saudi arabia: gateway to islamic finance interview: a

GLOBAL PERSPECTIVE ON ISLAMIC BANKING & INSURANCE

ISSUE NO. 168JULY–SEPTEMBER 2008

RAJAB–RAMADAN 1429

SAUDI ARABIA: GATEWAYTO ISLAMIC FINANCE

INTERVIEW: A NEW TAKE ON RIBA

TAKAFUL FOCUS:INDONESIA

ACADEMIC ARTICLE:ISLAMIC HEDGE FUNDS

TARTAN SUKUK: ISLAMICFINANCE IN SCOTLAND

CASE STUDY: ISLAMIC PAYMENTS SWITCH

PUBLISHED SINCE 1991

www.newhorizon-islamicbanking.com IIBI 3

NEWHORIZON Rajab–Ramadan 1429

Features

Regulars

CONTENTS

14

47 RATINGS & INDICESMSCI Emerging Markets Islamic Index.

48 QUESTIONS & ANSWERS

49 CALENDARComprehensive diary of upcoming Islamicfinance events worldwide endorsed by the IIBI.

50 GLOSSARY

39 IIBI NEWSIIBI welcomes students on a visit fromDubai Women’s College and PoznanUniversity in Poland. Summary of the sukuk workshop organisedby the IIBI.

42 IIBI LECTURESApril, May and June lectures reviewed; July lecture preview.

05 NEWSRound-up of the important stories from thelast quarter around the globe.

30 APPOINTMENTSSummary of appointments within theIslamic finance industry.

32 ACADEMIC ARTICLEIslamic hedge funds: work in progress.

20 ‘Tartan sukuk’ a possibility?Examining the development of Islamic finance in Scotland.

21 Islamic Capital Markets SummitReport on the summit endorsed by the IIBI, recently held in London.

22 Saudi Arabia: gateway to Islamic financeCountry focus on ‘The Land of the Two Holy Mosques’ and its contribution to Shari’ah-compliant finance.

34 Different paths to Shari’ah bankingHow important is Shari’ah-compliant technology to a bank’s success and what systemsprove to be most popular with Islamic banks around the world?

38 Women in Islamic Finance SeminarDiscussing the growing presence and importance of women in the industry.

46 ‘Islamic Finance: A Practical Guide’, consulting editor, Rahail Ali

Review of this recent addition to industry literature.

10 A new take on ribaDr Azeemuddin Subhani delves into thedefinition of riba and comes to a ground-breaking conclusion on its meaning.

14 Growing the marketInterview with Saiful Yazan Ahmad,president director of PT Syarikat TakafulIndonesia, on Indonesia’s Islamic insurancemarket, its current state and future direction.

16 Principal paymentsFirst of its kind Islamic Payments Switchprovides much needed Shari’ah-compliantaccess to money for pilgrims during theirHajj and Umrah pilgrimages.

22

4 IIBI www.newhorizon-islamicbanking.com

NEWHORIZON July–September 2008

Executive Editor’s Note

EXECUTIVE EDITORMohammad Ali Qayyum,Director General, IIBI

EDITORTanya Andreasyan

IIBI EDITORMohammad Shafique

CONTRIBUTING EDITORSDon BrownlowJames Ling

NEWS EDITORLawrence Freeborn

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

DESIGN CONSULTANTSEmily BrownGillian Griffiths

PUBLISHED BY IBS Publishing Ltd8 Stade StreetHythe, Kent, CT21 6BEUnited KingdomTel: +44 (0) 1303 262 636Fax: +44 (0) 1303 262 646Email: [email protected]: www.ibspublishing.com

CONTACTAdvertisingIBS Publishing LtdPaul MinisterAdvertising ManagerTel: +44 (0) 1303 263 527Fax: +44 (0) 1303 262 646Email: [email protected]

SUBSCRIPTION IBS Publishing Limited8 Stade Street, Hythe, Kent, CT21 6BE, United KingdomTel: +44 (0) 1303 262 636Fax: +44 (0) 1303 262 646Email: [email protected]: newhorizon-islamicbanking.com

©Institute of Islamic Banking and InsuranceISSN 0955-095X

Cover photo: Prophet’s Mosque, Medina

EDITORIAL

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

Surat Al Baqara, Holy Quran

This magazine is published to provide information on developments in Islamic finance, and not to provide professional advice. The views expressed inthe articles are those of the authors alone. The Publishers, Editors and Contributors accept no responsibility to any person who acts, or refrains fromacting, based upon any material published in the magazine. The Editorial Advisory Panel exists to provide general advice to the editors regardingmatters that may be of interest to readers. All decisions regarding the published content of the magazine are the sole responsibility of the Editors, andthe Editorial Advisory Panel accepts no responsibility for the content.

Mohammad Ali QayyumDirector General, IIBI

The second quarter of the year has shown no slowdown ofIslamic finance development across the globe, as more andmore countries are welcoming the industry. France hasrequested the assistance and advice of the UK governmentin applying Islamic finance, the Maltese authorities arecurrently examining the possibility of introducing it to thecountry’s market, and the people of Tanzania can nowbank in accordance with Shari’ah principles.

Indonesia, the country with the world’s largest Muslimpopulation (over 200 million people), is devising acomprehensive regulatory framework for Islamic bankingand insurance markets – a move eagerly anticipated by thecountry’s bankers and takaful providers.

Another major Muslim country and the birthplace of therenowned Islamic Development Bank (IDB) – Saudi Arabia– comes into the spotlight of the country focus section.NewHorizon talks to the specialists on the ground and

examines why the country hasn’t taken the top position among the world’s Islamicfinance hubs – despite its central location in the Muslim world and the presence ofthe IDB – and what developments are shaping the Saudi finance sector.

We also look into the topical issue of access to money for pilgrims on the Hajj andthe Umrah pilgrimages and how it has been addressed, as well as scrutinise theShari’ah-compliant banking technology. Banks from around the world share theirexperience in choosing and implementing dedicated solutions to support theirIslamic finance operations.

A must read of this issue of NewHorizon is an interview with Canada-basedacademic, Dr Azeemuddin Subhani, about his ground-breaking paper (recentlypresented at Harvard Business School) on the definition of riba.

And, as always, NewHorizon features all of the latest indispensable updates on theInstitute’s activities, including lectures, training programmes and associations withother educational organsaitions from around the world. We have made a minoramendment of dates on the cover of the magazine; you may have noticed that thisissue of NewHorizon is dated differently to the previous issues; as of now, themagazine will feature forward dates.


NEWHORIZON Rajab–Ramadan 1429 NEWS

New takafulventure

announcedfor Egypt

Indonesia, the country withthe world’s largest Muslimspopulation (over 200 millionpeople), plans to issue newIslamic finance laws which are designed to encourageforeign investment in theburgeoning industry. Despitebeing inhabited by ten per centof the world’s Muslimcommunity, Indonesia has sofar lagged behind countriessuch as Hong Kong, Malaysiaand Singapore.

However, Dr MuhammadSyafii Antonio of Indonesia’sCentral Bank and regulator,Bank Indonesia, has publiclystated that the country istrying hard to transform itsimage and grab a slice of the$700 billion Islamic financemarket. ‘The issue of Islamicbonds is a strategic instrument

for the national economy’, hesays. Dr Antonio indicates hishope that the new legislationwill increase Islamicinvestment in the nationalbond market from 2.3 per centnow to five per cent in thenext two years.

Domestic Islamic insurance(takaful) operators are alsohoping for a favourableframework to be introducedby the authorities. There arecurrently over 40 providers oftakaful in the country,although the sector anticipateslarge-scale growth if BankIndonesia introducesregulatory changesaccommodating this type ofinsurance. (More informationon takaful in Indonesia can befound in the ‘Takaful focus’section of this issue, p14).

Most populous Muslimcountry set for

lift-off in Islamic finance

Plans are afoot for a new jointventure insurance firm in Egypt.To be named Arab OrientTakaful Insurance Company, theinitiative follows a similarsuccessful venture in Syria. The new company will be theproduct of an agreementbetween Amlak Finance, thelargest real estate financier inthe Middle East, Arab OrientInsurance Company PSC, amember of Al Futtaim Group ofcompanies, and Abu DhabiIslamic Bank (Egypt).

A Memorandum ofUnderstanding has been in placebetween the three outfits sinceAmlak Finance’s successfullaunch in Egypt in October lastyear. ‘The Egyptian market hasalways been a key attraction toUAE investments, and with thisnew partnership I am confidentof the future success of thisentity,’ said Arif Alharmi, CEOof Amlak Finance.

Abu Dhabi Islamic Bank is well placed to grow in theEgyptian market since itsacquisition of National Bank forDevelopment in Egypt in 2007.According to Khamis Buharoon,chairman of the Abu DhabiIslamic Bank in Egypt, ‘thispartnership is reflective of ourstrong commitment to theEgyptian market, whichrepresents a key growth marketfor the Abu Dhabi Islamic Bank internationally’.

IslamicDevelopmentBank easesfood crisis

The Islamic Development Bank(IDB) has responded to theglobal food crisis by earmarking$1.5 billion in low cost loans tothose Muslim countries worstaffected. The IDB alreadyprovided around $50 billion tofinance development projects inthe Islamic world. The bank’smission statement is to foster theeconomic development andsocial progress of membercountries, and the money isintended to boost food securityand increase agriculturalproduction over the next fiveyears. It will reportedly be in theform of a soft loan, i.e. cheaperthan the market rate.

Food riots have occurred innumerous places recently,including in Egypt, Pakistan,Somalia and Yemen. Manycountries in the Middle East areaffected, and it is the poor whosuffer the brunt of the riots. Therise in food prices has beencaused by increased globaldemand, bolstered by countriessuch as China and India, andmarket distortions.

The money will therefore comeat an opportune time for thoseaffected. Saudi finance ministerand chair of the IDB’s governingcommittee, Shaikh Ahmed BinMohammad Al Khalifa, statedthat the five year programmewas intended to ‘help the leastdeveloped member states reachfood security’.

Sumatra, Indonesia

© Elena Pokrovskaya | Dreamstime.com


NEWHORIZON July–September 2008NEWS

The British government hastaken yet another step towardsembracing Islamic finance, asindicated by the third meetingof its Islamic Finance ExpertsGroup (IFEG). Kitty Ussher, theTreasury minister who chairedthe meeting of the IFEG, hasannounced the government’spositive conclusion to itsconsultation on a sterling sukuk(Islamic bond) issuance.

The detailed consultation hadbeen announced in November2007 (NewHorizon,October–December 2007issue), following on from anearlier consultation on sukukissuance. This latestconsultation has considered theadvantages, disadvantages andrisks of the government issuingsovereign sukuk, as well assome technical questions.

Ussher praised the worth of themeeting of the IFEG, statingthat ‘today’s discussion hasemphasised both the importanceof the Islamic finance sector tothe City [of London] and thegovernment’s commitment toensuring the continued growthof this important sector in thefuture. The government isdetermined to maintain itsmomentum on work on Islamicfinance and to make clear tostakeholders its commitment tothis industry.’

The key conclusions of theresponses to the government’sconsultation are as follows: thegovernment favours a ‘bill-like’sukuk programme which couldbe fully integrated with the

conventional treasury billprogramme, rather than a‘bond-like’ sukuk, which thebalance of advantages and risksdoes not favour; a rollingprogramme of around £2billion ($4 billion) sukukissuance should be achievable;and a basic ijara structurewould be the best way tofacilitate sukuk issuance.

The government, incollaboration with the IFEG,plans to publish a paperdetailing UK strategy on Islamicfinance by the end of 2008.Meanwhile, the government willcontinue to resolve outstandingissues to ensure that there wouldbe a level playing field forShari’ah-compliant andconventional finance beforeissuing sovereign sukuk. The government will publishanother update of its progress inthe next pre-budget report.

In parallel with the work of theIFEG, National Savings andInvestments (NS&I), thegovernment body which issuesconventional government-backed bonds to the public, hasalso presented the findings of itsown study into the feasibility ofissuing retail Islamic financialproducts. The study includedissues such as consideration ofthe costs involved and of thepotential size of the market forretail Islamic financial products.NS&I has decided that it is tooearly to offer Shari’ah-compliant products, and willrepeat the study again once thegovernment’s position onsovereign sukuk is clear.

Saleh Kamil, the chairman ofthe General Council forIslamic Banks and FinancialInstitutions (GCIBFI) and aprominent Saudi businessman,believes that the Islamicbanking industry is growing at35 per cent a year, with assetsof financial institutionsreaching $600 billion in 2007.Kamil counts the number ofIslamic banks in 2007 to havebeen 470, up from less than300 in 2005.

However, Kamil’s highlyencouraging message wastempered by the possibility thatthe Islamic banking industrymight briefly become a victim

of its own success – because ithas grown so quickly, themarket place is low onemployees who have beentrained in Shari’ah-compliantbanking systems. Kamilbelieves that of the 300,000employees in the industry, 85per cent lack knowledge ofIslamic banking because theyhave studied conventionalbanking systems. Kamil urgedthat more should be spent oninvestment in training andeducation for Shari’ah-compliant finance. Kamil wasspeaking at a seminar at theannual conference of governorsof the Islamic DevelopmentBank (IDB) in Saudi Arabia.

How quickly can the Islamicfinance industry grow?

One step closer to British sovereign sukuk issue

Maltese authorities examine Islamic finance

Malta, the English-speakingarchipelago in theMediterranean, may be on theroad to embracing Islamicfinance. The Malta FinancialServices Authority has released apublic consultation document onthe introduction of Islamicfinance, and plans to release asimilar document for Islamic

bonds (sukuk) later this year,with a further document ontakaful (Shari’ah-compliantinsurance) in 2009. The publicconsultation document indicatesthat Malta is consideringchanges to allow Shari’ah-compliant financial services tooperate within the country’sregulatory framework.

Malta

© Rui Vale De Soussa | Dreamstime.com



Kenya has finally welcomed asecond Shari’ah-compliant bankinto the country. FirstCommunity Bank is astandalone Islamic bank whichwas licensed by the CentralBank of Kenya around a yearago, and has just opened itsdoors. It will compete with GulfAfrican Bank, another Shari’ah-compliant bank and thecountry’s first, which openedfor business in January.

Both banks had been hit bydelays. NewHorizon previouslyreported that First CommunityBank opened for business in May2007, while Gulf African Bankwas originally intended to openin April of that year. However,registration procedures appear tohave delayed the deployment ofboth banks.

First Community Bank will havean approved capital base of

KES1 billion ($16 million), andwill have a 51 per cent Kenyanshareholding. It will offercurrent, saving and investmentdeposit accounts as well as assetand services financing.

First Community Bank willtarget both Muslims and non-Muslims according to NathifAdam, the bank’s CEO. TheKenyan Islamic banking markethas already attracted theinterest of large banks such asBarclays, Kenya Commercial

Bank, I&M and Dubai Bank,all of which offer Shari’ah-compliant products.

With two new Islamic banksopening in a relatively shortspace of time, as well as theefforts of the internationalbanks, growing competition inIslamic finance should be good news for Kenya’s largeMuslim community, which isroughly six million peoplestrong, a quarter of thecountry’s population.

Islamic finance competition heats up in Kenya

The United Arab Emirates(UAE) has announced plans tocentralise the management ofits zakat fund. Zakat collectstax from Muslims as apercentage of their wealth.Abdullah Bin Aqeeda AlMuhairi, secretary general ofthe fund, has announced thatlocal Islamic banks andcompanies will have to pay 2.5per cent of their net operatingcapital to the fund from thebeginning of next year. AlMuhairi has said that eightIslamic banks would beincluded among those that willhave to make zakat payments.

The fund’s bylaws will beamended to make it mandatoryto submit audited accounts andpay the required share. AlMuhairi has indicated that thepurpose of centralising thefunds is to streamline theprocess of distribution.Previously, companies wereexpected to distribute theirshare of zakat directly tocharities and the needy.

Muhairi expects the responsefrom Islamic companies to befavourable, and has also hintedthat non-Islamic companieswith large Muslim

shareholding may be expectedto pay zakat in years to come.

Zakat, the principle ofdistributing wealth to the needy,is one of the five pillars ofIslam, and is seen as a way ofpurifying wealth. Al Muhairihas said that ‘scholars infer thatzakat purifies a Muslim’s wealthand also suppresses ego,jealousy, greed and miserliness.It is not a form of tax but rathera divine duty and considered asa right of the poor over the rich,not a charity.’ Zakat helpsconfirm Islam’s status as areligion based on social welfare.

Zakat revamped in UAE

NEWS

Two Bahraini firms, IthmaarDevelopment Company andArabian Ventures, along withKuwaiti outfit Al SafatInvestment Company, havelaunched a Shari’ah-compliant$500 million Latin AmericanReal Estate Fund.

The fund will target real estateassets in Brazil, Argentina,Colombia, Mexico, Ecuador,Chile, Venezuela and CostaRica, among other destinations,and will initially have a fiveyear term.

The three companies will lookto take advantage of the realestate and commodity boomwhich has seen regional tradegrow at ten per cent in the lastfew years, and the populationclimb. The venture also reflectsMiddle Eastern confidence inthe economy in that part of theworld, which, after a few falsestarts in the past, is nowgrowing healthily.

CEO of Arabian Ventures,Mishal Al Jarallah, puts thegrowth down to more marketfriendly policies and politicalstability, while Waleed Ahmad alSharhan, chairman of Al SafatInvestment Company, believesthe continent is entering a periodof ‘stability and productivity’.

MiddleEasternIslamic

investorstarget Latin

America

Nairobi, Kenya

© Vladimir Kindrachov | Dreamstime.com



Central Bank of Bahrain to offer Islamicliquidity instrument

First Islamic ETF for Singapore

The first Shari’ah-compliantexchange-traded fund (ETF) inSingapore has begun trading.Known as the Daiwa FTSEShariah Japan 100, it waslaunched jointly by DaiwaAsset Management (Singapore)and the Singapore Exchange(SGX). The fund will also beDaiwa’s first ETF in Singapore.

Of Japan’s largest and mostliquid companies, the fund will only track those whichcomply with Islamic financialprinciples. These willcollectively be known as theFTSE Shariah Japan 100 Index. Yasaar Limited, a global

Shari’ah consultancy firmwhich offers Shari’ahcompliance services, will betasked with the Shari’ahscreening of companies at fundlevel. At present, holdings inthe fund include Toyota,Nippon Steel, MitsubishiElectric, Komatsu, Canon andNintendo. To be included in thefund, companies must not onlyavoid haram activities (such asproducts related to alcohol),they must also have acceptablymodest levels of debt.

