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  • 7/30/2019 Islamic Finance Todady Oct Dec 2008

    1/481October - December 2008 Islamic Finance Today

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    2 Islamic Finance Today October - December 2008

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    3October - December 2008 Islamic Finance Today

    The Financial Meltdown06 Ancient Values11

    Scope of Islamic Banking16 Private Equity21

    Non-Muslims in IFIs23 Ijarah Leasing25

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    4 Islamic Finance Today October - December 2008

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    5October - December 2008 Islamic Finance Today

    Asiff Hussein - Editor - Islamic Finance Today

    Today, at a time whenwe are witnessing theglobal nancial system

    being shaken to its very core,it is heartening to learn thatIslamic Finance has gainedadded respectability evenin previously skepticalquarters. The built-infeatures of Islamic Financethat ban highly speculativeinvestments such as seenin modern-day hedgefunds and such practices as

    short selling has meant that it has taken the punch that hasknocked out the powerhouse economies of the west verylightly and suered only a little over a 2 percent dent over

    this period. For instance, the DJIM Financials Index lost only2.74% when the crisis was at its peak while almost all othernancial indexes globally lost more than a fth of its valuedue to the banking meltdown at Wall Street.

    Grard Al-Fil in his Commentary on the Dow Jones IslamicMarket Indexes in September When the night is at itsdarkest observes that in the wake of the takeovers it isbecoming clear that the future of the nancial world will takeon a completely new shape. Observing that at the beginningof the 1970s former U.S. President Richard hailed the statecontrolled economic policy of famous economist JohnMeynard Keynes and declared We are all Keynesians now,

    he asks whether after banning short-selling, the next USPresident will announce that we are all Muslims now? . Headds that though this might be far-fetched, the future seemsto be bright for a new way of ethical investments; somethingsimilar to Islamic Finance. The message of Islamic Financeis: yes, you can earn money, even if you deny short-sellingand exclude options, swaps and hedge funds from yourportfolio. This is certainly food for thought for the worldscapital markets.

    This brings us to another important topic, namely, the idealeconomic system envisaged in Islam. It is evident that Islamicnancial theory is based on the principle of economic

    The case for Islamic Financestronger than ever

    development of the masses as a whole as against the benetsof such development accruing to a very privileged few. Theimposition of Zakat or the Alms Tax and the prohibitionagainst Riba or interest- based transactions and monopolisticpractices are all meant to achieve just this - The circulationrather than the accumulation of wealth so that all membersof society could benet.

    Ideally, Islam does not know of a nancial system thatessentially bets on what is going to happen in the realeconomy as the conventional capital market does. Rather itseconomic system is based on the real economy. As Islamicscholars point out, the prohibition of Riba along with theimposition of Zakat means that one can invest only byplacing ones wealth in the real economy since there is noother avenue to invest such monies. Such monies couldeither be invested directly in the real economy or through

    an intermediary in the form of an Islamic bank or nancialinstitution. As saved wealth is subject to Zakat it will be moreprudent to invest it, since although wealth invested is alsosubject to Zakat, it nevertheless brings in prot to the investorand also makes him or her a direct player in the economic lifeof the nation of which he or she is an integral part.

    There is another important dimension to it. Taxation inIslam is wealth- based rather then income-based since it isthe wealth saved and invested that is liable to taxation, notthe income one earns or derives from investments. As suchthere cannot be income taxes such as we come across inconventional economies. What this means is that individuals

    will have much more disposable income which can be spentor invested in the real economy. This in turn should create amultiplier eect as money will circulate freely leading to avibrant and dynamic economic system where all concernedare beneciaries. This is indeed a far cry from the conventionalsystem where a few benet at the expense of many. It istherefore high time the concept of Islamic economy andnot just Islamic Finance is promoted amongst the rest of theworld. Islam, after all, is meant for all mankind.

    Islamic Finance Today is a magazine exclusively

    dedicated to Islamic Banking & Finance

    published by Pioneer Publications (Pvt) Ltd.

    It contains a variety o interesting eatures on

    various aspects o Islamic banking and fnance

    as well as other inormation o relevance to

    the Islamic fnance industry. No part o this

    publication may be reproduced in any orm

    without the prior written permission o the

    publisher. Views expressed in this magazine are

    not necessarily those o the publisher.

    No 04, Collingwood Place,Colombo 06, Sri Lanka.

    Tel +94 11 7395090Fax +94 11 4413030

    www.pioneer-publications.com

    EditorAsi Hussein

    editor@pioneer-publications.com

    Editorial BoardDr. M.A.M. Shukri

    Dr. Shariq NisarLathee Farook

    Khalid Faroukino@pioneer-publications.com

    Research PartnerResearch Intelligence Unit

    ino@riunit.com

    ThePulseofEthical Business

    ISLAMIC FINANCETODAY

    The exclusive Islamic finance magazine

    Layout & DesignM.G. Chandana Kumara

    chandana@pioneer-publications.com

    Marketing & CirculationMohammed Hikamhikam@frstglobal-group.com

    hikam@pioneer-publications.com

    Mohamed JaleelJaleel@frstglobal-group.com

    Printed by :

    addictive.adz@gmail.com

    International DistributionMalaysia - Singapore - Bahrain - QatarUnited Arab Emirates - Maldives -India

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    6 Islamic Finance Today October - December 2008

    and its implications forIslamic bankingBy Roshan Madawela - Research Intelligence Unit

    REPORT

    The mentality of reckless greed and the resulting spread of toxicnancial externalities into the real economy can be viewed asbeing diametrically at the opposite end of Islamic nance, intheory at least. This year has witnessed the most serious break-down in the US nancial system in some 70 years. However it isnot only the US that has been aected. It has spread out acrossthe globe touching Islamic nance as well.

    S

    hould we be surprised? Many commentators have been forecasting

    something of this nature for a number of years based on the underlying

    concerns regarding the US economy. The Research Intelligence Unitfor example has been following the series of events that have led up to this

    years collapse and gave out warnings of such a shock for a number of years.

    Whilst no one could predict the precise moment of events as they unfolded,

    many were sounding the alarm that the rails were loose but the train kept

    on moving at full speed until its inevitable derailment.

    As economist James Galbraith says, a well-functioning nancial system has

    rules and its when the rules are relaxed that shady practices and get rich

    quick schemes ourish. This is what happened in the [sub-prime] mortgage

    system in 2005 and 2006, triggering o a bigger collapse. This collapse

    has spread out to the entire globalized economy. The implications of the

    nancial crunch and the subsequent bail-out on the US economy and itscurrency, the global commodity markets, on other major economies in

    Europe, India, China and the wider world are yet to be fully realized.

    There are of course developing nations like Sri Lanka, for instance, which issaid to be somewhat insulated from the US led meltdown due to the lower

    The fnancial meltdown

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    7October - December 2008 Islamic Finance Today

    levels of nancial integration with the global system.However, many people with foreign income are aected

    and this would have an impact on the demand for luxurygoods like local condominiums and vehicles. For theaverage citizen, the impact of lower demand for the islandsexports will have a signicant impact on their economicwell-being. The garment industry was perhaps the rst tofeel the pinch from declining US demand. Moreover theuncertainty regarding the availability of nance as well asthe negative sentiments prevailing in most of Sri Lankasexpo