor relative who is unable to work. The juristic opinions
differ as regard to some of the conditions of this right nd on whom it is due. The most
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appropriate opinion seems to be that it is based on inheritance rights. Thus the
maintenance of the incapacitated poor man is obligatory on his rich relative(s) who will
inherit from this poor man if it is assumed that the poor man leaves inheritance. If there
are a number of such rich relatives, the amount of maintenance is distributed amongst
them according to the share of their inheritance from him. This is in accordance with the
principle :
'Liability is linked to gain'
Guarantee by the public treasury of a minimum level of living for each citizen.
The contemporary literature on the economic system of Islam has covered this
topic in some detail. Therefore, we will content ourselves with a few observations only :
(1) Some people are under the impression that the guarantee by the public treasury of
a minimum level of living is a recent ijtihad by the Muslim scholars. The following
texts negates this view :
"This is an epistle (of peace) from Khalid ibn al-Walid to the people of Hirah ... and
I have promised them that : any old person who is unable to work or has been
struck by a calamity, was rich and then became poor to the extent that the people
of his faith started giving him charity, his jizya stands waived, and he and his
dependents are to be provided from the treasury as along as he resides in Dar-al-
Islam ....: (al-Kharaj by Abu Yusuf, p.290).
(2) The implementation of this guarantee requires that the conditions under which an
individual is entitled to seek help from the public treasury be clearly spelled out.
Such determination is an area of public policy which is determined by the political
system and changes according to the circumstances. The above mentioned epistle
of peace is a good example of an objective determination of th circumstance
entitling non-Muslims to help.
Right to acquire the necessities of life.
If a person is faced with a situation in which he fears losing his life due to his hunger
or thirst, then it is lawful for him "to take whatever will sustain him, from any place
irrespective of whether it is the property of an individual or of the state. It is not permitted
for him to eat carrion ... if he can find lawful surplus food in the possession of any
person... 'Abbadi has thoroughly investigated the juridical (Shari i) evidences and juristic
opinions on this subject. The most important of these which relates to our topic deals
with the issue of whether a person under duress is obliged to pay the value of the food
that he acquires ? There are two opinions among jurists on this issue. The first is that it
is necessary for him to pay the price and the owner is obliged to sell it to him at the
market price. If the one under duress does not have money he can acquire the food on
credit.
According to the second opinion, food or water must be given free to a person
under such a desperate need. Imam ibn Taym i yah reconciles the two views and says
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that if the person under duress is poor, it is not permitted to take compensation from
him, but if he is rich it is allowed.
Jurists have applied the preceding rules to cases of desperate need for other
necessities such as clothing and shelter. There is no doubt that they can be applied to
one in dire need of medicine also.
Islamic strategy for distribution
The major elements of the Islamic strategy for the realization of the distributive
objectives are as follows :
(i) Utmost concern with the problem of distribution :
This concern is manifested in the multiplicity and comprehensiveness of the
distributive measures in the Texts of the Qur'an. Amongst the objectives of Shari'ah
is the reduction of disparity between the people as regards wealth. There are a
number of compulsory measures for redistribution such wealth. There are a number
of compulsory measures for redistribution such as Zakah, Fay', Zakah al fitr,
inheritance and obligatory maintenance of near relatives.
(ii) Multiplicity and Comprehensiveness of distributive measures : The Shari'ah has
prescribed a large number of distributive measures, identifying main criteria and
possible means of distribution.
However, power as a basis of distribution has not been used except partially in
the share of those "whose hearts are to be reconciled" (Mu'allafat al qulub). As a
means it has not been utilized except for the right of acquisition of basic necessities of
life.
The multiplicity and comprehensiveness of Islamic system of distribution have an
important implications. It shows that Islam recognizes the limits of effectiveness of any
single criterion or means of distribution. It avoids relying on a single measure as a
precaution against negative effects. The outstanding example of this is that the holy
Prophet (pbuh) did not rely only on charity to alleviate the poverty of Muhajir i n. He,
first advised the Ansar to use the system of Maniha and then utilized Fay for the
restoration of balance in the distribution of wealth in society.
(iii) Moderation and flexibility :
The moderation of the Islamic plan for distribution is evident from the utilization of
both voluntary and compulsory means rather than a reliance upon any one of
them alone. Its flexibility is apparent from the fact that Shari'ah declared some of
the schemes as permanent and obligatory for continued implementation like Zakah,
Zakah al fitr, participation in the ownership of some forms of natural wealth and
the system of inheritance. There are other additional measures which are brought
into use if the permanent measures do not yield desired results. Amongst them
are : the use of Fay', for the rectification of distribution, obligatory maintenance by
near relatives, the right to acquire necessities, and guarantee of basic needs by the
public treasury.
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(iv) Increasing the supply of assistance : This is achieved by inducing people through
faith, reward in the life hereafter, training as well as by the authority of the state.