The new ETF will provide anextra option for Islamicinvestors in Japan and

Singapore, and it will alsoprovide a low-risk option forinvestors with reputable, largeand well-known Japanesecompanies. Daiwa thereforeexpects that the fund willappeal to non-Islamicconventional investorsworldwide, as well as non-Islamic ethical investors.

The Singapore Exchange’sexecutive vice president andhead of development, ChewSutat, believes demand forShari’ah-compliant investmenthas risen thanks to the increasedattention of rich Islamicinvestors from the Middle East.

The Central Bank of Bahrain(CBB) will launch the Islamicsukuk liquidity instrument (ISLI),an Islamic financial instrumentthat has been developed jointlywith the Liquidity ManagementCentre (LMC), a Bahrain-basedorganisation which providesasset sourcing, structuring andmarket making capabilities.

The ISLI is designed to allowconventional and Islamic financialinstitutions to access short termliquidity against governmentbacked ijara sukuk (bonds),which are issued by the CBB.

Dr Abdul Rahman Saif,executive director of bankingoperations at the CBB, statedthat ‘the development of theuniquely-structured ISLIrepresents a majorbreakthrough for the Islamicfinance industry worldwide,and will significantly enhancethe sukuk market’.

The purpose of the CBB’sstrategy is to create a deeperand more liquid sukuk market,which should stimulate andpromote a more active Islamicfinance market. The ISLI will be

enabled because, to achieve this,the market needs a multiplicityof short and long terminstruments with which tomanage liquidity. Theinstrument has been endorsedby the Shari’ah boards of theCBB and LMC.

To date, the CBB has offered atotal of 14 issues of ijara sukuk,totaling over $2 billion. TheCBB issues two sukuk a month,one of a three month tenor, theother of six months. The mostrecent is listed on the LondonStock Exchange.

NEWS

Kenya Commercial Bank (KCB)has been given the green light bythe government of Tanzania tomarket its Amanah Islamicbanking suite.

The government’s approval willallow the bank to introduceShari’ah-compliant loanproducts. There is, to date, noShari’ah-compliant finance inthe country, and strict bankingregulations seem to havedeterred entrants until now.

KCB will introduce a newaccount known as the KCBAmanah Account. Head ofliabilities at the bank, Osman DAhmed, told a local newspaperthe bank believes there is apotentially lucrative market forIslamic finance in Tanzania, andthe account is similar toofferings which thrive in otherIslamic countries, such as Egyptand Sudan.

As demanded by the NationalMuslim Council of Tanzania,the KCB will establish aShari’ah advisory board andShari’ah compliance officers.

Tanzania sits on the southernborder of Kenya. It is home to40 million people, of which alarge number are Muslims.Estimates of the proportion ofMuslims in the country rangefrom one third to one half,suggesting a large opportunityfor the Islamic banking industry.

Islamicaccount forTanzanianMuslims

To stay up to date with all the news in the Islamic financial sector, visit the Breaking News section of the NewHorizon website at www.newhorizon-islamicbanking.com



carry such serious punishment in the Quran.You can do even worse – you can rob byforce, or by murder – but this most grievousof impacts on a fellow human being doesnot attract such serious punishment as ribadoes in the Quran.

The punishment is clearly out of line with thegravity of the perceived sin – perceived as it isas an economic or financial sin. This plainlygoes to show, at least to me, that the act ofriba is not solely an economic paradigm. It does not belong in that category.

So what is your answer for the discrepancy?

I asked myself, what is the intrinsiccharacteristic in the process of riba? For this Iused a linguistic analysis of the Quran whichhas not been attempted before in this area.My conclusion is that, if you analyse the actof interest taking and some other verbalapplications of riba in the Quran, you willfind that the Arabic term ‘riba’ basicallymeans growth from a process of selfgeneration. ‘Riba’ is one agent acting on itselfto produce growth. Money begetting money,as Aristotle might say, is the obviousexample. Without the intervention of anyother agent, money can just keep on growing.You just put it in a bank account, and even if

NewHorizon: What is the background ofyour thesis?

Dr Subhani: If you survey Islamic literature,you find that the whole question of theprohibition of riba has been dealt with at avery cursory level. None of the scholarshave really gone into the depths of the issueas to what the real meaning of ‘riba’ is, andwhy there is such a strict idea of theprohibition of riba in the Quran. This sin istreated as the greatest of all sins, and theQuran lays down very graphic punishmentfor any human indulgence in riba. But nobody gives us an exact explanation asto why the financial or economic act of ribacarries such characterisation as the greatestof sins. The Quran threatens humankindwith eternal hellfire for those who indulgein any act of riba. So my question became,why? What is at stake here? Is riba just afinancial and economic sin?

There are more serious economic crimes,but they do not attract such punishment inthe Quran. If riba, or interest, is usurpationof wealth from the poor to the wealthy, atleast there is consent from both parties. You can have a usurpation of the samewealth from poor to rich by fraud ordeception, which is theft. But theft does not

A new take on ribaDr Azeemuddin Subhani spent nearly three decades working as a financial advisor in the Saudioil ministry. Though he worked in a conventional financial environment, he neverthelessharboured a passion for Islamic finance and law. When he retired in 1999, he took theopportunity to study it at McGill University in Canada. He finished a PhD in Islamic Law andFinance in April 2007. He has since presented his thesis, in which he provides a new definitionof the concept of riba, at Harvard Law School in the US, where it is currently being edited forpublication. Dr Subhani has been publicising it for a couple of months now, in which time SheikhNizam Yaqubi, a prominent Shari’ah scholar, has offered to translate it into Arabic and distributeit to libraries across the Arabic world. Others have offered to translate it into Turkish and Urdu.Here, Dr Subhani explains to NewHorizon what he thinks the true meaning of riba is all about.

INTERVIEW

Dr Azeemuddin Subhani


NEWHORIZON Rajab–Ramadan 1429 INTERVIEW

the bank does nothing with that money, youcan come back at the appointed time eachmonth and collect the interest. That processtheoretically can continue for an eternity.

It is this element of self generation which isthe conspicuous characteristic underlyingriba. When we talk of self generation, weare close to talking of self emanation, of selfsubsistence, and eventually eternity. Andthese ideas are absent in other economiccrimes. This explains the discrepancy, and ifyou look at these attributes, they are clearly,and very obviously, divine attributes. Theyare not in the human gift.

Therefore, I submit that any humanindulgence in any act of self generation,which includes interest taking, is atransgression of the divine domain. Anytransgression in the divine domain is an actof shirk, an act of idolatry, an act ofpolytheism. And this is the only reason whichcan possibly explain why the Quran providessuch graphic, otherworldly punishments forcommitting an otherwise worldly sin.

Is there anything else in the Quran thatsupports your definition?

Yes. This whole principle of self generationand intra-action by one agent on itself iswell documented in Islamic tradition. Thereis a prophetic saying from the popularbooks of the Hadith such as Sahih Bukhari,which says that the sin of committing riba isworse than committing incest with one’sown mother. This Hadith is well received inIslamic tradition. But when scholars havebeen asked what this association of ribawith incest means, they simply cannotexplain beyond asking, ‘can’t you see themoral and ethical connotations? TheProphet is trying to create an extremerevulsion in you for the practice of riba.’

But look at it slightly more philosophically.Consider what is happening when a mancommits incest with his own mother. A manis incapable of reproducing by himself, butif he commits incest with his own mother,he is coming as close as possible tobecoming his own father, or fatheringhimself once again. The closest he can come

to reproducing himself is to reproduce withthe one who produced him in the first place.So the Prophet associates incest with riba toemphasise the extreme intra-activeness andself generation of the act of riba.

There is also another injunction in theHadith, a prophetic saying which states thatriba has 72 chapters and so does shirk, oridolatry. This saying establishes anequivalence between polytheism and riba,which scholars have included in theirwritings but never commented on.

There is more evidence if you look at thelinguistic root of the word. The linguistic

root of ‘riba’ is strikingly similar to that of‘Rabb’. They are not the same but they arecognate roots. And ‘Rabb’ is the Arabicword for ‘Lord’. Moreover, nobody hascommented on this but the Quran alsodeclares riba to be ‘harrama’ (2:275). TheArabic verb ‘harrama’ in its emphatic formmeans, to prohibit something because it isout of bounds for you, or because it issacred. So there is nothing intrinsically evilabout riba. Yes, the practice of financialriba may have some evil effects ofexploitation or injustice. But it may not inother cases. What this means is that it is notprohibited because it is an evil practice, butbecause it is a divine practice.

To contrast this, the practice of maysir,which is gambling, has not been declaredharrama or sacred. It has simply beendeclared as something to be avoided becauseit is evil. Avoidance of gambling, which isthe second foundation of Islamic finance, isnot on the same religious or theoretical levelas riba is. It is simply a satanic act. It has notbeen declared sacred like riba has.

So what impact would your definition of‘riba’ have on Islamic banking?

When we restrictively translate ‘riba’ asinterest/usury, we are narrowing the

definition to a financial practice. When weanalyse a financial document, we simplylook for the presence of interest as such.And if there is no word ‘interest’ in thedocument, we are satisfied. We can declarethat document to be Shari’ah-compliant.But under my more intrinsic definition, youhave to look not just for interest but for anyexchange of homogeneity, any exchange ofhomogeneous items in a businesstransaction where an increase is takingplace. That exchange would also becomeriba. Any exchange of homogeneous items –money for money, commodity for similarcommodity – if it involves an increase,would be under the sanction of riba.

My definition will establish the properunderstanding of the concept of riba, andwill explain the severity of commissioningriba. Nobody will be able to summarilydismiss it as purely a financial matter. Onceyou have this explanation, you’ll thinktwice about a dismissive reaction. But thedefinition will simplify the practice ofIslamic finance. It will provide one guidingprinciple, which is that in order to look forriba you must look for any instance of selfgeneration. That is riba, and you must stayaway from it. What you shouldn’t do is getinto a semantic debate about the definitionof usury, what it used to be and what it isnow. All that semantic debate leadsnowhere. It doesn’t explain the theology ofthe concept. My definition gives a simplelitmus test of what is riba and what is not.

Once you define riba in this broad sense, thereare other acts of riba, not just financial ones.Human cloning is one act of biological riba.Incest is another easily identifiable example,the nearest one can come to self generation.

Why has the extant scholarship missed thisconcept?

The only plausible explanation is thatscholars, especially modern scholars, havelooked at the question of riba only by asking

Any human indulgence in any act of selfgeneration, which includes interest taking, is atransgression of the divine domain.


NEWHORIZON July–September 2008INTERVIEW

what the most likely financial practice wasat the time of the revelation of the Quran.They have tried to connect all theprohibitions of riba to those perceivedfinancial practices, on which ironically thereis no historical agreement. There is completedisagreement as to what those financialpractices were. Once you take a contextualapproach, it becomes very shallow, and youcompletely ignore the deeper philosophical,metaphysical and theological aspects behindthese divine injunctions.

It is generally characteristic of the tendencyamong interpreters of the Quran to shunphilosophy. That attitude has in my opinioncontributed to shutting out this whole fieldof philosophical thought which is behindthe Hadith. The Quran invites scholars toreflect on it. Scholars should interpret it andbenefit from it.

How has your theory been criticised?

The entire effort on my part has been togive hermeneutical balance between theenormity of the sin and the severity of thepunishment for committing the act of riba.The only concept which balances the sinand the prescribed punishment is that ribais a transgression into the divine domain.

The implication is that anyone indulging inriba is not a monotheist, as they aretransgressing in the divine domain. Thequestion I get asked is, are you accusing usof being polytheists or idolaters? This is adelicate question. But a distinction has to bedrawn between the act itself and the actor.My whole thesis is, the act of riba itself isan act of denial of monotheism. But thisdoesn’t mean anybody indulging in it is apolytheist. He has his own set of beliefs.Any believing monotheist would neverknowingly do it, and now he is being told,‘do not do this because it is an act ofpolytheism’. I’m not passing judgment. I’mjust a researcher who has come up with thisexplanation. I repeat, the important thing isto distinguish between the act and the actor.

What is the wider impact of your definitionon your beliefs?

Interest or usury is only one instance ofriba. There is a Prophetic saying whichstates that there are 72 chapters of riba.The financial definition is only one of them.There are therefore multiple, even if thenumber 72 is used figuratively, applicationsof riba in human behaviour. But there isalso the act of bay’. This is a bilateralexchange of give and take. Procreation is anact of bay’, because it takes place betweentwo opposite agents, male and female. TheQuran is replete with assertions thathumanity, indeed everything, is created inpairs, and invites man to reflect on it.

The Quran says Allah has prohibited ribaand permitted bay’ (2:275). This provides avery golden rule of human behaviour.

Stay away from intra-action or selfgeneration, and indulge in interaction. Bay’is the mother of all contracts in Islamic law.The contract of marriage is also the contractof bay’. Bay’ leads to trade, and because ofthis, Islam is a champion of business andcommerce. The Prophet himself was atrader. The Quran is replete withcommercial terms. There is nothing wrongwith business and trade, and the only thingAllah demands you stay away from is selfgeneration, in addition to certain namedproducts. Once you do that the wholesubject will become very easy to operate.

And once you start thinking along these lines– that there exist two injunctions, stay awayfrom riba and indulge in bay’ – the wholefield of human life becomes clearer, as towhat you are supposed to do in this world. It explains the purpose of human creationitself. Before the creation of humanity,singularity prevailed. God, Satan and the

angels are all models of singularity. Theintroduction of duality came in the form ofAdam and Eve, or riba and bay’. Godcreated them to see how interactively theybehaved on this planet while they are here,and forbids that they indulge in any activityof singularity, which even smells of divinity. God created humanity to test the dualitymodel on this earth, with the full interplayof free will. The very first sin of riba wascommitted in the Garden of Eden where,prompted by Satan, Eve and then Adamtransgressed by tasting the fruit of theforbidden (sacred, out of bounds) ‘Tree ofEternity’. Consequently, humanity wasconsigned to this earth to prove that evenunder divinely granted free will it can shunriba and practice bay’ in order to eventuallyregain eternal entry into the Garden ofEden. This explanation makes my thesis theGrand Unifying Theory of religion.

None of the scholars have really gone into the depthsof the issue as to what the real meaning of ‘riba’ is...

Volaw Dubai:

Bringing 25 years of expertise to our Middle East clients


NEWHORIZON July–September 2008TAKAFUL FOCUS

You would have thought that selling Islamicfinancial products in the country with thelargest Muslim population in the worldwould be like shooting fish in a barrel… butyou would be wrong. Despite Indonesia’smassive Muslim population (more than 200million of the 235 million populationregard themselves as Muslim), there are stillseveral hurdles for it to overcome before itcan stand shoulder to shoulder with itsneighbour, Malaysia.

One area where this is particularly apparentis in Islamic insurance. ‘If we talk about thetakaful market in Indonesia relative to theneighbouring Malaysia, it can be consideredreally small and very passive,’ says SaifulYazan Ahmad, president director of PTSyarikat Takaful Indonesia. In his opinion,the market is ‘not that aggressive and there’sstill a lot to be done’.

The country has more than 40 providers ofIslamic insurance. However, of these onlythree are fully-fledged, with the remainderbeing Islamic windows in conventionalinsurance companies. And Ahmad can seethat takaful is clearly lagging behind itsconventional rival.

There are several reasons apparent to himas to why Shari’ah-compliant insurance isstill playing catch-up. One major reason hecan see is a lack of what he describes as‘human capital’. ‘At this point in time,takaful doesn’t have sufficient people whoare experts in the technical know-how.’ Asecond problem is with the readiness of theconsumer. ‘The market penetration overallfor conventional and takaful insurance isless than ten per cent, as opposed to othercountries with 15 to 20 per centpenetration,’ he explains.

There is a positive note to both of theseproblems; if you solve the first, then thesecond will naturally follow. ‘Awarenessneeds to continue to be done aggressively tocreate awareness of insurance and Islamicinsurance. Then awareness of thedifferences between Shari’ah and theconventional,’ says Ahmad.

Another hurdle for the industry to overcomeis the challenge of finding Shari’ah-compliant opportunities to invest takafulfunds in. ‘One of the factors that meanstakaful can not move very fast in Indonesiais a lack of Islamic investment instrumentslike sukuk. We have some difficulties to findthe best returns that are Shari’ah-compliantin Indonesia.’ There is no such problem forconventional insurance, as it has offeredmore choices and investment opportunities,and Ahmad feels this is an area thegovernment needs to look at.

There is one further problem that theindustry needs to overcome – the regulatoryframework. ‘Even though the first takafulcompany has been established for 14 yearsalready, there is no law on Islamic insurancein Indonesia today,’ explains Ahmad. He describes this as a major problem.‘What we are writing on is underconventional law. There are quite a numberof differences from Islamic law; there aredifferent areas accounting wise, how wetreat the investment and how we treat theprofit sharing.’

There is a light at the end of the tunnelwhen it comes to Indonesia’s lack of atakaful act. Ahmad has met with theregulators on several occasions to discussthe law, and it would seem that they arelistening. ‘I believe they are doing

Growing the marketDespite having the largest Muslim population in the world, the takaful market in Indonesia is stillrelatively small. NewHorizon looks at what one company is doing to change this.

Saiful Yazan Ahmad,PT Syarikat Takaful Indonesia


NEWHORIZON Rajab–Ramadan 1429 TAKAFUL FOCUS

something, but I don’t think it will be outsoon. It will be two to three years downthe road.’

If the Indonesian regulators are to act onthese discussions and bring in laws relatingto takaful, then Ahmad believes they don’thave far to look for the way it should bedone. ‘If you are talking about takaful,Malaysia is the role model. The governmentgave full support for all Islamic finance,takaful, as well as banking and capitalmarkets. It has invested a lot of money toensure that Malaysia becomes the financialhub in the region, and hopefully globally.’It’s not just the support that the governmentgives the industry that Ahmad is impressedby; it is also the regulatory structure.‘Malaysia should be the role model for theregulatory framework, and how the takaful operators market and develop the products.’

Malaysia does indeed have a strong andvibrant takaful industry. As a market, it isproof of what Islamic finance can achievewith the right levels of support fromregulators. This is not lost on Ahmad. Hebelieves it is not only the Indonesian marketthat should look to the country forguidance. ‘I know Dubai tries to emulateMalaysia, I don’t want to say which one isthe best, but at this point in time, perhapsMalaysia can be the role model globally.’

Despite a slow start, takaful in Indonesia isbeginning to make progress. Currently thebest way takaful providers have found toget their products to market is throughpairing up with banks to offer‘bancatakaful’. This, claims Ahmad, is oneof the lowest cost distribution channels forinsurance companies. It also providesbenefits for both parties through cross-selling. ‘My company works very closelywith all the Shari’ah banks,’ says Ahmad,‘we have some joint development productsfor Islamic banking and takaful.’

Currently, the product that Ahmad sees thehighest demand for is investment-linkedtakaful. This, he claims, accounted foraround 30-35 per cent of his company’srevenue in 2007. And with demand still

high this year, he expects this product tocontinue being a big seller into next year.He can also see a distinct demand for healthand medical takaful.

Getting takaful products into the marketthrough the Islamic banks is a good start,but Ahmad knows that more still needs tobe done. ‘Insurance, especially at theinfancy stage, depends a lot on theinsurance agents. If you see all thesuccessful insurance companies, one of thecritical success factors is the number ofintermediaries or agents. The more theyhave, usually the higher their businessgrowth.’ It is because of this that he believeshis company can’t run away from recruitingas many agents as possible. ‘In order toboost our market share, we need to recruitas many qualified agents as we can.’

Of course recruiting more agents shouldonly be the first stage for growing thebusiness. What Ahmad sees as one of the‘critical success factors’ is staffdevelopment. ‘We have to make sure thedevelopment of agents is very effective interms of training and product knowledge.’

Linked to this, Ahmad also championsgood customer services as a way to buildthe business. ‘You let your customer gothrough a pleasant experience with an areato provide the services.’ This concept is truenot only for the issuing of policies, but alsowhen it comes to claims as well.

For Ahmad, the key to achieving this ishaving a good IT infrastructure in place.‘We have to ensure the IT is the latest andthe fastest so that we can issue the policiesin the shortest period of time. We also haveto ensure that the policy holder doesn’thave any bad experiences when it comes toturnaround time for claims being made.’

One thing is clear – Indonesia has a hugepotential market to be tapped into. With 87 per cent of the population being Muslimtakaful should be the insurance product ofchoice in the country. This is somethingAhmad is keenly aware of, ‘I see a hugepotential for Indonesia. The domestic needfor Islamic insurance is huge. I foresee thatif you have the right ingredients, theregulatory and human capital, Indonesiacan maybe overtake the big players in other countries.’

The only way that the country can achievethis and become a dominant force in Islamicfinance, is for the government to takeaction. It needs to take a long hard look atthe regulatory challenges that the takafulproviders are facing, and tackle thesethrough producing a dedicated takaful act.

With proper top level support, andincreased public awareness, there is noreason why this country could not moveinto the group of leading players inIslamic finance. The market is there, it just needs to be given the opportunity to flourish.

I foresee that if you have the right ingredients, theregulatory and human capital, Indonesia canmaybe overtake the big players in other countries.

For Muslims the annual pilgrimage toMecca, the Hajj, is an obligation that mustbe carried out at least once in their lifetime.Every year Muslims from all over the globemake the journey to Saudi Arabia andperform a series of ritual acts. Thepilgrimage takes place in the twelfth monthof the Muslim calendar, and in December2007 an estimated two million pilgrimstook part.

One of the problems that pilgrims facewhen they get to Mecca is getting access totheir money. The solution for many hasoften been to take large amounts of cashwith them, but there is a degree of personalrisk to carrying large quantities of money.The alternative to this has been usingtravellers cheques, but money changerscharge a high premium for the service. Theother option was by using cards onMasterCard’s Cirrus or Visa’s Plus networksto withdraw money from the local ATMs.The problem with this is these cards areusually credit cards that incur a cashadvance fee as well as the ATM withdrawalfee, this extra charge is deemed un-Islamic.Pilgrims needed a solution where they couldget access to their money from the localnetwork whilst not going against their faith.

One possible solution has come out ofMalaysia. It has a strong presence in theIslamic banking industry, and PrimeMinister Abdullah Ahmad Badawi hasdeclared that he wants Malaysia to becomea hub for the Islamic finance world. Thecountry also has a large Muslim population;around 100,000 Malaysians take part in theHajj every year. The combination of thesefactors led Malaysian payments company, e-Kencana, to create an Islamic PaymentsSwitch (IPS). The company decided ‘itwould be a good idea to start a retail basisswitch in Malaysia that could bridge the

Islamic world’, says e-Kencana managingdirector Shahzad K. Sultan. ‘If e-Kencanacould get involved in that, at least it wouldposition Malaysia as some sort of hub forIslamic retail payments.’

Malaysia would seem like a natural choicefor a country to host the IPS as it wants toposition itself as a moderate Muslim country.‘Malaysia is a very serious country when itcomes to Islamic banking. Creativity withinthe world of Islamic banking is always beingtested and refined,’ says Sultan. ‘We are hereto grow Islamic banking from Malaysia, it’sa national task, we have to build Malaysiainto an Islamic financial hub of the world.Our Prime Minister wants it, so we aim togive it to him.’

There was a definite decision made to focuson the retail side for this switch. ‘As far asbank-to-bank dealings are concerned, allbanks are Swift members today, so we don’tneed to replicate that,’ says Sultan.

‘Whether or not the monies are deemed tobe Islamic or free from interest, that doesn’tarise under Swift.’

The switch was designed to segregate retailmoney into Shari’ah-compliant funds andthose that do not adhere to Islamic beliefs.This was done ‘so the everyday depositorcould know whether the monies coming outof an ATM or POS network would be freefrom usury’, says Sultan. It was hoped thatthe switch would ‘revolutionise the financialinfrastructure and systems for pilgrimsvisiting Mecca’, says Jeremy Wilmot, AsiaPacific president for ACI Worldwide (an international provider of paymentstechnology), and ‘provide efficient paymentchannels and encourage economic growthbetween Islamic countries’, he continues.

The product idea resulting from this wasthe Al Musafir card (musafir means‘traveller’ in Arabic). Before they travel,Malaysian pilgrims would be able to loadcash in Saudi Riyals onto the prepaid card,this could then be used to withdraw moneyfrom the Saudi ATM or POS network, withthe switch facilitating electronic fundstransfer. This prepaid travel card would beaimed primarily at the mass market annualpilgrimage of the Hajj, but also the lesserHajj, the Umrah pilgrimage, which occursthroughout the year. ‘There’s enough of aworld market who will be able to buy aprepaid card or an international depositcard and use it at ATMs,’ says Sultan.

To make this idea a reality e-Kencanawould need to partner with banks in bothcountries. The payments company neededto work with banks due to ‘issues of audittrail, money trail and money laundering’,says Sultan. ‘Going with a bank you canadhere to KYC (know your customer) andAML (anti-money laundering) laws.’


NEWHORIZON July–September 2008CASE STUDY

Principal paymentsThe issue of access to money for pilgrims on the Hajj and Umrah pilgrimages has been addressedthrough an Islamic Payments Switch. James Ling, NewHorizon’s contributing editor, reports.

Shazad K. Sultan, e-Kencana


NEWHORIZON Rajab–Ramadan 1429 CASE STUDY

The solution to this came in the form of Al Rajhi Bank. The bank is the largest retailbank in Saudi Arabia, and had also openedup a subsidiary in Malaysia.

The bank ‘jumped in straight away’, saysSultan. By being able to charge an ATMwithdrawal fee on all transactions, it wasan opportunity for the bank to get a returnon its investment for its network. ‘By getting the rest of the Islamic world towithdraw from its ATMs, use its POS, andbe able to charge for it, it represents a good cost recovery,’ explains Sultan. ‘Its shareholders were ecstatic.’

The next stage was to select the technologyto power the IPS. This meant ‘trying tomatch Islamic principals against the growingneed for technology in banking’, says Sultan.He believes it’s difficult to have faith-basedbanking and get the top-end out oftechnology designed for making money frominterest, ‘but funnily enough it was possible’.

There was a rapid, one month selectionprocess, evaluating several vendors beforeselecting the Base24 payment engine andCard Management System from ACIWorldwide. ‘Most banks worldwide werealready using Base24,’ says Sultan. ‘There areother solutions in the world but ACI wasrobust, it had the backing of the internationalbanking community,’ he says. ‘There wasalready a support system there; it was decidedto latch on to that support system. It wasbasically a speed to market strategy.’

By selecting ACI Sultan feels there is acertain level of transparency which willenhance perceptions of the switch. ‘Becauseour system is ACI-based it goes through allthe channels where all the world authoritiesget to see everything going on in atransparent basis. The net effect is theIslamic world is getting together with thesystem of the west, and in a sense givesconfidence to the west.’

The decision also meant that expansion ofthe IPS would be easier. With a largenumber of banks using the same system itwould be easy to link these to the switch. ‘If we had gone with another proprietaryproduct then we would have had to have

dealt with a lot of customisation and a lotmore time being wasted getting to themarket,’ says Sultan.

With a fixed go-live date of the Hajj inDecember 2007, the system needed to be upand running quickly. It was a six monthimplementation project, which Wilmotdescribes as having ‘no major problems’. He attributes this to ‘close co-operation andteamwork between ACI, Al Rajhi and e-Kencana’. The switch went live ‘in thelatter part of the Hajj period’ in December2007, says Wilmot. Because of this ‘the firstHajj period saw start-up volumes’, hecontinues. Sultan puts this small initialtraffic down to ‘not having enough time toproperly market the product’. However,Wilmot is upbeat about the future use of theIPS. ‘The traffic during the go-live monthshowed a steady growth in transactionvolumes. It is anticipated that the comingUmrah and the next Hajj periods will see astrong leap in transaction volumes.’

The switch has been designed with largetransaction volumes in mind. ‘The system’scapacity will easily manage two milliontransactions a month, and has been sized tomanage a peak of five transactions persecond,’ claims Wilmot. ‘It is ready for theprojected transaction volumes and is wellbenchmarked for the next Hajj,’ he continues.

With the IPS now up and running,partnership seems to be the name of thegame for Sultan. ‘What I want to do iswork together with Cirrus and Plus, andwork on a switch-to-switch level to cordonoff money with usury, and money without,to be able to segregate Islamic andconventional.’ He believes that this kind ofpartnership would be an enticement forother banks to join the IPS. ‘Banks, likeCitibank, that really want to join theIslamic payments system for their Islamicbanking customers, can do so withoutworrying about other points of access.’

International growth is clearly the nextstage for the IPS. According to Sultan, it isforeign banks rather than the localMalaysian ones that are seeing the value ofthe IPS. But this does not discourage him:‘I’m happy because it’s an Islamic payments

switch that’s supposed to be global innature, so let the players be global. If Citibank can do more for this than alocal Malaysian bank, then so be it.’ The first target for this internationalexpansion is Indonesia. It has the largestMuslim population in the world, and wouldbe an easy first link because ‘all the banksthere have ACI’, says Sultan.

The long-term goal for the IPS is to use it toallow domestic Malaysian and Indonesiancards to be used in the Saudi ATM network.However, in the short-term the plan is touse Al Rajhi Bank Malaysia-issued AlMusafir cards to ‘flood the market, not justin Malaysia, but Indonesia, Pakistan andBangladesh too’, says Sultan.

The prepaid card is just one of the projectswhich Sultan is planning to use the IPS for.Despite Wilmot saying the IPS ‘is not a switchfor international money transfers’, Sultanbelieves it could be used for just that. ‘Thefuture is to use the same network for cross-border remittances’. He is counting on thelarge Indonesian migrant labour forceworking in the Middle East. ‘It’s very hard forthem to send money home. If it’s a matter ofgoing to a cash deposit machine, slotting inyour card putting in your cash and walkingaway, and the beneficiary using a card to pullout the cash from the nearest ATM. Thiswould make things easier for the people.’

Sultan insists that despite the name, the IPShas not been designed only for one group.‘It’s not just Muslims, very religiousChristians and Jews also tend to adhere tothe principal of monies being free fromusury. e-Kencana had a lot of enquiriesfrom the Vatican-controlled banks; they’revery interested in how we position anetwork that can be free from usury.’ This,he claims, was the reason to start the IPS.‘It’s not so much for the Islamic world, butit’s to make sure we had a network thatcould be free from money which was beinginvested in unknown entities, or of ausurious nature.’

This spirit of inclusion is something thatSultan is keen to promote. ‘I’d be very happyif the whole world used the network withoutdiscrimination at all. I don’t want to be


NEWHORIZON July–September 2008CASE STUDY

funnelling the market towards Muslims only, Iwant to encourage everyone.’ This, he claims,is one of the reasons to partner with the othernetworks. ‘It’s about convergence; it’s aboutgetting the Muslim world to participate moreand more, and getting more transparency.’

The IPS is intended to ensure pilgrims haveone less thing to worry about on theirjourney. ‘One of the preconditions of Islam,according to the Prophet Mohammed, is tomake things easier for the people; it’s all

about serving the people,’ says Sultan. ‘The IPS is a manifestation of the Malaysianideal; to turn Malaysia into an Islamicfinancial hub; to show that Islam is apeaceful, dynamic, go-getter religion; thatIslam contributes to other communitieswithout putting them at a disadvantage andclaiming superiority for themselves,’ he continues.

With the switch having completed its firstHajj, Sultan is hopeful it can build on this

for future years. ‘We want this project to bea success. We don’t know where it will go,but we’re hopeful it will be a success. We feel there is enough of a marketdemand.’The key idea behind the IPS hasbeen to make life easier for pilgrims, and ithas gone some way to achieve this. Thenext step will be to get buy-in from morebanks, and form a larger network. If thiscan be achieved, then this technology couldbe used to make travelling safer for millionsof pilgrims around the world.

Not all transfers of money go through therecognised banking system. Vast sums ofmoney are transferred through the MoneyService Business (MSB). This business canbe classified as regulated (such as theWestern Union-type businesses) and un-regulated (such as the hawala system). Thisdifferentiation is sometimes referred to asformal and informal.

The World Bank estimated that, in 2005,over $200 billion was transferred throughthe formal channels with another $100billion going through informal channels.

Use of the informal channels is not onlyrestricted to migrant workers – the UK’sDepartment for International Developmentlast year surveyed 10,000 UK householdsthat used MSBs. It showed that 24 percentof people who sent money abroad wereborn in the UK and 44 per cent hadresided in the UK since before 1990.

Hawala has been around for longer thanthe conventional banking system. It ismentioned in classical Islamic law,although it is believed to have originated inthe Southern Asia and particularly theIndian sub-continent. There are placeswhere conventional banking facilities donot exist, are terribly inefficient, or areslow or expensive.

The hawala system works entirely on thebasis of trust. Local social, tribal or familynetworks provide the backbone of trust

between participants. A sender of moneyin one location will give money to ahawala agent (hawaladar). That agent willcontact another hawaladar that is knownto him in the destination location (villageor city). The money will be made availableto the recipient directly from thedestination hawaladar, sometimes throughknowledge of a password or sometimessimply through personal recognition. Thetwo hawaladars will not exchange fundsfor each separate transaction but will morecommonly aggregate a series of fundsbefore settling between them. Settlementmay not necessarily be in monetary form.

In practice, the hawala system is likely tobe much faster and more dependable thanthe conventional banking system. In theconventional system the dispersing bankwould normally require receipt of clearedfunds before it will release those funds tothe intended recipient. Under the hawalasystem this clearance is not neededbecause the funds are released on the basisof trust. By using this informal systemfunds can be in the hands of the family ofan overseas migrant worker, for example,just a few hours after they were given tothe original agent.

Strong cultural pressures also promote theuse of this informal system. For example,the dispersing hawaladar may well be arespected and well-known member in therecipient’s community – meaning that, forexample, a female member of the sender’s

family need not make external contactoutside of her family or community group.

The transfers under this system are alsolikely to be much cheaper that thoseoffered by the conventional bankingsystem, indeed they may not be offered atall by the conventional banking system.Such official bodies may be prevented byonerous foreign exchange controls orregulations that may prevent transferstaking place or may levy significantcharges on those transactions. Certainly,the banking system will be forced to use‘official’ exchange rates which may bequite different to the unofficial ratesavailable to unofficial dealers or agents. In comparison, the hawala agents oftenoperate other businesses (for example,small shops), so their operating costs forperforming money transfers are reduced.Because they are unregulated, there are noregulatory costs that would have beenincurred by a conventional bank.

The conventional banking system may noteven be an option for some people whowish to make remittances. Because oflevels of literacy, linguistic ability or simplysocial status the formal banking systemmay not be available to the potentialsender of funds. In the case of overseasworkers, they may not have legal status tobe present in the host country so will notbe able to provide sufficient identificationto be able to use the official system.

Hawala


NEWHORIZON July–September 2008OVERVIEW

‘Tartan sukuk’ a possibility?NewHorizon takes a brief look at the development of Islamic finance in Scotland.

Scotland has a long and established history infinance and investment. It boasts impressiveindustries in insurance, fund management,private wealth as well as in banking. Two ofthe leading banks in the UK, HBOS and RBS,have their global headquarters in Edinburgh.Either directly or indirectly Scotland employsaround 100,000 in the financial servicesindustry, which accounts for around eight percent of Scottish GDP, well above the overallUK rate. The Scottish asset managementindustry controls around £450 billion ($880billion) of assets with many clients andinvestments originating overseas. Scotlandhas a growing Muslim population withfigures ranging between 40,000 and 50,000who are increasingly looking for Shari’ah-compliant banking products and services.Asians’ wealth in Scotland is estimated to bein excess of £300 million ($580 million) andthe Shari’ah-compliant market is quoted atabout £150 million ($290 million).

Against this backdrop, Scotland has twodistinctive characteristics which position itwell to be a key contributor in promotingUK as a leader in the global Islamic financeindustry. Scotland’s strong heritage in ethicalfinance is a prime fit for Islamic finance,which as a result of Shari’ah regulation canbe viewed as a sub-set of ethical finance.Trustee Savings Bank (TSB), now part ofLloyds TSB, was founded in Scotlandthrough an initiative in 1810 by the RevHenry Duncan, a famous Scot, oftenreferred to as the ‘Father of Savings Banks’.Scotland has contributed significantly to theco-operative financial movement. The‘mutual trust’ background of many Scottishcompanies such as Scottish Equitable,Scottish Life and Scottish Widows also lentitself to long term investing based onprudent principles with an ethical slant.Both the co-operative and mutualmovements have a lot in common withIslamic finance. Scotland has a proven track

record in innovation and pioneeringdevelopment within new market segments.Over the years Scottish financial servicesfirms have developed investment trusts,‘with-profit’ funds, unit trusts, overseasequities and emerging market investmentsand now the industry is increasingly lookingto embrace Islamic finance as a further levelof innovation.