(v) Decreasing the demand for assistance : There are numerous texts of Shari'ah
which make it obligatory for the individual to become self-sufficient through his
own efforts and to make his family independent from seeking assistance from
others, specially from seeking Zakah and charity (Sadaqah). The best known of
these texts are the words of the holy Prophet (pbuh) about Zakah: "There is no
share in it for the wealthy or the able bodied" and also his saying : "The hand that
gives is better than one extended". He also described charity as "the filth of the
people:" to be shunned unless there is no way to avoid it.
This is to decrease the demand for assistance. The organization of assistance is a
matter of great importance. Consider this example which contains an objective and
clear determination of the circumstances under which an individual is permitted to ask
others for assistance.
Muslim narrates from Qubaysah that the holy Prophet (pbuh) said : "Asking
(charity) is not permitted to any one but three : one who is burdened (with a debt) is
permitted to ask till he meets it then refrains; one, who is struck by a calamity which
destroys his wealth, is permitted to ask till he finds a support for sustenance, and one
who faces dire poverty to the extent that three reliable persons of his clan vouch that
so and so is facing poverty. Such a person is permitted to ask till he finds enough
sustenance. As for others besides them, O, Qubaysah ! It is illegal to ask; if one does
so, he devours money illegally." (Sah i h Muslim, III, Tradition No. 113).
Some axioms of distribution in Islam
Various distribution axioms emerging from our analysis may be summarized as
follows :
(i) All citizens are partners in certain types of natural resources.
(ii) All citizens are partners in public wealth.
(iii) It is recommended (and at times obligatory) to give away freely "surplus real
wealth". Each person who possesses productive assets, natural or produced, is
obliged to give away freely the surplus usufruct without compensation. Surplus is
that whose additional (marginal) utility and cost for the owner is negligible. If the
utility for the beneficiary of this excess is very large it is permitted to oblige the
owner to bear some minor costs involved in the process of granting the surplus.
He who produces "surplus" as his basic profession is exempted from giving it away
freely.
(iv) Man i ha (particular kinds of gifts) is recommended in all kinds of productive assets.
This gradually changes to an obligation as the need of the beneficiary increases and
that of the donor decreases. The Imam is authorized to make it mandatory and
organize it on a wide scale if the distribution is much distorted. Maniha must be
temporary, and the ownership rights of the donors must be guarded. The assets
should be returned to the owners when the beneficiaries become well off, or when
the public treasury can provide for them.
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(v) Resources which become available to the Muslim community without a special
effort from anyone, and are not generated from a privately owned asset, are
governed by the rule of Fay' and are appropriated to the public treasury so that all
Muslims share their benefits. Priority of benefitting from Fay' is granted to the poor
and to those who perform public duties.
(vi) Society may deduct from each category of private earnings a portion which is to
be spent as Fay'. Such portion decreases as the labour, risk and cost of earnings
increase.
(vii) Awqaf (charitable trusts) are to be encouraged so that their immense benefit to
the people is restored. They are to be organized so that their social role in the
provision of public services is revived.
(viii) Different forms of mutual social support (social insurance) should be encouraged
and organized for the aid of individuals who have been harmed by misfortunes and
accidents.
(ix) It is obligatory for the ruler to determine, in the light of the principles of Shari'ah
and the economic conditions of the community, the minimum level of real income
to be guaranteed by the public treasury for those who are unable to attain it and
do not have any prosperous relatives, in case the sources of Zakah are insufficient.
The courts should be permitted to entertain suits against the treasury for the
enforcement of this guarantee.
(x) Those economic policies are to be encouraged which reduce disparities in distribution.
*****
CHAPTER - IV
CONTENTS
Chapter - IV............................................................................................. 219 - 222
Fiqh - Islamic financial Jurisprudence
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Chapter IV
FIQH - ISLAMIC FINANCIAL JURISPRUDENCE
- A BRIEF INTRODUCTION
The jurisprudence of financial transactions (Fiqh-al-Mu'amalat) has a specific meaning
in Islamic law. The word 'Fiqh' is commonly used or referred to as Islamic Shari'ah.
However, this view is not correct. When we say Shari'ah, we mean the Qur'an and
Sunnah. When we talk about Islamic law or Fiqh, we mean the interrelations, the views
and ideas given by the Muslim Jurists as explanations for the Qur'an and Sunnah. For
the application of Qur'an and the Sunnah in his day to day life, a Muslim should understand,
interpret and explain the Qur'an and the Sunnah. What are the principal intentions, the
rules, the norms of Shari'ah as contained in the Qur'an and the Sunnah and what do
they direct us to do ? This understanding comprising interpretations, views and
the opinions of Muslim jurists is called 'Fiqh' or Islamic Law.
Islamic laws are related to human understanding of the Shari'ah. This understanding
could either be correct or incorrect. This is the nature of Fiqh. On the other hand,
Shari'ah can never be wrong as it is the revelation by Allah through His Prophet (pbuh).
Shari'ah is thus permanent. It cannot be challenged as it is just the Qur'an itself. Allah
says "God commands justice. The doing of good and liberality to kith and kin and He
forbids all shameful deeds, and injustice and rebellion" (16:90). This is the revelation.
The responsibility of the prophets is to convey it, not to invent it according to their own
likes and dislike. "The Apostle's duty is but to proclaim (the message) but God knoweth
all that ye reveal and ye conceal" (5:102). Thus, the role of the Prophet (pbuh) is to
convey the will of Allah and the role of the jurists and the scholars ('Ulama') is to
understand and interpret it. Every scholar or jurist is not qualified to interpret the will of
Allah, since the Prophet (pbuh) has made it clear that if one is qualified to understand
and interpret Shari'ah, then he will be serving Allah, even if his interpretation is not
correct.
Islam places much emphasis on ljtihad. It is the only religion which asks its followers
to make ljtihad; to carry out research, even if the findings, the results, the views
reached at, are wrong. The efforts so directed are also met with reward. The reward is
double if the conclusions are right, but on the condition that it is carried out by qualified
persons. If it is not done by the qualified persons, it is prohibited. At the same time, they
should be sincere, and they should not follow their own desires, likes and dislikes. Thus,
it is a brief introduction to what is law and what is the difference between Islamic Fiqh
and Islamic Shari'ah.
Muslim jurists, in their writings, have classified Islamic Fiqh (or Islamic law) into
various categories. The foremost among them is Fiqh-al-'lbadah (The jurisprudence of
worship). It encompasses the relations between the man and his creator, Allah. It includes
rules pertaining to prayers (Salah), fasting (Sawm), charity (Zakah), pilgrimage (Hajj)
and the likes. Almost one fourth of the Fiqh or Islamic law consists of Fiqh-al-'ibadah.
The second category is Fiqh-al-Mu'amalat (the jurisprudence of transactions on social
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dealings). It contains the doctrines, norms, laws, rules and regulations governing the
dealings, transactions, contracts, and agreement between man and man concerning
assets and property. In Arabic language, Mu'amalah means dealings, to deal with, to
buy, to sell, to hire etc. Hence, in Fiqh-al-Mu'amalat, we come across such terms as
'Aqd-al-Bay' (contract to sell), ljarah (hiring), Mudarabah (commenda), Musharakah
(partnership) etc. There is another category of Fiqh namely Fiqh-al-Jinayat which deals
with the criminal law. The Fiqh-al-Hukm, yet another category, deals with administrative
and constitutional matters.
Since we are primarily concerned with the Fiqh-al-Mu'amalat, let us define it. Fiqh-
al-Mu'amalat are the norms, the rules and regulations, governing Mu'amalat i.e. the
contracts, agreements, dealings, and transactions between individuals. This fact is evident
from the books written by Muslim jurists, wherein forms of contracts have been
interpreted within the realm of Islamic law i.e. interpretations of Qur'an and Sunnah. If
one wants to go into one of these contracts, one finds the prerequisites or the conditions
for the validity of these contracts i.e. whether these are in conformity with Islamic
injunctions. But, of course, if one wants to study the Fiqh-al-Mu'amalat or the contracts
under the Fiqh, it will take a fairly long time to study each and every contract. Therefore,
here we will confine ourselves to give only the basic and fundamental principles governing
the Fiqh-al-Mu'amalat.
First, one should be aware of the Islamic rules and regulations governing these
transactions, contracts, agreements. This is the basic requirements to evaluate the
Islamic norms and the Islamic principles governing the transactions, the Mu'amalat.
Most of the time economists find themselves in a situation where they cannot even use
a contract not to speak of combination of contracts. But it is not very difficult. It
requires thinking and research just to utilize and put to it together and to bring something
new out of two, three, four five of the Islamic contracts.
Although jurists are bound to make research and reach any amicable solution of
the questions put to them but two conditions should be there to guide them. The first
condition is that the solution should not involve Riba (interest). The second is that it
should not involve Gharar (uncertainty). It is thus rightly said by some jurists like ibn
Rushd that all agreements between Muslims, i.e. the contracts, transactions etc. are
lawful Islamically if there is no Riba and there is no Gharar. Keeping these two principles
in view, the jurists in the past have made their own ljtihad and gave us certain devices,
tools which were sufficient for their own time. On the same lines, the jurists in the
present times can carry out research putting these conditions clearly in mind and find
solutions to the problems they are facing nowadays. Their solutions, findings, opinions
or views will be Islamically correct, and that is what we are doing now in Islamic
Economics.
As is stated in Fiqh books that a Mudarabah contract is a combination of several
contracts. They used to say Mudarabah is 'Aqd Wadia because the Mudarib when he/
she gets the capital, is not the owner of the capital. He has no title, no propriety rights.
At the same time it is not loan nor it is a contract of loan. The details of Mudarabah or its
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nature are not directly expressed in the Qur'an and the Sunnah because it is not a
contract in itself but it is a combination of several contracts. The Mudarib is a wakil or in
economic term a partner. Therefore what the author has to emphasize is that one
should go ahead with his research, make use of the tools mentioned in the Qur'an and
the Fiqh as understood from the Qur'an and the Sunnah and reach a conclusion. But
two things should be foremost in this kind of analysis that no Riba or Gharar should be
involved.