On the retail side, there were initialchallenges in tailoring Islamic mortgages toScots law. This was successfully overcomeby United National Bank, assisted by theirlawyers Tods Murray LLP, and since 2005they have been actively servicing the market.Graham Burnside, partner at Tods Murrayand board member of the Islamic FinanceCouncil (IFC), structured a solution thatcomplies both with Islamic and Scots law.‘While we were initially compelled torethink the mortgage structure adopted inEngland because of differences in ourproperty laws, the alternative we haveestablished, based on co-ownership, is insome respects closer to Shari’ah principlesthan the English model,’ he states. There arenow no legal or fiscal barriers, to providingShari’ah-compliant property financing inScotland (stamp duty relief was extended toScotland in 2005). Scotland is oftenrecognised as one of the richest per capitasegments of the UK Muslim community.

Barclays Wealth has launched a number ofIslamic products to compliment the range italready offers, and the drive to help Muslimsmanage their money was led by BarclaysWealth in Scotland. Saftar Sarwar, a privatebanker at Barclays Wealth and a boardmember of the IFC, notes that ‘the ScottishMuslim community is increasingly lookingfor choices for their wealth requirements.Now the banks and other financial firms arelooking to provide such choices to them –deliver to them what they want’.

Lloyds TSB is offering Islamic bankingproducts and services in UK, with an Islamiccurrent account facility available in Scotland.Scottish Widows Investment Partnership has aglobal Islamic fund (managed fromEdinburgh) available to institutional as well asretail investors. CB Richard Ellis (CBRE), aninternational commercial real estate company,has been involved in high value bespokeShari’ah-compliant commercial property dealsin Glasgow.

In 2005 the IFC was established by itschairman, Tariq Masood Shaikh, to promoteIslamic finance in Scotland to ensure that allMuslims and other believers in ethical financehave the opportunity to conduct theirfinancial dealings according to their faith.‘We view Islamic finance as an inclusiveproposition open for all,’ says Shaikh. ‘Ourprojects are designed to promote the industryglobally but also locally, to ensure thatScotland and the broader UK benefits fromthe growth and opportunities the Islamicfinance sector brings.’ At a national level, theIFC has engaged with the Scottishgovernment to support their strategy forIslamic finance. The IFC responded to theScottish Futures Trust Bond consultation andhas met with the First Minister, AlexSalmond, to discuss Islamic finance. Maybe a‘tartan sukuk’ could be issued before the UKTreasury finalises its plans?

Glasgow CentralMosque, Scotland

Chaired by Neil Miller, a partnerin the banking department ofNorton Rose LLP, the summitwas attended by around 50individuals, split between localsand international figures, mostof whom remained present to the end.

The roster of speakers wassecond to none, and betweenthem they gave a decent overviewof Islamic capital markets from aLondon-focused perspective. Thekeynote address was given by the LordMayor of London, Alderman David Lewis,reflecting his interest and involvement inIslamic finance related matters. Thespeakers’ roster included a couple ofacademics, a couple of scholars, a sprinklingof lawyers and a handful of businessmen.However, the biggest group of speakers wasfrom the regulatory side of the industry.

This cross section of the roster is animportant point, because the balance ofspeakers, with its orientation around thefinancial authorities, probably reflects thestate of the industry in the UK. Overall, thefeeling was that much of the discussion wastheoretical; the audience was there to pickup an idea of what the foundations of thisindustry will be like, gaining knowledgethat would be useful in future. A typicalexample of this was the panel, during theafternoon session, which consideredprogress towards the standardisation of documentation.

There were exceptions to this, of course.Some of the speakers were able to lay outtheir own practical experiences of theindustry for the benefit of the audience.Mark Payne, who is a partner at the law

firm Clifford Chance LLP, gave a case studyoutlining the Islamic financing of theChelsea Barracks, the largest such realestate deal of its kind. Another exceptionwas the case study focusing on sovereignsukuk, which considered the example ofBahrain’s Ministry of Finance, covering itsissue of a $350 million sukuk.

A relatively subdued audience, while attentivethroughout, was perhaps slightly reticent inasking questions. This was perhaps due to thetiming of the event itself; the industry inLondon was currently awaiting an update onthe work of the British authorities on thesubject. While everyone expected positivesignals to be sent by the update, in June, therewas nevertheless a slight feeling of flux at the conference.

The feeling was manifest in one or twocomments from the day. Richard Thomas,the managing director of Global SecuritiesHouse Kuwait’s UK subsidiary as well asthe chairman of the UK Trade andInvestment Islamic Finance Subcommittee,emphasised his belief that 2010 will be thekey year for the Islamic capital marketsindustry in the UK. While the currentBritish government has been positive about

Islamic finance, there was also ahint of political uncertaintyhanging in the air. JamesKnight, senior policy advisor inthe UK Debt ManagementOffice, was asked whether thereexists cross-party support forthe British government’sconducive stance on Islamicfinance; he did not feel in aposition to comment.

A wide range of fascinatingtopics was considered by the

speakers in the most informative andenlightening way. These included; the UKstudy into the feasibility of issuing Islamicfinancial instruments; the steps London istaking to establish itself as a market leader;the benefits of co-operation between Islamicfinancial centres; regulatory convergence;creating a level playing field for sukuk(a widely discussed, and perhaps the mostcrucial, subject); the challenges ofstructuring sukuk; developing anappropriate risk methodology for sukukbonds; and the implications of Basel II forIslamic financial products.

The eminent collection of speakers includedsome internationally renowned figures inthe industry. Highlights included JohnDavie, head of international businessdevelopment of Vector ManagementLimited, a firm exploring private publicpartnerships in Shari’ah-compliant forms;Nik Thani, executive director of Islamicfinance for the Dubai InternationalFinancial Centre (DIFC) Authority; IbrahimA Mardam-Bey, chief executive officer ofSiraj Capital; and Mohammed Amin,partner at PricewaterhouseCoopers and amember of the IIBI editorial advisory panelof NewHorizon.

London Islamic Capital Markets SummitThis year’s London Islamic Capital Markets Summit took place in the impressive surroundings ofthe Grosvenor Hotel Victoria on Buckingham Palace Road. The summit was endorsed by IBII.


NEWHORIZON Rajab–Ramadan 1429 CONFERENCE REVIEW

© iStockphoto I Gordon Dixon

Kingdom Centre, Riyadh

Saudi Arabia: gateway to Islamic finance‘The Land of the Two Holy Mosques’ – Mecca and Medina – is also home to the IslamicDevelopment Bank, the most prominent multilateral development bank of the Muslim world. But is itenough to make the country a global hub for Islamic finance? Tanya Andreasyan, NewHorizon’seditor, takes a look at how the Saudi finance market stands in the world today.


NEWHORIZON Rajab–Ramadan 1429 COUNTRY FOCUS

When thinking of the financial institutionsplaying the key role in development ofShari'ah-compliant finance worldwide, oneorganisation immediately springs to mind –the Islamic Development Bank (IDB).Jeddah is the birthplace of the bank, whichwas launched there in 1975 and remainsheadquartered there today. This coastal city,located on the Red Sea shores, is consideredto be the commercial capital of the countryand the wealthiest city in the Middle Eastand western Asia. It is also the principalgateway to Mecca, Islam’s holiest site – thedestination of millions of Muslims on theirHajj and Umrah pilgrimages. In similarfashion to Jeddah being a gateway to thehistoric, cultural and the religious aspects ofIslam for its followers from all over theworld, IDB opens doors to Islamic financeon a global scale.

The bank’s main function is to facilitate theeconomic and social progress of Muslimmember states (currently 56 states), as wellas Muslim communities in other countries inaccordance with the principles of Shari’ah.Saudi Arabia is one of the majorshareholders of the bank (on the basis ofpaid-up capital), with a 27.9 per cent stake.It is followed by Libya (11.2 per cent), Iran(9.8 per cent), Turkey (8.8 per cent) and theUAE (7.9 per cent). The rest of the shares aredispersed among other nations, includingIndonesia, Pakistan, Kuwait and Egypt.

The bank offers various forms of financial,technical and educational assistance,accumulating an outstanding track record ofsuccessful projects. Last year alone,NewHorizon continuously reported on the

IDB’s involvement in improving lifestandards in its member countries. The banklaunched a $10 billion Poverty AlleviationFund to combat poverty, promote generaland health education and empower women(NewHorizon, January–March 2007 issue).Saudi Arabia became the main contributorpledging $1 billion to the fund.

In another recent development, the bankhas approved over $530 million for variousdevelopment projects for Muslimcommunities in Slovenia, Kenya, India,Union of the Comoros, Tanzania,Macedonia, Thailand and the UK. To easethe current food crisis, the IDB hasallocated $1.5 billion in low cost loans tothose Muslim countries worst affected (for more detail, see the ‘News’ section ofthis issue, p5).

On the Islamic finance front, the IDB has beenvigorously investing in Shari’ah-compliantfinancial institutions, and also assisting withresearch and training. Among recent examplesare Kyrgyzstan, where the IDB helped tolaunch the first Islamic bank, EcoBank(NewHorizon, April–June 2007 issue), andKazakhstan, where the IDB assisted withdrawing up plans for Islamic securities(NewHorizon, January–March 2008 issue).Most recently, the IDB has announced aninitiative to organise an investment conferencein Tatarstan (a predominantly Muslimrepublic in Russia), which will be the firstconference held by the IDB in Russia.

All in all, the IDB has contributed over $200million worth of technical assistance toaround 70 Shari’ah-compliant financial

institutions worldwide, including banks,finance houses, investment, insurance andleasing companies.

Major standard-setting bodies of the Islamicfinance industry have also benefited from theIDB’s initiatives. The bank supported thelaunch and further activities of suchheavyweights as the Accounting and AuditingOrganisation for Islamic Financial Institutions(AAOIFI), the International Islamic FinancialMarket (IIFM), the Islamic Financial ServicesBoard (IFSB); the International Islamic RatingAgency (IIRA) and the InternationalArbitration and Reconciliation Centre forIslamic Financial Institutions (ARCIFI).

Of course, the IDB is not the only majorcontribution of Saudi Arabia in thedevelopment of Islamic finance. Alongsideit, the country hosts the Organisation of theIslamic Conference (OIC), another majorplayer in the Islamic world (includingeducation, science and technology, trade,commerce, sports, and finance sectors).Actually, the IDB owes its existence to thisorganisation – it was the first conference ofFinance Ministers of the OIC that foundedthe IDB. Furthermore, the basic conditionfor the membership in the IDB is themembership in the OIC.

Established over three decades ago, in 1971,the OIC nowadays comprises 57 Islamicmember states and has a permanentdelegation to the United Nations. It has itsown Parliamentary Union (dubbedPUOICM – Parliamentary Union of the OICmember states), headquartered in Tehran.In 1977, the International Association of


NEWHORIZON July–September 2008COUNTRY FOCUS

Islamic Banks was created under theauspices of the OIC, to promote andfacilitate cooperation between Shari’ah-compliant financial institutions, as wellcontribute to harmonisation of the industryon an international level. The Associationoperates from Jeddah.

Since its inception, the OIC has accumulateda host of subsidiaries and affiliates across theglobe. For example, Islamic Fiqh Academy isbased in Jeddah, the Research Centre forIslamic History, Art and Culture is in Turkey,the General Council for Islamic Banks andFinancial Institutions is located in Bahrainand the Islamic Chamber of Commerce andIndustry (ICCI) is headquartered in Pakistan.Last year, the ICCI and the OIC announceda ten-year development plan, according towhich up to 200 Islamic companies are to beestablished in the OIC’s member countrieswith the aid of the ICCI’s subsidiary, ForasInvestment Company (NewHorizon,January–March 2007 issue). Foras’ chiefexecutive, Hatim Jamil Mukhtar, stated atthe time that the purpose of the project wasto accelerate the process of economicdevelopment across the internationalMuslim community.

Saudi Arabia, of course, is also to benefitfrom this initiative. The state is committedto further strengthening its economy, whichat the moment is heavily dependent on oil(around 75 per cent of budget revenues,nearly half of the GDP, and over 90 per centof the country’s export), making it theworld’s largest petroleum exporter.

The banking sector has not been prominentuntil five or so years ago, partially due to thestringent laws prohibiting the internationalbanks setting up independent operations inthe country. The regulations were introducedin the 1970s, when the banking sector wasnationalised, and the rules were relaxed onlythree decades later, with Saudi Arabia’sefforts to join the World Trade Organsiation(WTO). The first foreign bank to be granteda license from the Saudi Arabian MonetaryAgency (SAMA, regulator) to open a branchin the country was Deutsche Bank – this wasin 2003. Since then, a number ofinternational players dipped their toes in

Saudi waters (although licensing of foreignbanks was temporarily suspended by SAMAin 2006), including HSBC, BNP Paribas,Kuwait National Bank, State Bank of India,National Bank of Pakistan and JP Morgan.

Today, the Saudi banking market holdsassets totalling $290 billion, and analystsname it as one of the most profitable andefficient in the region.

The Islamic banking sector has beendeveloping in parallel to the conventionalsector, albeit until recently at a somewhatslower pace. The domestic banks felt thesting of international competition, withforeign banks offering better servicestandards and more extensive productrange. Whilst originally local financialinstitutions offering Islamic products andservices were perceived to be more tuned tothe local customers’ needs, foreign banksmoved in on the Shari’ah-compliant financeterritory by opening dedicated Islamicwindows. However, the majority ofdomestic financial institutions successfullystood their ground, Al Jazira Bank beingone of the most eminent examples. Thebank went from strength to strength,expanding its services to Islamic insurance(Takaful Ta’awuni programme) andscooping the Islamic Finance Weekly awardfor the Best Takaful Operator in 2004,Euromoney Islamic Finance Award for BestLife Takaful Provider worldwide in 2006,and Middle East Insurance Award for LifeInsurer of the Year in 2007 (NewHorizon,January–March 2007 issue).

Saudi Hollandi Bank (SHB) is also amongthe flourishing domestic financialinstitutions. With a history dating back tothe 1920s, the bank has a wealth ofexperience, including in serving as Saudi’scentral bank (for some time, SHB was theonly operating bank in the country andacted as a central bank, maintaining Saudi’sgold stock and processing the first oil-related transactions). Today, SHB is theeighth largest bank in the country, with anetwork of 42 branches offering corporate,consumer and treasury banking productsand services. The bank launched Islamicoperations in 1995, recalls Iqbal, senior

Imran Iqbal, Saudi Hollandi Bank



manager, Islamic banking at SHB. It startedwith murabaha solutions for financing andinvestment, and expanded to musharakahtransactions and project financing in thesubsequent years. ‘The Islamic operationsremained a relatively small element of bankuntil 2006,’ says Iqbal. ‘In 2007, the bankexpanded its Islamic banking team by hiringboth local and internationally experiencedindividuals.’ Today, SHB and its subsidiary,Saudi Hollandi Capital, are ‘activelypromoting Islamic products in all areas’,including consumer and corporate banking,asset management, treasury and investmentbanking (specifically debt capital markets).‘It culminated recently in the banksuccessfully lead managing the Kingdom’sfirst local currency sukuk, issued by TajeerCompany, Jeddah,’ notes Iqbal.

Today, most of the banks in the countryoffer Shari’ah-compliant financial products.‘The demand for Islamic finance keepsincreasing,’ says Christopher Aylward,partner at Denton Wilde Sapte LLP (Dubaiand Riyadh offices), the international lawfirm. Aylward has a first-hand experience –he spent nearly five years working in thesphere of Islamic finance law, and heobserved the ongoing rise of the industry.‘When I first moved to Saudi Arabia, overfour and a half years ago, 80 per cent of mywork was conventional and 20 per cent wasIslamic,’ he recalls. ‘Within four years thatproportion has shifted around to 80 percent Islamic and 20 per cent conventional.And there is a similar shift in retail finance.It is obviously very market driven.’

‘The drivers for innovation in Saudi Arabiaare starting to change, prompting furtherdevelopment of Islamic finance,’ he states.‘Firstly, there is more desire for faith-basedbanking and financing, which is nowoutstripping the drivers in otherjurisdictions.’ He notes that quite a few ofthe largest banks in Saudi Arabia are now‘either completely Islamic or substantiallyIslamic in their product mixes on retail andcommercial level’, which is quite different tomost of the Middle East, where conventionalbanking continues to play a significant role. Aylward also cites changes in issuing fatwasas an important indication that Islamic

finance is taken more and more seriously bythe country’s business industry. Today, thecompanies that claim to operate inaccordance with the Islamic law have to beentirely Shari’ah-compliant, and cannothave any financial dealings with the entitiesassociated with haram activities (e.g.charging interest or being involved in thegambling or alcohol industries). ‘The fatwarequirements are very strict for thecompanies that are halal,’ says Aylward.‘They have to finance themselves entirely ina Shari’ah-compliant manner. Any companythat is listed or has aspirations to becomelisted in the future needs to ensure that itsfinancing is done in an Islamic manner.’

As mentioned above, a lot of development isset around the oil industry – the main fuelfor Saudi Arabia’s economy. In the recentyears, there have been a number ofsuccessful financing projects in this sector,involving Islamic tranches, partially orentirely. In 2005, Rabigh project (a jointventure between Saudi Aramco and Japan’sSumitomo Chemical to develop apetrochemical complex in Rabigh, SaudiArabia – PetroRabigh) and Yansab project(a petrochemical complex built on the RedSea coast in the city of Yanbu by Saudi BasicIndustries corporation), worth $9.9 billionand $5 billion respectively, includedsignificant Islamic tranches. Following thesuccessful closure of their financings, Al-Waha Petrochmical Company took a stepfurther and went for a completely Shari-ahcompliant tranche, declining conventionalbanks or export credit agencies for funding.Instead, the project relied on funding fromshareholders and Saudi government agenciesin addition to the Shari’ah-compliantfacility. The $526.5 million Islamicfinancing for Al-Waha was signed inNovember 2006, arranged by the ABCIslamic Bank, Bank Al Jazira, Banque SaudiFransi, Gulf International Bank, SaudiHollandi Bank and the Saudi British Bank (SABB).