The transaction or the contract involves Gharar if anyone who is a party to the
contract is not aware for sure as to what he will get as compensation or reward out of
the contract. There are three categories of contract : 'Aqd Muawada, 'Aqd Tabarru' and
'Aqd Musharakah. The difference between these three categories is very essential for
our economists because Gharar is permitted in 'Aqud Tabarru' at and not in 'Aqud
Mu'awadat. To make the point more clear, if it is said that I buy your car with some
rupees, it is not clear as to the real net amount. Similarly if one says that he gives
hundred rupees and the recipient should give books in exchange, the matter is not clear
enough. There is also Gharar. On the other hand, if someone offers his car for Rs.
5000.00 with condition that it will be handed over after sometime (time not defined) it
will be Gharar fi ajal. It means that one should know at the time of contract, as to how
much, what quality/quantity he will get and at what time. It is also Gharar when something
is sold but that is not available at the place of contract. Therefore one should be sure
about the correct nature of contract as to what he will get as consideration in return.
Gharar is of many types :Gharar fil-miqdar (that is in quantity) Gharar fi-sifah (in quality)
Gharar fil ajal (as to the time of delivery) and Gharar fil attasl i m (the delivery). All the
contracts whether valid or void have these elements.
The other consideration is Riba which can be defined in one sentence as that one
gets some return from the other party which is not a gift and not a compensation of a
work performed and without facing any risk for the money invested. In other words, if
somebody gives his money or capital to another person, which is not price of something
or is not compensation for something hired for and gets something extra, over and
above his original money without risking his money, thus the additional amount received,
is Riba. Let it be put in another way that the Prophet (pbuh) made it clear in a principle
that - there is no gain without risk. You never get any reward, return or profit unless you
carry risk. The one who faces the risk is the one who is entitled to the profits. In the
case of Riba-based loan, the capitalists will get his money back in all cases. The risk will
be of businessman or borrower or the investor. Hence, he is not entitled to any interest
payment.
There is a basic difference between Riba and contract of Mudarabah with regard to
investment of money. In the case of Riba, the lender physically hands over the money
to the borrower and the borrower is the sole proprietor of the money so received. But
in the case of contract of Mudarabah, the provider of capital, the one party to the
project, remains the owner and possessor of capital. During all the life of the project, he
remains the sole proprietor. Suppose an Islamic bank is financing ten million dollars of a
project in the way of Mudarabah. This ten million dollars will be the property of the bank
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all the time during life of the project. Even the capital goods such as machinery, from
the start of the project will remain the property of the bank. There is why no one can
claim bankruptcy. Then, one should not mix the loan contract ('Aqd al Qard) with the
Mudarabah contract. They are different. There is no relation between these two, because
one is a contract of loan in which the capital is physically transferred to another party
and in case of contract of Mudarabah, the capital will remain the property of the Rabb-
al-Mal (provider of capital).
If we want to build up new theories, we have to keep in mind these two conditions
- what is Riba ? What is Gharar ? What are the forms of Riba and forms of Gharar ?
Once we are aware of these two things, we will be safeguarded. No Riba means there is
no separation between Kharaj (gain) and Daman (risk). There is no exception in the
Islamic law in this case. If there is no risk then there will be no return, no profit, no share
at all from the investment. The one who bears the risk (the Daman) is the one who will
get the return. There is no separation between Kharaj and Daman. These are together.
*****
CHAPTER - V
CONTENTS
Chapter - V .............................................................................................. 223 - 231
Profit Vs. Bank Interest - An analysis
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Chapter V
PROFIT Vs BANK INTEREST
IN ECONOMIC ANALYSIS AND ISLAMIC LAW
For the past few years, particularly after the emergence of "Islamic"monetary,
financial, and economic institutions, there has been a controversy as to whether bank
interest is a legitimate, permissible (Halal) return or a forbidden Riba and as to its
feasibility as a mechanism for the management of contemporary economic activity.
For an objective discussion of this important issue, we must first clearly define the
following elements :
- The concepts of Riba,
- The nature of modern banking,
- The feasibility of the interest rate mechanism,
- The efficacy of the profit mechanism.
The concept of Riba :
Riba as a term is the increment obtained over the principal in return for nothing in
commutative contracts. Riba mentioned in the Holy Qur'an is the pre-Islamic Riba, the
clear Riba which is the Riba of a debt or loan. It is the increment given in return for time,
whether the increment is specified as a condition at the conclusion of contract or
designated at the time of repayment for extending the due date. In this context, Riba is
forbidden in all Divine Revelations as it represents the most abominable form of illegally
expropriating personal and public capital. As such, it is considered a grave sin in Islam.
Any excess over the original debt, no matter how little it may be, is considered an evil
gain. On that, Allah, the Exalted says : "If you repent, you may retain your principal,
wronging none (with an increase) without being wronged (by suffering a loss)".
Riba in this sense is forbidden, irrespective of the nature of the loan (whether for
consumption or production); or of the nature of the parties to the loan contract
(individuals, individuals - companies, governmental, or international organizations); or
the circumstances of one party, or all parties, to the contract (rich or poor); and finally,
of the change of the value of the currency (decrease of increase).