Another driver that ‘is really pushing thedevelopment of Islamic finance in SaudiArabia’ is the sukuk market, according toAylward. There has been ‘a huge shift inSaudi securities regime’ and the country is

Islamic Development Bank, Jeddah

26 IIBI

COUNTRY FOCUS

now witnessing growth of Shari’ah-compliantsecurities – a trend that Aylward predicts tocontinue. In the last three years, Saudi Arabiahas proved to be one of the main players inthe global sukuk market alongside Malaysiaand the UAE. While in 2004 it did not issueIslamic bonds, by 2006 it accounted for threepercent, and a year later the figure jumped toeleven per cent, making Saudi Arabia thethird largest sukuk issuer after the UAE (34per cent in 2007) and Malaysia (31 per cent).

‘The sukuk market is the way to financedeals, for example, to refinance existingtransactions. The syndicated loans market ispretty much tapped out in Saudi Arabia. If you talk to the bankers there, they’ll saythere is only so much left,’ says Aylward. ‘At some point in future, we’ll see thedevelopment of Islamic version of the projectsukuk, although it is still some way off yet.’

The area of Islamic insurance, or takaful, isalso playing a major part, observesAylward. According to the country’slegislation, all insurance companiesoperating in Saudi Arabia must comply withShari’ah law. ‘Insurance in the Muslimworld has very low penetration, but this ischanging’, says Aylward. ‘The potential forthe industry is big.’

Interestingly, it is not just the country’sinsurance sector that must operate incompliance with Shari’ah, but the entirelegal system. ‘Out of all the Middle Eastnations, in Saudi Arabia the legal systemand the constitution are most closely alignedwith Shari’ah,’ emphasises Aylward.‘Shari’ah is the law of Saudi Arabia.’

The picture is somewhat different in thebanking sector. The banks, unlike theinsurance operators, are not under theobligations of Shari’ah compliance. Bothconventional and Islamic financialinstitutions are permitted to operate in thecountry and they are regulated by the sameregulatory framework. To date, there is noseparate licensing regime for Islamic andconventional banks. SAMA’s prudentialstandards, protections, capital adequacyprocedures, etc. are based on a conventionalbanking market. The regulator ensures that

the same level of requirements and scrutinyis applied in the Islamic space, as well asconventional. The Saudi banking market isfamous for being very conservative in termsof capital adequacy and prudentialstandards, so it does not really have a highrisk issue.

Shari’ah supervisory boards are amandatory requirement for the Islamicfinancial institutions operating in SaudiArabia. It is up to these boards to decidewhat products and services are Shari’ah-compliant. The model is similar to Bahrain,where the central bank and regulator doesnot centralise the decision-making processconcerning Shari’ah compliance issues ofindividual banks and does not interfere inthese processes (for an in-depth analysis ofBahraini Islamic finance sector, seeNewHorizon, January–March 2007 issue).

This approach is very different to someother Islamic finance centres, such asMalaysia, where the Shari’ah board of everyIslamic financial institution licensed in thecountry is subordinate to the Shari’ahAdvisory Council for Islamic Banking andTakaful (SAC). SAC, established by BankNegara Malaysia (the central bank andregulator), is the ultimate authority ofShari’ah compliance in Malaysia. Beforeintroducing any Islamic banking product orservice to the market, the board of the bankpasses it to SAC for approval. Oncesanctioned by the central bank and SAC, itbecomes available to all banks to take onboard if they wish (Islamic finance inMalaysia is examined in NewHorizon,July–September 2007 issue).

Some specialists think that a somewhatsimilar approach should be taken on board bySAMA in Saudi Arabia. ‘I would like to seethe creation of a unified Shari’ah supervisoryboard under the regulator,’ says DhaferAlqahtani, co-CEO and CIO of ArbahCapital, Saudi-based Islamic investment firm,‘and also the creation of a standalone bodyunder the regulator for Islamic financialinstitutions to supervise their activities.’ Healso thinks there is a need to accelerate theadoption of AAIOFI standards for allShari’ah activities in the country.

Mecca

IIBI 27

Arbah Capital is a new venture, having beenrecently incorporated as a fully-fledgedShari’ah-compliant investment firm,authorised and regulated by the SaudiCapital Markets Authority (CMA). Thecompany has 22 domestic shareholders andis set to introduce the first set of Islamicwealth management products and servicesto the country’s market, initially in theeastern region and then the entire country,according to Alqahtani. ‘At a later stage itwill expand to other GCC countries, the restof MENA and Asia through Bahrain, underthe umbrella of Arbah Global House’, headds. ‘Location is strength. Arbah is the firstIslamic wealth management firmstrategically situated in Saudi Arabia’seastern region next door to Bahrain’sfinancial markets.’

In Alqahtani’s view, it is the Kingdom ofBahrain that is at the forefront of theIslamic finance. ‘Bahrain is, without doubt,the global hub,’ he states. ‘It has fullinfrastructure for setting up all kinds ofIslamic finance and investment firms beside takaful business. Bahrain’sregulatory framework is mature and faradvanced compared to others in terms of ease of entry.’

Aylward agrees that Saudi Arabia has notyet reached the status of a global hub forIslamic finance. ‘It is either Malaysia orDubai/Bahrain,’ he thinks. ‘That is becausethat’s where the skills set has been. Therehas been a lot more drive for innovationoutside of Saudi Arabia than inside.’

The overwhelming majority of specialistsinvolved in the development of Islamicfinance products and services (e.g. bankers,lawyers) have been resident outside thecountry’s borders. There is a lack ofspecialists the world over, but it is felt mostacutely in the Saudi market. Certainly, thereis no lack of Shari’ah scholars in thecountry – a lot of well-known andrespected scholars are from Saudi Arabia –but it is the finance practitioners that are‘more involved in pushing the boundaries,rather than the academics or Shari’ahscholars themselves,’ says Aylward. ‘It is just the nature of Islamic finance.’

COUNTRY FOCUS© Aidar Ayazbayev | Dreamstime.com


NEWHORIZON July–September 2008COUNTRY FOCUS

In his opinion, although Saudi Arabia willalways be the place where the Islamicfinance practices are applied, it will notnecessarily be the place where they areoriginally developed. Despite the noticeableshift of Western bankers and other specialistswithin the industry to the Middle East, it isdoubtful that ‘the next step for them[Europeans] will be moving to Saudi Arabia,as there are just too many difficulties forthem associated with living there’.

Meanwhile, Iqbal thinks that, in someaspects, the Saudi Arabian Islamic financemarket is more advanced comparable withits GCC or Malaysian counterparts. ‘Bahrainand the UAE have made strong advanceswhen it comes to investment banking, but Saudi Arabia is rapidly catching up interms of project finance, sukuk and so on,’he says. ‘In the personal banking field, it hasalready taken over in terms of the percentageof total business done under Islamicstructures – with more than 90 per cent ofpersonal banking business in Saudi Arabiabeing Shari’ah-compliant.’

He also notes that although Malaysia has a‘particularly well-organised framework forIslamic finance’, it is still ‘seeking globalacceptance of most for some of its Islamicproducts and services’. To promote closerworking relationships with Malaysia, SaudiArabia has established a number of jointventures there.

So, what advantages does Saudi Arabiaoffers over other countries in terms ofIslamic finance? In addition to the afore-mentioned high demand for Shari’ah-compliant products and services, Alqahtanicites the presence of ‘large supply of Shari’ahdeals, in terms of both size and type’ as ‘thebiggest advantage’. Furthermore, the factsthat Saudi Arabia has largest economy in theGCC, the largest population (over 27 millionpeople) in the Gulf region and the largest oilreserves are surely playing into its hands.‘Because of its sheer size it is not a marketanyone can ignore,’ says Aylward.

Iqbal points out that the high oil price andbooming economy create many newbusiness opportunities, which attract

overseas companies and specialists. ‘Thegovernment has big plans to develop thecountry’s infrastructure which will, in turn,lead to many projects being financed byShari’ah-compliant means,’ he states.

Another major advantage is ‘the widespreadacceptance of Islamic finance by the public’,notes Iqbal. ‘In other hubs the products aresupply driven by the Islamic banksdeveloping products and convincing peopleto buy them. Here in Saudi Arabia, it is ademand driven market, with customer needdetermining the areas requiring development.For example, with more and more peoplewishing to buy their own homes, there hasbeen a rapid development in the offering ofIslamic home financing.’ There is also agrowing trend among companies to converttheir conventional borrowings to Islamicborrowings, observes Iqbal. He sees it as aresult of the pressure exerted fromshareholders as well as investors who screenout companies not complying with Shari’ah.

However, there are a number ofdisadvantages, too. ‘The legal system suffersfrom uncertainty of enforceability, and fromthe lack of recognised forms of security,’thinks Aylward. ‘The court system isrelatively unsophisticated andunpredictable, due to the broad discretiongiven to judges in Saudi Arabia.’

Nevertheless, Shari’ah-compliant finance isgathering pace in the country. Thegovernment realises its potential and sees itas a strategic development, confirmsAlqahtani. ‘It is part of the fact that SaudiArabia is the cradle of Islamic civilisation,home of the two holy mosques and, inrecent history, also home of the IDB; not tomention the huge demand for Islamicproducts and services by the masses. All thisdictates the direction for the policy makers.’

SAMA encourages the development of theindustry, agrees Iqbal. ‘SAMA hostsmonthly meetings of the heads of Islamicbanking and finance in the local and jointventure banks to discuss current trends andideas,’ he explains. ‘One of the positiveresults of this is a widely accepted standardagreement for inter-bank placements using

I would like to see the creation ofa unified Shari’ah supervisoryboard under the regulator.

Dhafer Alqahtani, Arbah Capital


murabaha.’ SAMA also actively participatesin various initiatives by the IFSB, forexample, in canvassing opinion for the newexposure drafts. The regulator also requireseach bank to submit an Islamic bankingassets and liabilities return to allow it tomonitor the growth of the industry.

Alqahtani describes the growth of Islamicfinance as ‘phenomenal’, on both regionaland global scale, and does not see it slowingdown any time soon. ‘In fact, Shari’ah financeis becoming mainstream.’ The industrywelcomes Muslims and non-Muslims alike, he observes, as it is ‘an alternative toconventional banking regardless of what theclient’s religion is’. ‘This is one of the majorunique points of Islamic finance – it is openfor any belief, while conventional bankingdoes conflict with many teachings andprinciples besides Islam.’ In his opinion, it wasthis conflict that lead to the development ofsocially responsible investment.

Also, the equity-based nature of Islamic financetranslates as investment into communities bydeveloping industries and creating jobs.‘Shari’ah is a great advocate of keepingliquidity in circulation, ensuring the welfare ofthe community regardless of its geographicallocation or religion, not to mention taking riskand sharing profit and loss, which is essentialfor the prosperity of the economy with long-lasting effects,’ states Alqahtani.

Alongside the growth of the domestic Islamicbanking market, major Saudi banks havebeen gaining a strong foothold in theinternational arena. SABB is nowincorporated under the HSBC Amanahumbrella and Samba Financial Group becamethe first Saudi bank to open a branch in theUAE (the bank also has an office in the UKand a subsidiary in Pakistan, CrescentCommercial Bank Ltd). Al Rajhi Bank,already a household name in Saudi Arabia,has an established presence in Malaysia.International banking is high on Riyad Bank’sagenda, with its branches strategically locatedin the UK, US and Singapore.

And now the most recent addition – AlinmaBank, created by the Saudi government. It isdescribed as the largest Shari’ah-compliant

Arab bank, and is set to rival the existing‘heavyweights’ in the country and the region.‘The creation of the Alinma Bank is atestimony to the country’s commitment tothe Islamic banking system,’ statesAlqahtani. The bank is scheduled to open inthe second half of the year, with 15 branchesacross the country. It will offer a range ofIslamic products and services, including thearrangement of project financing.

Alinma has already caused waves in thebusiness world, when its $2.8 billion IPObecame the largest one ever in Saudi Arabia.Postponed several times, the event wasfinally held in April this year on the SaudiStock Exchange. The government wasselling off 70 per cent of the bank’s shares,retaining a 30 per cent stake (controlled bythe Saudi Arabian General Investment Fund,the Saudi Arabian General Retirement Fundand the Saudi Arabian General Organisation for Social Insurance). After theten day subscription period, the number ofsubscribers stood at a remarkable 8.8 million.

This IPO helped Saudi Stock Exchange tosecure the second position in the list ofworld’s busiest markets for IPOs, surpassingLondon and only yielding to New York StockExchange, which came on top with $19.7billion listing of Visa. The total of Saudibourse IPOs in 2008 grew more thanthreefold compared to the previous year. Inthe first five months of 2008, it notched up$8.5 billion, benefiting from a number ofhigh-profile deals alongside Alinma, including$1.87 billion listing of Zain Saudi Arabia(mobile phone company) and $1.2 billionfloat of the afore-mentioned PetroRabigh.

With such large stock market capitalisation,coupled with high demand for Shari’ah-compliant products and services (especiallyproject finance), huge amounts of wealthand a strong economy, as well as theobvious central positioning in the Muslimworld and the presence of the IDB, SaudiArabia has all the right ingredients toachieve the status of the global Islamicfinance centre.


Mosque by the Jeddah Corniche, Jeddah

Bank of London and The Middle East plc, theShari’ah-compliant London-based wholesalebank, has engaged the advisory services ofProfessor Mahmood Faruqui. Prof Faruquihas served as an advisor to many banks,having worked in the Islamic finance industryfor over 30 years. Banks have included HabibBank, Al Faysal Investment Bank and FaysalIslamic Bank of Bahrain. He is also a foundermember of the Pakistan Banking Council.

London-based European Finance House, anew Shari’ah-compliant subsidiary of QatarIslamic Bank, has appointed Mark Watts ashead of asset management. Watts spent 18years at Baring Asset Management, andmoves from Morley Fund Management. He is the fellow of the Securities Institute.

Citi, the global retail and corporate bankingprovider, has announced the appointment ofSamad Sirohey as CEO of Citi IslamicInvestment Bank, and head of global Islamicbanking. Sirohey has worked with Citi for 14years, and was closely involved in developingCiti’s Islamic Capital Markets business.

Michael JT McMillen, a renowned Islamicfinance lawyer, has joined Fulbright, one ofthe largest international law firms in the US.McMillen will head the firm’s Islamic

finance practice. He has focused on Islamicfinance for years and teaches a course onthe subject at University of PennsylvaniaLaw School. He is also currently chairmanof the Islamic Law Forum.

Tejoori Limited, a Shari’ah-compliantinvestment company based in the UAE, hasannounced the appointment of new boardmembers following an extraordinary generalmeeting. New appointments includeMahmoud Al Mahmoud as chairman, TalalKhouri, Mohammed Al Zaabei, Khaled AlNaser and Saad Al Fawzan. The new boardmembers are highly qualified and bring awealth of experience to the company.

Bahrain Islamic Bank has namedMohammed Ebrahim Mohammed as itsnew CEO. Mohammed joined the bank ayear ago, bringing with him 30 years’banking and wealth management experienceincluding several senior management andexecutive positions.

Datuk Dr Nik Norzrul Thani has becomethe chairman of the Malaysian legal firmZaid Ibrahim & Co. Dr Thani has also beenappointed head of the firm’s Islamic financepractice. He was formerly deputy dean atthe International Islamic University’s LawFaculty. He is also a member of the CentralBank of Malaysia’s Law Reform Committeeon Islamic Banking and Finance.

Wasim Saifi will serve as the CEO ofTamweel Holdings, following anextraordinary general meeting whichestablished a new subsidiary of Tamweel,Tamweel Properties and Investments.Abdulla Nasser Abdulla, chief commercialofficer of Tamweel Holdings, will also serveas CEO of the new company. Abdulla joinedTamweel following more than a decade ofemployment at Dubai’s Emirates Airlines.

On the moveIthmaar Bank, the Bahrain-basedinvestment bank, has appointed MohamedHussain as co-chief executive officer,responsible for overseeing the bank’sholdings and subsidiaries. Hussain, theformer chief executive and member of theboard at Shamil Bank, will serve on theboards of Ithmaar’s subsidiaries, includingFaisal Private Bank, Faysal Bank Limited,and Bahrain-based Solidarity, a globaltakaful company. Hussain joined ShamilBank in 1998, and previously held the postof general manager at Islamic InvestmentCompany of the Gulf.

Replacing Hussain at Shamil Bank is newchief executive Faisal Mansoor Al Anwan.Al Anwan will bring 30 years’ experience inbanking to the Bahrain-based Islamiccommercial and investment bank. He movesfrom The Arab Investment Company, wherehe spent 18 years, including as generalmanager of the company in Bahrain. He wasalso once vice president and general managerat Societe de Banque Privee for six years.

Solidarity Group Holding, a subsidiary ofIthmaar Bank, has elected a new board ofdirectors. Khalid Abdulla-Janahi will bechairman and Rashid Ismail Al Meer vicechairman. Other board members are ZiadHassan Al Rawashdeh, James Beltran, UdoKrueger, Jamil Wafa, Salah Al Jaida,Mansoor Mohamed Al Musleh,Mohammed Bucheerei and MohamedHussain. Solidarity Group owns SolidarityFamily Takaful Company and SolidarityGeneral Takaful Company.

Gatehouse Bank, the Shari’ah-compliantwholesale investment bank based inLondon, has appointed Anthony Saint ashead of capital markets. Saint joins fromStandard Bank, the London-based arm ofThe Standard Bank of South Africa, wherehe spent ten years, most recently as globalhead of specialised finance.

Davide Barzilai(left) has beenappointed to theposition of partnerin the Islamicfinance group ofNorton Rose, theinternational legalpractice. Havinggraduated from the

University of Manchester in 1996, Barzilaijoined Norton Rose in 2003. Since 2005he was responsible for the Asian part ofthe group’s Islamic finance practice.


NEWHORIZON July–September 2008APPOINTMENTS



Hedge funds and the GCC investor

Investors in the GCC have been investing inthe conventional hedge fund market for anumber of years. GCC institutions have, interms of their own portfolio diversification,generally mirrored global investment thinking.

Strong regional growth and the steadyliberalisation of the GCC markets haveattracted a wide range of conventionalhedge fund managers to the Gulf.Sophisticated investors in the GCC areattracted by the differing investment returnson the variety of alternative strategies whencompared to conventional and regionalstock markets, private equity, property andoil based returns. Within the Gulf, investorsare turning to hedge funds as a source ofstability and security during the regionalstock market volatility evident in certainGulf states in recent years. Investors thatare perceiving that regional equity, propertyand IPO successes may not be sustainableare also looking to diversify their successfulportfolios by investment in structures thatmay protect downside risk.