Riba, in this sense, is really the "AIDS" of contemporary economic activity, as it
deprives economic life of its immunity and robs it of its ability to fight economic disease.
Consequently, a feeling of exploitation prevails, productivity decreases, the efficient use
of resources deteriorates, economic potential is wasted, and, ultimately, economic
disorders are aggravated.
The nature of modern banking :
The work of modern banks, commercial or specialized, is to handle credits, debts,
or loan. Credits and debts are the two aspects of a loan. Credit pertains to the loan-
giver in relation to the loan, and debt pertains to the loan-receiver in relation to the loan.
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The relationship between the bank and those dealing with it is controlled by the
loan contract. The way that the bank deals with its clients is revealed in the details of its
financial position as presented in its balance sheet. The balance sheet is divided into two
parts : resources of funds, or liabilities, and uses of funds, or assets.
Resources are basically controlled by the loan contract. The major part of these
resources comes mainly from depositors. As such, depositors are loan-givers and the
bank is a loan-receiver in return for interest which the bank pays (a debit interest from
its part), except for current deposits for which the owners are not usually given any
interest. In relation to all deposits, the bank is a guarantor, i.e., the bank guarantees the
original deposit and offers interest on deposits that are not current.
As to the uses, the bank loans the money it has accumulated to merchants,
investors and others. Their status as loan-receivers is that of a guarantor, i.e.,
guaranteeing the original loan and paying interest (a credit interest from the bank's
part). The difference between the total interest that the bank pays to its depositors and
the total interest which the bank receives from those making use of its financial resources
represents the bank's net return.
Therefore, in the bank's balance sheet there are fixed debts on both sides which
must be paid after a definite period of time, along with a conditional increment defined
at the start, for payment on due date, or on a new due date after maturity for extending
the period of time. Thus, the return for the use of the debt is justifiable for the debtor as
he is the guarantor, but is not justifiable to the creditor, according to the Islamic principle
which stipulates that "Al Kharaj bi Addamaan", i.e. the return is not justified unless there
is some risk involved, and, in this case, the loan-giver, in contrast to the loan - receiver,
bear no risk.
On this basis, Islam, emphasizing real social solidarity, recognizes only Qard Hasan.
Any loan repaid with any benefit is Riba. If people wish to develop and invest their
money, then they must do so through true Islamic investment, by placing their money
in risk-taking projects and bearing the consequence, be it profit or loss. Money does not
by itself generate money; it increases or accumulates, justifiably, through actual
investment in economic activity, in accordance with different Islamic modes of investment
based on partnership and sales contracts. Thus, money grows through a partnership
system, not through a debt system in return for interest. This, in essence, is how
Islamic banks function.
The feasibility of the interest rate mechanism :
Some economists consider the interest rate as the strategic price in the
contemporary economic system. For them, it is the nervous system of modern banking;
the main tool for the management of the monetary system; the effective savings
factor; and the criterion that helps to ensure investment allocation in the most efficient
projects. They believe that the use of this mechanism will save developing countries
from further foreign indebtedness and, consequently, from dependence. Eventually, they
believe, it will guarantee the most efficient use of resources through better distribution;
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and as a result, economic development will be achieved; pillars of economic power will
be perfected; and society will progress. Some economists even consider the use of the
interest rate mechanism in contemporary economic system to be a manifest destiny
and an irreversible fate.
They further believe that if any existing system attempts to free itself from the
interest rate mechanism, a great misfortune will befall the owners of wealth, most
especially creditors. They believe that this would result in the collapse of the banking
system, the paralysis of the monetary system and decreasing savings by increasing
hoardings, and the flight of capital to the rest of the world, exposing a nonconforming
economy to escalating foreign debt in order to finance investment with interest loans.
This, they believe, is inevitable and unavoidable.
Any attempt to escape from this fate will, accordingly, be doomed to failure because
the elimination of interest will make capital as free as air. This will cause a confusion in
terms of capital investment because they believe that capital will not necessarily be
invested in projects with the highest productivity but rather in projects commanding the
most authority and influence. Their prognosis is the onset of economic chaos in which
the poor will become poorer and their dependency greater.
For Western economists, the contemporary economic system with its methodology
and modern institutions is inextricably bound to the interest rate mechanism. The
elimination of this mechanism will lead to collapse and destruction.
Money and banks are among the variable of modern global economics, and the
Islamic economic system should not be prevented from adapting to the innovations of
the present age simply because there are no precedents (i.e. Banks) from earlier Islamic
epoch. At the same time, the adaptation of these innovations to the needs of Islamic
society does not presume the abandonment of one of the immutable principles of the
Islamic economic system on the pretext that contemporary economics cannot function
without the interest rate mechanism.
Consequently, it is not believed that contemporary Islamic society whose
predecessors did not know these novelties must, in order to rise to the present age,
accept them in their totality as "one package", thus abrogating one of the pillars of the
Islamic system. Rather, believed that it is the logical and fair approach is in, firstly,
questioning the necessity and efficiency of the interest rate mechanism in contemporary
economic systems, including developing ones, and, secondly, in deciding whether the
Islamic system can adopt these innovations without employing the interest rate
mechanism. This is the approach adopted in the following exposition.
This is definitely not the appropriate place to enumerate the well-known profound
disagreements among economists regarding the definition and theoretical
conceptualization of the interest rate, let alone its role in, and influence on, economic
activity.
We will not go so far as to say, as some have said, that the role of the interest rate
in the economy is something like a dreamer's hallucination or a pink elephant, and that
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it is nonexistent as an element of cost in a planned economy. There are those who
allege that identifying the interest rate is like searching for a black cat in a dark room at
midnight, except that in this case, any search would be in vain for the cat is not there at
all.
At the same time we will not go to the other extreme and say, as some have said,
that the interest rate is the foundation of all forms of production and that all the returns
of the elements of production are in one way or another a form of interest, as the price
of, or rent for, the use of money, regardless of the fact that the interest rate is not an
intrinsic element of production. The interest rate is extraneous to the production process
because it is imposed and controlled by monetary authorities. Moreover, we will not
contend, as some have contended, that all forms of income can be evaluated as interest
on the value of property and manpower.
In the face of these two opposing perspectives - one emphasizing the reality of
interest and the other denying its very existence - and entangled in a jungle of conflicting
perspectives as to the raison d'tre of the interest rate, we should admit its existence but
as an unhealthy reality, most apparent in capitalist economics; shyly concealed in socialist
economic ideology; and very weak in developing economies.
In consequence, stagnation (stagnation/inflation), manifest and hidden, has spread
throughout every level of these economies. This virulent economic disease is a by-
product of inept allocation and utilization of resources, as well as monetary, financial
and economic instability, which has led to a growing paralysis in production activity. This
is a terrible injustice to the large majority of those involved in the economy. It is,
moreover, a terrific threat to the practice of capitalist accumulation and a manifest
obstruction to growth and development.
For example, J. Enzler, W. Conrad and L. Johnson have concluded on the basis of
field research that capital in contemporary economies has been seriously misallocated
in various economic sectors and various types of investment, primarily because of
interest rates. Interest is an inferior tool. It misdirects the allocation of resources,
prejudiced as it is to largescale projects, on the unproven assumption that they are
automatically credit worthy. As a result, interest stimulates monopolistic tendencies.
Larger loans at lower interest rates are extended to large scale projects on the
basis of their supposed reliability, while medium - and small-scale projects which may, in
fact, be more reliable, productive and efficient are penalized. These smaller projects are
loaned less money than they need at interest rates higher than they are capable of
repaying. As a result, investment projects which may have greater feasibility and a
higher projected return on investment are not carried out because of their failure to
secure financing which is often extended to larger projects with more power and influence
behind them but which are less productive and in relatively less need of external financing.
Even if, as many economists believe, we presume a strong positive connection
between interest and savings (i.e., a strong positive time preference by consumers) the
insistence of savers on fixed guaranteed interest is considered illogical, particularly in
economies where interest rates are arbitrarily determined and these economies are
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exposed to escalating rates of inflation. This would imply an irrational acquiescence to
the continued decline, not to say the total collapse of the savers standard of living as a
result of the progressive deterioration of the value of money, because of inflation. The
"real" rate of interest (i.e. the nominal rate minus the inflation rate) sooner or later
becomes progressively negative, causing the real value of these savings to decline
continuously year after year.
The situation is not any better when rates of interest change. Injustice occurs as a
direct result of distributing the return between savers (loan-givers) and investors (loan-
receivers) through the financial intermediation of banks, as a result of a rise or fall in the
rate of interest. This eventually leads to a slowdown in the rate of capital formation.
As a corrective measure for inflationary or deflationary structural disorders, most
economists agree that the effectiveness of the interest rate mechanism is limited,
particularly in the case of deflation. Monetary and credit policy is the essential function
of the Central Bank, which controls money supply (i.e. the amount of money in society)
in order to control credit in accordance with the needs of the "desired" level of economic
activity. This is effected by facilitating and encouraging borrowing, especially short-term
borrowing in times of deflation, and by limiting and discouraging credit facilities in times
of inflation through manipulation of interest rates. This manipulation is accomplished
directly through changes in the "Bank Rate" adopted by the Central Bank as a rate of
lending to banks, or indirectly, through other known quantitative and qualitative monetary
tools.
The situation in developing countries is, in fact, very different. In spite of the existence
of monetary and banking systems in these countries, we find that many of the basic
conditions for the already limited efficiency and effectiveness of monetary and credit
policy are either completely absent or present only in a primitive form.
Many economists are of the opinion that this indicates that "profit" and not "interest"
is the basic dynamic force which drives production and growth in capitalist and other
economies, not withstanding differences in definition, concept and theory.