Conversely, hedge fund managers have beenalso motivated by the success of locallyconcentrated investment funds. Manyfinancial institutions and law firms, includingVolaw, have set up offices in Dubai andBahrain, motivated by the flow of businessopportunities and proactive regulatoryenvironment in the Dubai InternationalFinancial Centre (DIFC). The Centre,established in 2004, aims to place Dubai atthe hub of Middle Eastern institutional

finance, creating a new pre-eminentinternational regime in the Gulf for funds,trusts and financial services generally (for more details on this initiative, see NewHorizon, October–December 2007 issue).

In December 2007, the Dubai FinancialServices Authority (DFSA), an independentregulator of the industry within DIFC,issued its Hedge Fund Code of Practice, thefirst of its kind to be issued by a regulatorand a landmark code in the regulation ofthe international Hedge Fund industry. TheCode sets out best practice standards foroperators of hedge funds in the DIFC. TheCode addresses some specific risks that areassociated with hedge funds and reflects theDFSA’s commitment to risk-basedregulation. There are nine high-levelprinciples in the Code, which cover areas ofkey operational, management and market-related risks, particularly in the areas suchas valuation of assets, back office functionsand exposure to market risks.

Shari’ah-compliant hedge funds

Due to the support of some Shari’ahscholars, the theoretical concept of aShari’ah-compliant hedge fund is now wellestablished. Islamic finance is constantlydeveloping ways of staying competitivewith conventional markets within anIslamic framework. Major Gulf financialinstitutions expect Shari’ah compliance in awide range of products. They also expectsuch products not to cost substantiallymore than their conventional equivalents.Shari’ah-compliant equity fund structures

have proved popular since, in theory, theyare consistent with Shari’ah principles ofparticipating in and sharing of their risksand rewards of a joint venture. This hasmade Shari’ah-compliant equity investmentfunds particularly attractive to Islamicinvestors and has led to end examination ofways in which similar forms of absolutereturn funds can be structured. Accordingly,asset managers in the Gulf region have beenseeking to develop strategies that willreplicate the absolute return mechanisms ofglobal hedge funds, whilst continuing toadhere to the principles of Shari’ah.

Needless to say, in the past few decadesthere have been many differing forms ofconventional hedge funds (owing to thevarious strategies employed by fundmanagers). However, the most widely agreedperception of a hedge fund is ‘a fund thatuses derivatives, leverage, shorting, margintrading and option techniques to achieve itsabsolute return investment goals’. Usually,short sales include the borrowing ofsecurities and their subsequent sale into themarket. Shari’ah scholars are wary of anyconventional form of short sale since, underfundamental Shari’ah principles, one cannotsell what one does not own.

Shari’ah, of course, generally imposesrestrictions on types of investment. It requiresthat Shari’ah-compliant funds avoidtransactions in unethical goods and services;the earning of returns from financialinstruments (riba, interest); and excessiveuncertainty in contracts (gharar); as well astrade in debt contracts, forward foreign

Islamic hedge funds:work in progress

Bill Gibbon (above left), group partner at Voisin law firm and head of its Shari’ah fundsdepartment and Trevor Norman (above right), director of Volaw Trust & Corporate ServicesLimited and head of its Islamic finance and Middle East group, examine the Shari’ah challengesin establishing an Islamic hedge fund.

ACADEMIC ARTICLE


NEWHORIZON Rajab–Ramadan 1429 ACADEMIC ARTICLE

exchange contracts and general forms offinancial options and similar derivatives.

As with all Shari’ah-compliant products, anyhedge fund strategy would have to becertified by a recognised Shari’ah scholar viaa fatwa (a ruling on a particular issue). Thereare, to date, various potential mechanisms inplace which aim to reproduce as near aspossible the equivalent derivative tradingtechniques of conventional hedge funds. Inparticular, the aim of producing a Shari’ah-compliant methodology, which replicates theeconomic effects of short selling, seems tohave been established in a number of cases tomanage risk in similar means to conventionalhedge funds. The success of a Shari’ah-compliant hedge fund will also depend uponthe hedge fund being able to combine thetechniques and strategies used with theethical requirements of openness.

Several such funds have been adverselyaffected by articles in the regional andIslamic financial press that criticise the lackof transparency in their short sellingmethodology, despite an initial Shari’ahsign-off or fatwa. The need for transparencycauses a problem over intellectual propertyfor the institution developing the product.However, the rewards for being transparentshould far outweigh the risk of being copiedby competitors.

Within the long/short hedge fundmethodology, there are various issues thatneed to be addressed before scholars will issuetheir fatwa on a fund. These will include:

Stock selectionAll investments must meet certainqualitative criteria such that any companyundertaking haram (prohibited) activities isexcluded (a common example is a companyproducing alcoholic drinks). A second testis to ensure that any company financed in aharam manner (e.g. with too much debt) isalso excluded.

LeverageMany hedge funds are heavily leveraged,but the fund will not be allowed to borrowmoney in a conventional manner such thatinterest is paid; leveraging can usually beachieved within the structure using a

murabaha (a financial institution buys andsells the items required by the customer) oranother Islamic contract.

Short saleThis is the major hurdle for the fund managerto overcome, as it is a fundamental principleof Shari’ah that you cannot sell what you donot own. Several institutions have attemptedto use various forms of Islamic contract,some of which are discussed below, as ameans of effecting a transaction akin to ashort sale of shares. However, the use of anIslamic contract can lead to problems in itself;prime brokers and other financial institutionswill have established systems based uponinternationally accepted forms of contractand may not be willing to change theirsystems for only one fund.

The more common forms of contract that havebeen proposed in these circumstances are:

Salam. This is a sale contract with a deferreddelivery and was the method generallyfavoured by early funds. However, Shari’ahStandard 21, issued by the Accounting andAuditing Organisation of Islamic FinancialInstitutions (AAOIFI), which came intoeffect in January 2007, stated that it was notappropriate to use salam contracts fortransactions in company shares.

Arboun. This is a sale contract with a non-refundable deposit. Whilst the Hanbali schoolof Islamic jurisprudence generally allowsarboun’s use in transactions over shares, theHanafi school seems to declare it haram. The main effect of this would be to harm themarketing of a fund which uses arboun inareas where the residents generally follow theHanafi school, such as much of Saudi Arabia.

Wa’ad. This is strictly not a ‘contract’ but aunilateral undertaking (promise) by oneparty to another. It is widely used in Islamicfinance but the methodology has its critics.In 2007, Sheikh Yusuf DeLorenzo, one ofthe world’s leading scholars, published anarticle titled ‘Total Returns Swap and theShari’ah Conversion Technology’, whichconsiders the implications of using wa’adcontracts in structured finance transactions,including hedge funds. DeLorenzo wasparticularly critical of certain structures that

have been approved where a wa’ad has beenused to convert profits earned from haramactivities into halal (permissible) income.The debate over DeLorenzo’s article is likelyto have a major bearing on the futurestructuring of Islamic hedge funds.

Shari’ah-compliant or Shari’ah-based?

Several leading experts in Islamic financehave questioned the appropriateness ofusing forms of contract derived from anagricultural economy of several hundredyears ago in modern financial transactions.A recurring theme in scholarly ideas is amove from Shari’ah-compliant productstructuring to Shari’ah-based productdevelopment. This move suggests a back-to-basics approach in Islamic finance, suchthat transactions are structured around theprinciples of Shari’ah and not by‘Islamising’ conventional products.

As far as characterisation of hedge funds ashighly speculative is concerned, this may bea reason why they have been seen asdifficult to achieve in a Shari’ah-compliantcontext. However, of course, the theory isthat hedging is seeking to minimise ratherthan take advantage of risk. It is at leastarguable that there is no greater speculationor gharar element in Shari’ah-complianthedge funds than in Shari’ah-compliantprivate equity funds. It may, ironically, bethat the current global credit crisis may bethe point at which conventional hedgefunds are reassessed. However, even in thiscrisis there may be promise for thedevelopment of Shari’ah-compliant hedgefunds. This is because of the ethical ruleswhich may restrict the leveraged and debtpositions taken by such funds and may leadShari’ah-compliant hedge funds to be lesssusceptible to such losses.

This back-to-basics approach should lead toa much wider acceptance in financial circlesof Islamic funds (which are often unfairlycriticised as being re-engineeredconventional financial products) and shouldlead to the development of a truly Islamichedge fund. In any event, the developmentof the various Shari’ah-compliant hedgefunds has resoundingly demonstrated thatIslamic finance is constantly evolving.

Undoubtedly, over the past few yearsShari’ah-compliant banking technology andits developers have enjoyed a notable periodof activity, with significant sales in thetraditional Islamic finance hubs of MiddleEast and South East Asia, and further afieldin the new markets of Europe and Africa.

Large international banking systemsvendors, including Temenos (Switzerland),I-flex (India) and Misys (UK), havedeveloped software catering for specificrequirements of Shari’ah-compliantfinancial institutions.

A French supplier, Delta Informatique, hasalso recently announced its plans tointroduce an Islamic solution to the market.The vendor has partnered with a Saudi ITcompany, Daleelteq, for this initiative, andis currently negotiating a contract for thesystem’s first implementation at FaisalIslamic Bank in Khartoum.

Kuwait-based Path Solutions and Lebanon-based BML Istisharat have been confidentlyincreasing their international customer lists.On a more local level, Leadsoft Bangladeshand Millennium Information Solution (bothBangladeshi companies) have been gainingwins from domestic banks, and also eyeingthe wider market.

However, as the Islamic banking andfinance industry is still very youngcompared to the conventional one, themarket for Islamic banking systems is notsaturated yet. If nothing else, banks wouldlike to see more choice, although there is ageneral understanding and acceptance thatthe technology side of Islamic finance hasnot reached the peak of maturity yet. ‘Theindustry matches the stage at which Islamic

banking is’, says Mohamed Berro, CEO ofAl Hilal Bank. ‘Islamic banking systemsprogress is almost in line with the progressof the Islamic banking industry itself.’

Al Hilal is itself a new entrant to themarket. It was set up by the Abu DhabiInvestment Council and is wholly owned bythe UAE government. The bank isheadquartered in Abu Dhabi with branchesscattered across the Emirates, open forbusiness as of June 15 this year.

When Al Hilal embarked on the selectionprocess (October 2007), it was ‘notexpecting to find the same number ofsolutions that are available for conventionalbanking’, cites Berro. Five vendors wereconsidered, including the afore-mentionedI-flex, Temenos and Path Solutions. Theselection stage was very swift, just twomonths, with initial assistance from aconsultancy firm, KPMG. The bank also

recruited a number of independentconsultants who were present during thevendors’ demonstrations and providedadvice. I-flex and Temenos made it to theshortlist and by the end of December it wasdecided to go with Temenos’ offering – T24Islamic Model Bank (originally developedby Temenos together with Al Salam Bank).One of the strengths of Temenos’ offering isthat it has ‘a complete model bank readyfor operations’, says Berro. ‘Once thesystem goes live, the majority of thebanking services are available.’

‘This is a really significant win against thetraditional Islamic vendors, which didn’teven make it to the short list for whateverreason,’ notes Juan Cejudo, the company’sgeneral manager, Middle East.

He adds that the bank demanded seriouscommitment to deadlines. ‘They wanted tostart the project on the 15th January and golive by June. “If you cannot make that, don’tbother doing the presentation,” they said.’

‘Banks in the Middle East spend five or sixmonths internally deciding what they aregoing to do,’ continues Cejudo. ‘Then theygo out to a vendor saying, you’ve got twoweeks respond to this, two weeks to dothis, then I want to go live. What happens isthey’ve got a one year timeframe to gettheir system up and running, but they spendsix or seven months deciding on strategy,and then put pressure on the supplier tomake sure they can make up the time.’

In addition to rigid timeframes, regionalpresence was also very important to Al Hilal. Flexibility, scalability and the sizeof the vendor’s financial resources weretaken into consideration as well.


NEWHORIZON July–September 2008ANALYSIS

Different paths to Shari’ah bankingWith the mushrooming growth of Islamic banks across the world comes an ever-increasingdemand for the dedicated technology. What systems prove to be most popular and what roledoes IT play in the industry today?

Mohamed Mostafa,The United Bank

The new system at the bank has beenlocalised to meet the country’s legislativerequirements, and is being deployed at thebank’s head office and the entire branchnetwork in the UAE. At present, Al Hilaldoes not have any branches outside thecountry, but there are plans for suchexpansion and Berro confirms that T24Model Bank will be implemented there as well.

The project is being managed by four teams:around ten people from Temenos, anequivalent number from IBM, a team fromthe bank (everybody at the bank is involved)and a third-party team of around dozenpeople assisting with the software testing.‘So far we are happy with our choice,’ statesBerro. ‘We are moving ahead.’

Temenos is not standing still either andexpects to clutch more deals in the MiddleEast in the near future. ‘We’re very hopefulwe’ll sign another one or two decentIslamic banks in the next few months’, saysCejudo. Although no names are beingdisclosed, it is known that another start-upIslamic bank in the GCC has alreadyselected Temenos’ products.

‘It’s a very exciting time in the Middle Eastnow,’ observes Cejudo. While ‘the rest of theworld is falling apart with this credit crisisand conventional banks in Europe arefocused on staying afloat’, the Middle East isgrowing fast due to oil prices and theopening up of GCC regulations, allowing thebanks to expand regionally andinternationally. Islamic business is developingat ‘a phenomenal rate’, with opportunities to‘take a large portion of the niche market’ inAsia and Europe (namely Malaysia,Indonesia, UK, Germany and France).

Meanwhile in Africa, The United Bank hasalready completed a core system conversionproject and is successfully running a newsolution. Headquartered in Cairo, TheUnited Bank is ‘a new name in the Egyptianbanking and finance sector’, in the words ofMohamed Mostafa, the bank’s CIO. Thebank came into existence as a result of thecountry’s Central Bank’s reform of Egypt’sfinancial market. Three domestic banks

were merged to create The United Bank:Nile Bank, the United Bank of Egypt andthe Islamic International Bank forInvestment and Development. The newly-formed entity offers both conventional andIslamic banking products and services forretail customers and corporates.

After careful consideration, the bankdecided against holding a tender. ‘One ofthe acquired banks already had Equationcore system [from Misys],’ points outMostafa. So, it was agreed to adopt thisproduct for The United Bank. ‘It canguarantee a basic system that allows thebank to present all the transactions andfinancial services for the individuals and

foundation, including the services of boththe Islamic banking and investment sectors,’he explains. The bank also wanted toimprove its customer service and ‘the wholebank system in general’.

The project commenced in the Autumn of2006 and was divided into five stages. Thefirst one consisted of gap analysis and datacleansing for the three acquired banks. This

process took about three months and thenthe project was moved to stage two –development and testing. By mid-April2007, the bank commenced the conversionof the first two banks, followed by the thirdbank a month and a half later. In latesummer that year, The United Bankimplemented an Islamic finance module.Misys’ Opics was taken for treasury activityto cover front, middle and back officeoperations. It was implemented in thecourse of the last phase, adds Mostafa, aswell as vendor’s Trade Innovation solution(for trade finance).

The new core solution is centralised andcovers all of the banks branches and officesacross Egypt (around 40). ‘Our vision basedon technology lead to the purchase of thelatest IBM i-Series server and building stateof the art WAN/LAN/IP telephony andsecurity,’ says Mostafa.

However, one international vendor believesneither in Islamic banking modules, nor inconverting conventional core bankingsolutions into Islamic ones. Path Solutionsemphasises that its flagship product forIslamic banks, iMAL, has been built fromthe ground up, which is the only way thesystem can be truly Islamic. NajiMoukadam, the company’s president, isconvinced that ‘changing the word “interest”to the word “profit” and adding somecomputations’ that ‘some vendors are doing’is not enough for the solution to workproperly. ‘It has to be a complete cycle.’

Path was one of the first companies to turnto the Islamic finance industry; it is amember of Accounting and AuditingOrganisation for Islamic FinancialInstitutions (AAOIFI) – a key Islamicbanking standards body – and ‘has beenfollowing AAOIFI’s guidelines from thestart’. According to Moukadam, the systemalso complies with the InternationalAccounting Standards (IAS).

Mohammed Berro,Al Hilal Bank


NEWHORIZON Rajab–Ramadan 1429 ANALYSIS

Islamic banking systems progress is almost in line withthe progress of the Islamic banking industry itself.Mohamed Berro, Al Hilal Bank


NEWHORIZON July–September 2008ANALYSIS

iMAL (‘i’ stands for Islamic and ‘mal’means ‘money’ in Arabic) has proved to bepopular in Path’s traditional ground of theMiddle East, and more recently, has foundnew takers in Malaysia, Africa and the UK. With 14 new wins in 2007 alone, iMAL is among the most popular Islamic banking solutions.

To provide local technical support for itsAsian and European customers, Pathopened new offices in London and KualaLumpur last year. And earlier this year, thecompany launched its own education centre– Path Solutions Academy – due to a veryhigh demand for Islamic finance specialistsin the market. At present, the courses areoffered only to the company’s staff, but ‘theplan is to go externally, across to Path’scustomers and other people that areinterested in Islamic banking andtechnology,’ notes Moukadam.

‘Technology is a major factor for Islamicbanks in having a competitive advantage,’he continues. ‘It is empowering people atthese banks and helping them to makebetter decisions.’ In his view, one systemwith a modular approach works best.

It is worth noting that the bulk of Path’srecent contracts have come from start-upbanks, with a number of deals in the UK,where Islamic finance is notably on the rise.The latest one is Gatehouse Bank plc, afully Shari’ah-compliant wholesaleinvestment bank based in the City ofLondon and recently authorised by the UKFinancial Services Authority (FSA). Thebank commenced operations in April 2008,confirms Twalha Dhunnoo, head of financeand operations at Gatehouse. Gatehouse’sparent company is The Securities HouseK.S.C.C., an investment firm in Kuwait,with interests overseas.

Incorporated in May 2007, Gatehousespent most of last year working on anumber of start-up programmes, recallsTwalha Dhunnoo, including applying to theFSA for authorisation, recruiting a team ofqualified front and back office personneland ‘investing in the right systems and

infrastructures’. ‘We needed a core system,which is compliant with Islamic banking,’he states. The bank engaged one of the BigFour professional advisory firms to supportthe system selection process (Pricewaterhouse-Coopers, Deloitte Touche Tohmatsu, Ernst& Young and KPMG comprise the BigFour). This constituted drawing up ashortlist from a number of potentialvendors including Path Solutions, whoeventually landed the deal.