Studies carried out within the American banking system corroborate this conclusion
by demonstrating the existence of a strong positive link between levels of investment
and profits. These studies reveal that undistributed profits create a means by which an
enterprise can finance itself. In the United States between 1977 and 1980, retained
profits and provisions for depreciation in joint stock companies generated a net internal
income equal to five times distributed profits. Of the gross capital expenditure in non -
financial companies in 1980, (amounting to about 299 billion dollars), internal financing
accounted for 87% of the total, with an additional 4% made up by capital increment
while loans accounted for only 9%.
In view of this, one can safely say that "profit" is the basic force that directs
investors' decisions, not only as a criterion of and incentive for investment, but as an
important source of financing as well. A study carried out by J. Miller on 127 enterprises
clearly confirmed this. He found that about 77% of these enterprises used the "rate of
return" concept when taking investment decisions.
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Finally, R. Turvey has confirmed that the rate of interest does not control the
economy, that the interest rate mechanism is, in fact, unfit for investment decisions
and that it should be replaced by the rate of the price of real assets or by the general
level of prices of shares. From this understanding, a general theory may be proposed in
which the price of real assets and not paper assets is central to the economy and in
which profit and not interest is its real and effective mechanism. This brings us to a
discussion of the efficacy of the profit mechanism.
The efficacy of the profit mechanism :
There are four factors of production : land, labor, capital and entrepreneurship.
Each one of these factors generates an income corresponding to the actual part it plays
in economic activity. Income generated from land is rent. Income generated from labor
is wages. Income generated from capital is interest. And income generated from
entrepreneurship is profit. The fourfold division of the factors of production and their
corresponding incomes, particularly capital and interest, are basic to economic theory
and fundamental to the theory of capital. In the literature of Western economics there is
a consensus as to this categorization of factors and returns, despite the familiar saying
that whenever two economists come together there are bound to be at least three
opinions.
According to Islamic economic principle, this share in profits is the cost of capital.
In consequence, profit becomes the criterion which controls the allocation of financial
resources. It is a mechanism which balances the demand for and the supply of these
resources. When the anticipated profit rate from a new investment exceeds the achieved
prevailing rate of the actual profit in the economic activity where investment is to be
undertaken, under uncertainty conditions, and on the basis of developmental priorities
of the society and the goal of achieving sufficiency, the supply of investible funds for the
project increases and the project is actually implemented. The opposite is also absolutely
correct.
Therefore, the actual profit generated is considered in Islamic economics as a
decisive factor in determining the success of a new project, and its ability to attract
investible capital. Capital in an Islamic economy is quite naturally invested where profit is
greater, rather than where interest is higher. so profit and not interest is the true indicator
of the real scarcity in the supply of capital and guarantees the efficient and productive
utilization of available financial resources in all economic activities.
For this reason, there is greater efficiency in the utilization of capital in an Islamic
system. More care is taken in evaluating projects. Those with low feasibility are dropped.
This is not the case when projects are financed by interest loans. The creditor cares
only about the yield of interest, and does not share in the risks connected to the
financing of the project. The risks are all borne by the producer-borrower (the
entrepreneur). The creditor is not in fact interested in comprehensive appraisal of the
project unlike what the risk-bearing capital provider should do. Thus, the rate of profit
represents a mechanism of allocation of resources which is more effective and efficient
than the rate of interest.
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It is clear that if modern banks take the rate of profit as a basis for financing, as is
done with respect to various modes and instruments of Islamic investment, then they
would have to be more precise, careful, and objective in appraising projects. In this
case, they would most likely no longer tend to favour large projects over medium and
small projects, as is the case at present. All projects would be treated on the same
footing and appraised according to merit.
The decision to participate in new projects is controlled by the profit rate alone. As
this rate rises, the chance that the project, regardless of its size, will receive financing,
or participation in financing, increases. The opposite is also true. As a result, the rate of
profit is not only more efficient in the allocation of resources, but it also more effectively
limits the development of monopolistic tendencies.
According to this criterion, the Islamic system can practically achieve justice for
both the saver (fund provider) and the investor (entrepreneur), as neither of them gets
before hand any guaranteed or fixed return. They both share the risks and the results
(profit or loss), in accordance with the agreement reached by them on the basis of
capital market forces. Hence, this healthy and productive relationship will not incur any
injustice to the saver, as is the case when interest rate declines and profits rise, or to
the investor, when the opposite takes place, (interest rises and profits decline), or when
losses are incurred. Justice prevails between the two parties and this will reflect favourably
on savings and investment.
In the light of the strong positive relationship between the rate of profit and
investment, and because profits are an important source in financing investments,
particularly those that remain undistributed, the Islamic system provides several
investment modes of finance, including various forms of Musharakah and Mudharabah
contracts (partnership) and sales contracts (e.g. Murabahah and Salam contracts).
According to Shari'ah, it is permissible to create new investment tools (contracts)
for which there have been no antecedents in Islamic fiqh, provided they conform to
Islamic tenets. This is called in fiqh "the unnamed contracts." Lease financing, lease
sales, Islamic stock financing or investment certificates issued in various denominations,
durations and extents of risk, according to the investors' requirements, are some of
such contracts in the Islamic economic system.
On the basis of these new investment modes and tools resulting from financing
through profit and loss sharing in lieu of interest-based loans, the institutional side (central
banks, commercial and investment banks, financing and investment companies, Islamic
solidarity and insurance companies, the cooperative movement, and the stock market)
plays a role in the mobilization of savings for investment, thus ensuring increased growth
in the rate of capital accumulation and the eventual realization of the objectives of the
Muslim society.
Despite the fact that monetary and banking mechanisms in Islamic economics
differ from those in other economic systems, the central bank remains the pillar of the
banking system as the bank which issues money, the bank of banks and the financier of
last resort, the bank of the state and the financial advisor to the government, and the
bank that controls the supply of money.
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Under the Islamic system, the central bank can employ the tools of a monetary
policy that conforms with a system of financing based on profit and loss sharing. Basically,
in this regard, its work is to control the money supply in a way which addresses the real
needs of economic activity and the development process, i.e., to realize the greatest
amount of exchanged services with a relatively constant value of money.
The most important duty of the central bank is to monitor the rate of change in
prices and the growth rate of production in order to ascertain that there is a real
justification, in the form of increased production, for issuing more banknotes. In other
words, the central bank should make sure as far as possible that monetary expansion
does not lead to inflation which reduces the real value of funds. In addition, the central
bank in an Islamic system has the authority to control rationally and inspect meticulously
other banks' activities. It is empowered to issue instructions to banks and other financial
institutions regarding the purpose for which financing may be made, its limits, the liquid
funds to be kept, and the ratio and kind of guarantee to be obtained.
In the case of financing of government expenditure, this should be from real sources.
Under the Islamic system, there is no place for financing government expenditure through
deficit, by issuing money or by borrowing from banks. Government must, instead,
maintain its expenditure through a rational fiscal policy in cooperation with its central
bank and the institution of Zakah. This can be accomplished by increasing revenues
from government economic projects and services, and by replacing taxes and excise
with Islamic financial levies imposed upon the held wealth of the rich and, finally, through
Qard Hasan.
In consequence, there is almost no need for internal or external borrowing with
interest. In the event a need for external financing does arise, it can first be satisfied on
a participation basis by surplus - capital Islamic states and thereafter by other states
and regional and international financial institutions.
Thus, the basic positive elements, inherent in the Islamic system, that make a
serious and comprehensive development process possible are the following: accumulated
savings, appropriate investment, openness to suitable technological progress, various
investment modes, an integrated organizational and institutional structure; rational
monetary and financial policies; and operational stability through an avoidance of reckless
fluctuations of prices and interest rates. However, these elements by themselves,
according to the philosophy of this system and its foundations, are not sufficient, as the
most important constituent of this system is its inherent morality or value aspect.
Conclusion :
In concluding the brief discussion of this important issue, one would like to point
out that one has not dealt with the juristic aspect of the issue of bank interest, as it has
been fully discussed by Islamic jurists, past and present, individually and collectively with
more than 30 fatwas passed thereon. One would like to record here, by way of emphasis
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not repetition, that bank interest, whether credit or debit, is Riba and utterly forbidden
by the Book, the Sunnah, and the Consensus of jurists. One also wishes to stress that
the interest rate mechanism is a wicked and corrupt means of managing modern
economic activity, whereas the rate of profit is the most practical and effective mechanism
for the management of an Islamic economy.
It is pointless to be preoccupied with issues which have already long been resolved.
Such a preoccupation is nothing but a distraction from more immediate and urgent
problems. Instead of using the juridical legacy of Islam to bring our Muslim economies
back to and within Shari'ah, we keep reverting to matters which have already been
settled. Only when Shari'ah is applied to finance investment can we take steps to redress
underdevelopment.
It almost seems as if this secondary issue has been artificially revived in an attempt
to validate a prohibited practice by justifying an indulgence in the sin of Riba. The function
of a modern bank is to trade in interest loans. Interest on loans is clearly a preconditioned
increment and constitutes Riba, which is categorically prohibited in Islam. The interest
rate mechanism is, thus, a corrupt method for managing modern economic activity.
The Islamic system offers an easy, effective, and practical alternative. This alternative
is the profit-loss sharing system instead of credit-debit relationship that is involved in
Riba. With this form of financing investment, conventional banks can be transformed
into Islamic banks, with profit acting as an effective and rational mechanism in the
management of contemporary economic activity.
Let us always remember and follow Allah's saying :
"O believers, have fear of Allah and waive what is
still due to you from Riba, if your faith be true ; or
war shall be declared against you by Allah and His
Apostle. If you repent, you may retain your principal,
wronging none (with an increase) without being
wronged (by suffering a loss)."
And Allah's saying :
"This path of Mine is straight. Follow it and do not
follow other paths, for they will lead you away from
Him"
And Allah's saying :
"When My guidance is revealed to you, he who
follows it shall neither err nor be afflicted; but he
who gives no heed to My warming shall live in
distress." Allah speaks the truth and there is no
power but with Allah ! Glory to Him and far is He
above all.
*****