The implementation process started in thelast quarter of 2007, shortly after thecontracts were signed. The bank mobilisedits staff, supported by external expertise,where required. ‘We wanted to buy andembed best business and system practicesupfront, before we went live, not after’,explains Dhunnoo.

The project was divided into stages. The first one consisted of extensive testingand customisation, so that by the first dayof 2008 the system could be put into action.‘We have been recording all transactionsand expenses starting from January 1, asour financial year runs from January 1 toDecember 31. We didn’t want to delay andback log transactions.’

The live system was customised to initiallymeet the bank’s requirements in the areas ofaccounting, reporting and operations. ‘We did a lot of work in terms of bringingthe system to the necessary standard to take it live as at the start of the year,’ notes Dhunnoo.

The second stage involved the testing ofadditional Islamic banking products thatGatehouse will offer and took place in theperiod between the first round of useracceptance testing and the FSA authorisation.

Path is still actively involved in the project.The company has an office in London and‘can be called at short notice whenrequired’. User training is also carried outby Path. ‘The project is on-track,’ statesDhunnoo. The participants are ‘workingtogether’ to ensure systems’ readiness forfull ‘business-as-usual’ operations, he adds.

Gatehouse is just one of a number ofIslamic financial institutions looking to gainsignificant ground in the UK, and one ofmany more opening for business around theworld. With the players equippingthemselves with sophisticated coresolutions, the world may well see Islamicbanking and finance take far more groundfrom conventional banking that it had everimagined. Those that are ready for it willreap the benefits.

Technology is a major factor for Islamic banks inhaving a competitive advantage.Naji Moukadam, Path Solutions

Naji Moukadam,Path Solutions

MEGA BRANDS. MEGA CLIENTS. MARKET LEADERS.

15 years of mapping the future of the global Islamic finance industry

15 years of gathering industry thought leaders in dynamic debate

15 years of bringing together over 1000 international delegates each year

15 years of successfully working with the market leaders in the global Islamic finance industry

15 years of delivering a one of a kind spectacle to the Islamic finance industry

15th Annual

23, 24 & 25 November 2008, Gulf Hotel, Kingdom of Bahrain

The 15th Anniversary��

Media Associate

Stella Cox, who is now one of the leadingspecialists in Islamic finance, recalled thetimes when she started working in theindustry over a decade ago, that she wastold that Islamic finance and women was animprobable combination. The times havechanged since then, and now women areactively engaging in the industry. Andfurthermore, the industry has createdsectors catering exclusively for women.

A number of investment and brokeragefunds were set up in the Middle East(particularly in Saudi Arabia) to targetwomen investors. Today, up to 30 per centof brokerage accounts in Saudi Arabia areowned by women, as well as around 40 percent of family-run businesses (usually assilent partners). In Bahrain, in 2006,Masrafy Bank became the first bank to offerwealth management services and Islamicbanking entirely for women. Qatar LadiesInvestment Company offers similar servicesin Qatar.



The seminar was well attended by theeminent players (for example, Dr NatalieSchoon, head of product development at theBank of London and the Middle East plc),as well as aspiring specialists. As one mightguess, the overwhelming majority of theattendees were women. Although a few menalso showed up, including such well-knownfigures as Mohammed Amin, tax partner atPricewaterhouseCoopers, and MohammadAli Qayyum, IIBI’s director general.

The event was chaired and moderated by NeilMiller, partner and head of Islamic finance atNorton Rose, who founded the firm’s Islamicfinance group in 2000. Since its inception, thegroup has actively promoted the industry inthe UK and has built up an impressive trackrecord of advising on Islamic financeinternationally, including Malaysia, the Indiansub-continent, Turkey and Indonesia.

The first speaker to take the floor was KittyUssher MP, economic secretary to theTreasury. She elaborated on the UKgovernment’s perspective on Islamic finance,an initiative that was started a year or soago, when the government announced itsplans to turn the UK into a leading globalcentre for Islamic finance (NewHorizon,January–March 2007 issue). Since then, thework has been ongoing on the highest level(most recent developments are featured inthe ‘News’ section in this issue, p6). Theprogress has been overwhelming, with ahost of fully-fledged Islamic banks openingfor business in the country. According toUssher, the French government is alsoexamining the possibilities of Islamicfinance in France and has turned to its UKcounterpart for consultation and advice.Then, Shaykha Halima Krausen, academic

and Shari’ah scholar from Germany, gave thelisteners an insight into the history of womenin Islamic trade and finance, drawingexamples of significant roles women haveplayed throughout the centuries in thedevelopment of business activities. She citedthe Prophet’s wife, Khadijah, as a majorillustration. Khadijah was a businesswomanand she actually employed Muhammad(prior to marrying him) as one of her agentsin her trading business. She was so impressedby his conduct and sense of responsibility,that she proposed to him and their marriagelasted 25 years, until she passed away.

Next, Dr Eva Bigalke, executive director atan international conglomerate, WestLB, andStella Cox, managing director of DDCAPLimited, Islamic financial services company,talked about their experience in the industryand various projects they have beeninvolved in over the years. Dr Bigalkepresented a case study on Aston MartinLBO (leveraged buy-out transaction) deal,completed in mid-June 2007.

The transaction, worth $965 million, wasmade up of 60 per cent financed throughequity contributions and the rest fundedthrough a commodity murabaha facilityarranged by the London branch of WestLB.It was recognised as ‘the most innovativefinancing transaction’ by the inauguralIslamic Finance Awards last year(NewHorizon, July–September 2007 issue).

The award was presented to Kuwait-basedInvestment Dar, part of Bidco, a consortiumthat acquired Aston Martin (other memberof the consortium include another Kuwaiti company, Adeem Investment, andseveral individuals).

Women in Islamic Finance Seminar

CONFERENCE REVIEW

Shaykha Halima Krausen

The growing presence and importance of women in the industry was highlighted in a half-dayseminar organised by Norton Rose LLP and held at the firm’s swanky office building in the Cityof London on the banks of the river Thames.


NEWHORIZON Rajab–Ramadan 1429 CONFERENCE REVIEW/IIBI NEWS

There is also an increasing (althoughrather slowly) number of womenworking at the highest levels across theIslamic finance sector worldwide. Mostknown examples include the celebratedgovernor of Bank Negara Malaysia(central bank and regulator), Dr ZetiAkhtar Aziz, who lead the country’sShari’ah-compliant sector to theprosperity it enjoys today. In manyrespects, it is Malaysian women whohave set the pace in Islamic finance. Forexample, Dr Eg Rabiah Adawiah BintiEngku Ali, an academic at theInternational Islamic University ofMalaysia, has become the first registeredfemale Islamic finance Shari’ah advisor.This opens the area that has been, ineffect, inaccessible to women before.

Elsewhere, Dr Shamshad Akhtar, is agovernor of Pakistan’s central bank, theState Bank of Pakistan; Sheikha LubnaKhalid Sultan al Qasimi is a minister foreconomy and planning of the UAE;Maha K Al-Ghunaim is a chairpersonand managing director of Kuwait-basedGlobal Investment House; LubnaSulaiman Al-Oleyan is a recentlyappointed board member of SaudiHollandi Bank in Saudi Arabia; and, ofcourse, Tanya Andreasyan is editor ofthis publication. There are moreexamples of women occupying seniorpositions in Islamic financial institutionsacross the globe.

Two young aspiring associates fromNorton Rose, Aziza Atta and Shatha Ali,gave their views on being involved inIslamic finance. Both described theirexperience as positive and encouragedwomen to join this rapidly developingindustry.

Of course, empowering women in thisarea depends on the cultural and socialaspects of different countries, whichrange broadly in different parts of theworld. To date, both Islamic andconventional finance sectors are stilldominated by men, although more andmore women are excelling in both.

Students from PoznanUniversity in Poland visit IIBIA group of students from the ScientificAssociation SKNProfit, which is a part ofthe Department of Investments and CapitalMarkets at the Poznan University ofEconomics in Poland, visited financialinstitutions in the City of London. As a partof a broader project of learning aboutinternational trends in finance, they visitedLloyds Insurance, the European Bank forReconstruction and Development (EBRD),Bloomberg, Saxo Bank, Goldman Sachs, theBank of England and the Institute of IslamicBanking and Insurance (IIBI). The visit,coordinated by Grzegorz Hucz, wasintended to further their studies, as well asbecoming a platform of cooperation in theirfuture careers.

According to Hucz, for the past couple ofmonths the group was trying to explore thetopic of Islamic finance and became veryinterested in this field. One of the mainreasons mentioned was the amount of articleson this subject that appeared in theinternational press within the past sevenmonths. They ‘became aware that in view ofthe credit crunch and soaring oil prices Islamicfinancial institutions are becoming more andmore important for the global economy’.

The group was also hoping to explore thegrowing interest in Islamic sovereign wealthfunds. Moreover, they had noticed theincreased activity of Islamic institutions inthe Central and Eastern Europe, such asArcapita Investments in Warsaw. They werehoping to learn about the needs of theIslamic finance industry and how they couldbenefit as Poles from the new businessopportunities. Hucz commented, ‘werealised that, as Poland is a mono-culturalcountry of around 90 per cent declaredCatholics, we do not know much aboutIslam and the rules that are important in theIslamic world. We felt that, as the world isglobalising, the ability to communicate in aproper and respectful manner with Islamiccultures would be an asset for us.’

‘I didn’t really know what Islamic finance isabout, but I know that I need to understand

it if I want to be a successful businessman,’said one of his colleagues.

Hucz explained that the students decided tocontact the IIBI, as ‘we learned from the Institute’s website that it is a platform ofcommunication in the field of Islamic financein London. Moreover, one of our alumniencouraged us to contact the Institute.’

The group was received by Mohammad AliQayyum, director general of the IIBI, on thepremises of DDCAP, one of the globalleaders in Islamic investment and finance.They were introduced to Stella Cox,managing director of a DDCAP subsidiary,DDGI Ltd, and a member of IIBI’s board ofgovernors, and her colleagues, LawrenceOliver and Andrew Betkowski.

The group found the presentation veryinteresting and helpful in understanding theprinciples of Islamic finance, whichaccording to them ‘turned out to be thebasic principles of running a decent life inharmony with the society, that could beapplicable everywhere’. After the visit Huczcommented, ‘we had an opportunity tolearn about the basic principles of theIslamic finance and its history, evolutionand future prospects. We were shownIslamic instruments, the development of theIslamic market in different countries andthe challenges for the future.’

‘We were very keen to learn more aboutIslam as there are not many opportunitiesto ask questions in Poland on these issuesand we do believe that there is a need forsuch meetings and such sources ofinformation,’ he stated. ‘We believe there isplenty of room for cooperation between theIslamic and Western financial worlds.’

On their return to Poznan, the group sharedthe knowledge that they had gained ofIslamic finance with other members of theirassociation, and are looking forward tohaving more chances for their members inthe future to explore the Shari’ah-compliantfinance industry.


NEWHORIZON July–September 2008IIBI NEWS

Dubai Women’s College students visit IIBIA group of students studying an AdvancedDiploma in Insurance at Dubai Women’sCollege, Ali Abdul Rahman Nasser Ayed AlOtaibi, Naeima Ali, Salma AhmedMohammed Ali Al Housani, ShaikhaMalalla Khamis Ali, Shireen Salem Khamis

Sulaiman Ali, Sumeya Ahmed Juma HussainAbdulla, with Mayada Mahmood IbrahimBin Essa as their chaperone and GrahamSpriggs as their teacher, were received byMohammad Shafique, programmedevelopment co-ordinator of the IIBI. Thepurpose of their visit was to learn moreabout the development of Islamic insurance(takaful) in the UK market.

The goal of Dubai Women’s College (foundedin 1989) is to provide an exceptional learningenvironment for young Emirati women thatenables them to ‘practice the future’ bydeveloping professional excellence and ethicalcommitment for leadership roles in a rapidlydeveloping local economy, characterised byEmiratisation and globalisation. Spriggscommented that the study tour to the UK wasan opportunity for the students to see howthe country’s market operates, as well asunderstand some of the HR (humanresources) and cultural issues and comparethese to the UAE.

The group was invited to attend a lectureby Mohammad Khan, director of takafuland retakaful services at Pricewaterhouse-Coopers, on Islamic insurance, organised bythe IIBI. Following the lecture there was aseparate session with Khan, where the

students had the opportunity to seek furtherclarification and information on the UKmarket. At the IIBI’s request, Omar Shaikh,member of the IIBI and Ernst & Young’steam on private equity transaction advisoryservices, gave an overview of thedevelopments of Islamic banking in the UK.

He also highlighted the difference in theregulatory and taxation regime faced byIslamic financial institutions operating inthe UK and in the Middle East, as he hasexperience of working in London andBahrain. Shafique updated the students onthe role of the IIBI in providing continuingprofessional education and training in bothIslamic banking and insurance. Thestudents also shared their knowledge of thelocal market and developments andmentioned that not all Muslims are takingup Islamic banking and insurance products.

The students were required to write areport on their experiences when they

returned to Dubai. They specificallycommented on the IIBI presentation, sayingthat it had been very informative and hadopened an interesting debate on thearrangement of Islamic insurance and itspotential for growth in both the UK and theGulf region. They found Khan to be veryknowledgeable and an excellent speakerwho explained the issues in a clear andentertaining way.

The IIBI also arranged for the group to visitPrinciple Insurance, the UK’s firstindependent takaful company recentlyauthorised by the FSA (Financial ServicesAuthority), the UK regulator. They werereceived by Alun Williams and briefedabout the products that the company willbe offering, and the market potential forIslamic insurance in the UK. The studentsfound this briefing very relevant as MrWilliams talked about some of the issuesfaced in trying to build an Islamic companyand ensure that the market for the productsis identified and reached.

As a token of appreciation to the IIBI forsupport in facilitating their visit, the grouppresented an engraved glass plaque which wasaccepted by Shafique on behalf of the IIBI.


NEWHORIZON Rajab–Ramadan 1429 IIBI NEWS

Sukuk, their practical applications and challenges

The last six years has seen exponentialgrowth in sukuk issuances, especially in theGCC and in Malaysia. In order to facilitatethe issuance and trading of sukuk in theUK, new changes have been made by thegovernment in legislation last year. With thegrowing demand in this asset class, the IIBIorganised a workshop hosted by theNational Skills Academy Financial Services,London. It was led by experts from theindustry and attended by senior figuresfrom the industry and regulators. Sukukrepresent Islamic investment instrumentsregistered in the name of their holders andare based on the principles of an underlyingShari’ah-compliant contract. This may be asale (murabaha, salam or istisna), leasing(ijara) or partnership (mudarabah ormusharakah), whereby investors mix theirfunds with other investors to make a profit.

In the first session, Dr Adnan Aziz fromBMB Islamic, an international Shari’ahadvisory firm, provided an overview ofsukuk. Holders participate in ownership ofthe company issuing the sukuk; they have theright to profits and bear the loss; the sukukmaturity corresponds to an underlyingproject. A sukuk manager represents theinvestors, working for their benefit byinvesting the funds in accordance with theapproved terms listed in the contract.

Dr Adnan named the key players in sukukso far, including HSBC Amanah and DubaiIslamic Bank. He also talked of building upa secondary market in sukuk, which hasbeen a focus of the Liquidity ManagementCentre (LMC) in Bahrain. For example,together with a handful of regional banks,

the LMC has been offering two-way pricingfor some sukuk on its website. Dr Adnanpointed out that development of an activesecondary market should help Islamicfinancial institutions manage their liquidity.

Richard de Belder and Matthew Sapte ofDenton Wilde Sapte, an international lawfirm, followed with a discussion on thepractical applications of Islamic financecontracts as a basis of sukuk activities. Theydiscussed some of the most popular Islamicfinance structures that have been used insukuk transactions. De Belder then went on todiscuss sukuk structuring issues, such aswhether sukuk should be asset-based or assetbacked. Sapte covered some of the mostinteresting sukuk issues in recent years, suchas the DCA sukuk, Tamweel, Amlak, PCFCand Aldar. De Belder then discussed theimplications for sukuk issues to date of thestatement made by AAOIFI in February 2008.

Phil Heath of PricewaterhouseCoopers thenpresented the taxation issues of sukuk. Hediscussed the practical issues surroundingcorporate tax, withholding tax, VAT, andstamp duty for a UK-based issuer, and thetreatment of income and capital gains in thehands of UK-based investors. He alsobriefly touched upon the changes made inthe UK tax law in last five years, and lastyear’s changes which are more focused onthe sukuk issuers and holders.

Mohaimin Chowdhry of European IslamicInvestment Bank (EIIB) subsequentlyexplained the requirements of Shari’ah lawand the difficulties of fulfilling these in aconventional legal framework. Shari’ah

Mohammad Shafique, IIBI editor of NewHorizon and programme development co-ordinator, presentsa summary of this workshop organised by the IIBI and held on the 29th April 2008 in London.

requires that sukuk must represent ownershipof real economic assets that generate revenue.It must not represent the sale of debt, returnsshould be linked to actual profits and not asa percentage of capital, and returns or lossesmust be shared equitably. Although there isfreedom of contract under English Law, thereappear to be significant problems inenforcing a Shari’ah-compliant contract.Regulators look at sukuk as a collectiveinvestment scheme and there are implicationsfor withholding tax to sukuk holders; whilethe initial sukuk transactions usedijara/salam/murabaha-debt type structures,some of the recent transactions have usedmusharakah/mudarabah/wakala-equity typestructures. Differences are appearing due tothe divergence in perception among Shari’ahscholars and the industry players; what isequity in Shari’ah eyes is a debt in industryeyes as investors must not be lenders butpartners. The way forward is either a shift inthe Shari’ah scholars’ thinking or a shift inthe industry’s thinking.

In the closing session, Mufti Barkatullah, aleading Shari’ah scholar, talked of theShari’ah-related issues in sukuk transactions.There was much coverage of sukuk recently inmedia after the statement of Mufti TaqiUsmani, chairman of the Shari’ah Committeeof the AAOIFI. Shari’ah scholars have allowedsome structures with the aim of promoting theindustry, and Mufti Usmani was critical thatuse of this exception was becoming a norm.This represents about 15 to 20 per cent of thetotal sukuk issued so far, but it was reported inmedia as if 85 per cent of all sukuk were notcomplying with Shari’ah principles.

Mufti Barkatulla, a leading Shari’ahscholar and a member of the Shari’ahsupervisory panels of a number ofIslamic financial institutions, discussedthe role of scholars for the Islamicfinancial services industry’s growth,and how the scholars are performing a delicate balancing act betweenauthenticity and innovation whenaddressing the needs of Islamicfinancial institutions in a highlycompetitive global market place.

The lecture was chaired byMohammed Amin, tax partner atPricewaterhouseCoopers LLP.

April: Role of Shari’ahscholars in standardisationprocess of Islamic finance

Promoting Islamic finance

Mufti Barkatulla noted that Shari’ahcompliance standards and divergence havebecome the focus of much deliberation. Therole of Shari’ah scholars has been scrutinisedby industry critics. There is internationaldivergence among Shari’ah scholars’opinions which may largely be attributed toregional cultures, norms and local practices.

Globalisation of the Islamic finance industryand cross-border transactions should pushfor convergence. With a new breed ofprofessionals emerging to enhance the roleof Shari’ah advisement and audit, thescholars need to have a thoroughunderstanding of finance practices, as wellas Islamic law and conventional economics.In a fast growing world of Islamic finance,there will always be a demand forinnovative products to compete with

Mufti Barkatulla

conventional products. While globalisationrequires universal standardisation, regionalpriorities are pushing towards newuncharted territories that require finebalancing between authenticity andinnovation by the Shari’ah scholars.

He also pointed out that Shari’ah advisorypractices are also evolving. There are a fewindividual-based consultancies who areadvising institutions in product developmentand Shari’ah compliance. These includeBMB Islamic, Yasaar Ltd, Dar Al IstithmarLtd, Islamic Finance Advisory andAssurance Services (IFAAS) and Al QalamShari’ah scholars’ panel. However, as theIslamic financial sector grows and as moreconsultancy firms emerge, this will lead tothe development of a professional code ofethics and standardisation of practices in theShari’ah advisory profession – as happenedin other professions.

He then briefly touched on the roles of theAccounting and Auditing Organisation forIslamic Financial Institutions (AAOIFI) andthe Islamic International Rating Agency(IIRA). The AAOIFI Shari’ah board isworking on the harmonisation andconvergence of Shari’ah supervisorypractices, Shari’ah standards in accountingand auditing and practicing collective ijtihad(reasoning) to settle divergent points andalso act as an arbitrator. Collective ijtihad isnot meant as a replacement of individualscholars, but to build consensus amongscholars with differing opinions. The IIRArates the Shari’ah compliance of Islamicfinancial institutions adhering to greaterstandards of disclosure and transparency.

Mufti Barkatulla elaborated on the Shari’ahsupervisory tasks which include advising onproduct development, consumer advocacy,screening legal and marketing documents,monitoring stocks, management practicesand fees, fiscal and moral purification of

portfolios, regular reporting and annualaudit of institutions, arbitration and disputeresolution, supervising Shari’ah training and annual audit and certification ofShari’ah compliance.

He finally added that the Shari’ah scholarsshould be involved from day one in theproduct development cycle as it willfacilitate the dialogue between practitionersand Shari’ah scholars and result in efficientproduct structuring and Shari’ah approval.It will not only resolve the problems whichmay come up from time to time in productdevelopment cycle, but also helps incapacity building which is crucial forefficient product development.

After the presentation there was anextensive session of Q&A; the participantsraised questions about the value addition bythe Shari’ah scholars, the enforcementmechanism for the Shari’ah committeerecommendations; whether the Shari’ahscholars are indemnified in case their adviceproves to be wrong and has an adverseeffect on the business; the conflict of interestissue as Shari’ah scholars are employed bymanagement and paid by them; and theshortage of well-trained Shari’ah scholars.


NEWHORIZON July–September 2008IIBI LECTURES


NEWHORIZON Rajab–Ramadan 1429 IIBI LECTURES

Mohammad Khan, director of takaful,Islamic finance, actuarial and insurancesolutions at Pricewaterhouse-Coopers LLP, presented an overviewof takaful structures used around theworld and what the current issuesfacing the industry are.

The lecture was hosted by theChartered Insurance Institute (CII) and chaired by Nick Plastow,operations manager, face-to-facetraining at the CII.

May: Current issues in takaful

Ruggiero Omar Lomonaco, head ofIslamic finance at ABN AMRO,presented an overview of Shari’ah-compliant hedge funds and proposed‘Islamic dynamic strategies’ as apossible way forward for the Islamicwealth management industry.

The lecture was chaired by Haliza AbdRahim, legal counsel at BMB Islamic,an international Shari’ah advisory firm.

Various strategies used by hedge fundmanagers include long/short,leveraging and margin trading.However, statistics indicate thatlong/short funds represent the largestproportion of current funds.

June: Islamic hedge funds– a possibility or acontradiction in terms?

The lecture began with a brief history oftakaful and the features of the business thatensured it was Shari’ah-compliantcompared to conventional insurance.

Khan explored the various factors for whytakaful is estimated to be growing at over20 per cent a year. These include theincreased wealth and propensity to buyfinancial products of individual Muslimsaround the world, the increase in awarenessand demand for Shari’ah-compliantproducts by individual Muslims and therealisation by potential providers thatIslamic products can be offered at a similarprice to competitive products and that thereis demand for these products.

Khan discussed the issues affecting thegrowth potential of takaful in the EU, inparticular the challenges faced by takafulbusinesses ensuring that they are not onlyShari’ah-compliant but also meet all of thenational insurance regulations in thecountry in which they are based. There wasa discussion with the audience about howtakaful products could be successfullymarketed to both Muslims and non-Muslims, and how different marketing

strategies would be required to successfullymarket to these different sectors.

Khan pointed out that takaful products areinherently ethical (i.e. takaful assets areinvested in ethical assets, the customersshare in any surpluses generated by thetakaful company, and an independentShari’ah board ensured that the companywas run on a Shari’ah-compliant, or‘ethical’, manner). Consequently, if takafulbusinesses could offer price-competitiveproducts such as motor insurance, theywould have a valuable marketingproposition to non-Muslims in the UK, USand Europe. Khan highlighted that in moremature Islamic finance economies (such asMalaysia), a significant proportion oftakaful customers are non-Muslims.

The issues of risks involved for policyholdersand shareholders, and how these risks areShari’ah-compliant were explored. Althoughpolicyholders bear the underwriting riskwithin a takaful business, the operatingcapital, regulatory capital and operatingexpense risk are borne by the shareholders.Also, the shareholders and their managersare responsible for the strategy and thereforethe possible future viability of the takafulentity. There was then a lively debateamongst the audience as to how takaful metthe Shari’ah challenges of the conventionalinsurance and whether all issues of Shari’ahcompliance could be met.

May Lecture

Khan highlighted that the major issue forIslamic financial institutions around theworld is the availability of Shari’ah-compliant investments. This is proving to bean issue in the GCC and Asian countries,not just Europe and the US. In particular,there is a lack of short term Shari’ah-compliant assets, and although there isgreater availability of sukuk and Islamicinvestment funds, the shorter term Shari’ah-compliant asset class still appears to beunder-resourced.

Khan concluded the talk by highlightingthat the major issue for the growth oftakaful was the lack of skilled professionalswho not only understand insurance but alsounderstand the Shari’ah principles requiredfor each function within an Islamicinsurance company.

Lomonaco looked at Islamic hedge fundswhich aim to achieve a similar return forinvestors to conventional hedge funds. Hecommented that fundamental Shari’ahconcerns with Islamic hedge funds aremainly on short-selling techniques; goinglong means buying stock to hold asinvestment and has no associated Shari’ahconcerns provided the stock is halal;shorting means borrowing and then sellingstock that one does not own in anticipationof re-purchasing it. This poses a problem forthe Islamic principle that you cannot sellwhat you do not own. Hedging hasgradually received the approval of someShari’ah scholars.

He also explained Shari’ah-compliantshorting techniques based on arboun andsalam. Salam and arboun contracts havebeen used to achieve the economic profile ofshorting; salam refers to upfront paymentfor an asset with delivery at a future date,and arboun is similar to a conventionaloption. However, both structures are notaccepted by the majority of the Shari’ahscholars and this poses a problem in themarketability of the Islamic hedge funds.

He proposed that in an effort to address thecompliance issue of these funds and toprovide Islamic investors with more choice,the Islamic wealth management industryneeds to encourage the development of

‘Islamic dynamic strategies’. The goal is todevelop low risk but stable return strategiesthat do not suffer from the same issues asIslamic hedge funds.

These strategies should be transparent andmade available in the form of capital-protected certificates which, in the event ofa collapse of the issuer or a malfunction ofthe strategy, have the ability to offer 100per cent redemption by adopting a strictsegregation of the Islamic principle via anIslamic trust, which in turn invests inShari’ah-compliant assets only. Heexplained the mechanics of ‘Islamicnavigator’ as an example of Islamicdynamic strategies, which invests in fourShari’ah-compliant assets based on analgorithm that identifies medium termtrends in these assets.


NEWHORIZON July–September 2008IIBI LECTURES

Over the last five years, the UKGovernment has made several changes toits tax laws with the goal of providing alevel playing field for conventional andIslamic finance. The July lecture willreview the changes made, assess how flatthe playing field really is, and make somesuggestions regarding future changes.

The speaker for IIBI’s July 2008 lecture willbe Mohammed Amin MA FCA AMCTCTA (Fellow), tax partner atPricewaterhouseCoopers LLP and head ofthe firm’s Islamic finance practice in theUK. He is member of the Council of theChartered Institute of Taxation, of thePolicy & Technical Committee of theAssociation of Corporate Treasurers, of theBusiness & Economics Committee of theMuslim Council of Britain, and of the HMTreasury Islamic Finance Experts Group.

There is no charge to attend the lecturebut you must register. To register, pleasevisit: www.islamic-banking.com

July lecture preview: UK taxation of Islamic finance –levelling the playing field

The lecture will take place on 10th July at 6.00 pm at:British Bankers’ AssociationPinners Hall105-108 Old Broad StreetLondonEC2N 1EX

Mohammed Amin, PWC

The result is a transparent, Shari’ah-compliant, low volatility strategy whichprovides stable returns. He pointed out thatsimulations of such strategies indicate thatthey have been largely successful. Heconcluded that Islamic dynamic strategiesprovide an excellent addition to Islamicportfolios and will drive Islamic wealthmanagement over the next few years.Attendees then raised questions whichincluded whether Islamic dynamic strategiesare suitable for risk-taking Islamic investors,the problems in segregation of funds,practical issues in trading certificates andShari’ah concerns on management of trustsand capital redemption guarantees.

A detailed article on Islamic hedge fundscan be found in the ‘Academic article’section of this issue, p32.

Rugglero Omar Lomonaco,ABN AMRO

Inside the Islamic Guide:

� Introduction

� Suppliers & Systems List

� Technology Overview

� Islamic Authorities

� Shari’a Boards

� Case Studies of banks which have already implemented Islamic banking systems

� Bank Keshavarzi: Financial Network Systems, Bancs (now TCS Bancs)

� United Bank Limited (UBL) Ameen: Path Solutions - iMal Enterprise Islamic Banking & Investment System

� First Dawood Islamic Bank: System Access – Symbols

� View from the Suppliers

� Supplier Analysis:� Profile of each supplier and its systems� Company details� History and development of each supplier and its

systems� Functionality details for each system � Customer lists

� Country Analysis

� Summary Analysis

IBS Publishing Limited, 8 Stade Street, Hythe, Kent, CT21 6BE, UK

Tel +44 (0) 1303 262636 Fax +44 (0) 1303 262646 Email [email protected] Web www.ibspublishing.com

to order call: +44 (0) 1303 262636 or visit: www.ibspublishing.com

The Who, What, Where Guide to

Islamic Banking SystemsEdition 3 – 2008

Printed £595Ebook £495

Printed & Ebook £750

A comprehensive guide to the Islamic core systems market with fully updated vendor profiles and unbiased editorial comment.

For more information including suppliers profiled and a sample chapter, visit our website: www.ibspublishing.com

PUBLISHED MARCH 2008


NEWHORIZON July–September 2008BOOK REVIEW

‘Islamic Finance: A Practical Guide’Consulting editor, Rahail AliRichard T de Belder, a partner with Denton Wilde Sapte LLP, London, and a leadpartner in the firm’s Islamic finance practice, reviews ‘Islamic Finance: A Practical Guide’published in 2008 by Globe Business Publishing Limited (ISNB 978-1-905783-13-7).The book is 170 pages long including bibliography and index and it is priced at £110.

Rahail Ali, one of the pre-eminent lawyersin this area, explains that the book is apractical insight to the diverse contemporaryapplication of Islamic finance and Islamicinsurance (takaful). It is aimed at peoplewho work in the industry, as well as thoselooking to move into it. The book is splitinto six sections.

The Islamic Finance Overview by MustafaHussain is a well written and conciseintroduction which will be of interest tothose new to the sector. The Equity andFunds section contains three chapters. The‘Overview of Islamic asset management’ hassome informative tables, although some ofthe terms used are perhaps debatable inplaces. The ‘Shari’ah screening and Islamicequity indexes’ chapter by Kamal MA Mianis extremely informative and goes into detailabout the history of the Islamic screeningprocesses and the different models currentlyin force. The final chapter, ‘Islamic privateequity funds’, by Judy Kawaf and NeilMiller, does include some overlap with theprevious chapter but also contains someinteresting insights into the various types offunds, how funds are managed and theoperation of the Shari’ah board.

The third section contains three chapters. The first is ‘Islamic syndications: legal andstructuring considerations’ by Rustum Shah.It employs many useful tables describingdifferent structures, which will be of interestto practitioners. The second chapter –‘Application of Islamic finance to projectfinance’ by Neil Miller and Mark Norris – is

split into the construction phase andoperating phase of a project, and provides agood summary of some of the differentstructures and issues that will be encountered.However, for those more experienced inproject finance, the chapter does not gobeyond the basic issues (although this is not aspecialist project finance book). The finalchapter in this section is entitled ‘Applicationof Islamic finance to trade finance’, by BialAhmed Khan and Abdul Rahman Al Shaikh.It considers various types of murabaha and isa helpful analysis of the differences that onewould encounter. There is also a short sectionon dispute resolution including a reference tovarious English court decisions andarbitration procedures. This section mighthave benefited from a reference to the recentEnglish court decision relating to arbitrations,and other recent developments.

The next section opens with an ‘Overviewof Islamic capital markets’, by Ehsun Zaidi,which contains a short summary of sukukand how the market has developed byreference to various sukuk issues (whichonly goes up to 2006). Next is ‘Innovationin the global sukuk market and legalstructuring issues’ by Bilal Aquil and ImranMufti. This is more up to date as it includessome of the 2007 deals. It describes twotransactions, which will be of interest topractitioners. The final chapter in thissection, ‘Fixed income sukuk: prospects forcorporate issuance’ by David Testa, givesthe perspective of a banker. There isdiscussion of sukuk, ijara and musharakah.Added value is achieved by references to the

Doplin Energy and Investment Dartransactions. There is also an interestingdiscussion about the question of whether allsukuk are a form of asset securitisation.

The penultimate section deals with takaful,starting with an overview by MohdMa’asum Billah. He looks at the basicprinciples behind takaful and, on the whole,succeeds. The following chapter comparesthe differences between takaful andconventional insurance. The use of tables isa good approach, although there isoccasionally some uncertainty as to what isbeing highlighted. The final chapter in thissection is ‘Islamic insurance products: a casestudy’, by Omar Clark Fisher. This chaptercontains some academic research into thecurrent state of the takaful industry.

The final section is entitled ‘A reflection oncontemporary Islamic finance markets’, byRafe Haneef. It considers the progress thatthe industry has made, its co-operation withthe conventional finance industry, and thechange in attitude towards Islamic financeof major Middle East family-ownedcompanies. There is also a discussion ofwhether the industry needs to move awaymerely from the conversion of conventionalproducts into Islamic alternatives.

In summary, while in places there is somerepetition, and for very experiencedpractitioners it may not be detailed enoughin some places, this book should definitelybe regarded as a valuable addition to the library.

IIBI 47www.newhorizon-islamicbanking.com

RATINGS & INDICES

MSCI Emerging Markets Islamic IndexBelow is the performance of the MSCI Emerging Markets Islamic Index vs its standard counterpartover the last year, together with sector weights and top 20 largest constituents, provided by MSCIBarra, an indices risk and return portfolio analytics provider. Detailed information on the MSCIGlobal Islamic Indices can be found on MSCI Barra’s website www.mscibarra.com

Sector weights and top 20 largest constituents as of 30/05/2008

Sector MSCI Emerging MSCI Emerging DifferenceMarkets Index Markets Islamic Index

Energy 19.73% 34.05% 14.32%

Materials 16.54% 23.19% 6.65%

Industrials 8.02% 6.85% -1.17%

Consumer Discretionary 4.58% 2.58% -2.00%

Consumer Staples 4.22% 2.72% -1.49%

Health Care 1.45% 0.55% -0.90%

Financials 20.71% 1.89% -18.81%

Information Technology 10.50% 14.44% 3.94%

Telecommunication Services 11.00% 9.92% -1.08%

Utilities 3.25% 3.78% 0.53%

Security Name Adjusted WeightMarket

Cap(USD m)

GAZPROM (USD) 144,219 7.52%

PETROBRAS PN 94,521 4.93%

CHINA MOBILE 88,267 4.60%

PETROBRAS ON 80,361 4.19%

SAMSUNG ELECTRONICS CO 79,473 4.15%

VALE DO RIO DOCE PNA 63,988 3.34%

VALE DO RIO DOCE ON 54,230 2.83%

LUKOIL HOLDING (USD) 52,348 2.73%

TAIWAN SEMICONDUCTOR MFG 45,612 2.38%

POSCO 40,218 2.10%

SASOL 37,084 1.93%

RELIANCE INDUSTRIES 37,033 1.93%

HON HAI PRECISION IND CO 28,472 1.49%

PETROCHINA CO H 27,302 1.42%

CNOOC 26,899 1.40%

NORILSK NICKEL MMC (USD) 25,349 1.32%

IMPALA PLATINUM HOLDINGS 22,820 1.19%

CEMEX CPO 20,066 1.05%

CEZ CESKE ENERG. ZAVODY 17,099 0.89%

CHINA PETRO & CHEM H 16,902 0.88%


www.newhorizon-islamicbanking.com48 IIBI

Q&A

Why is there a lack of trading insukuk?

Trading in investment and financialinstruments is subject to a number ofShari’ah rules. Instruments representingownership of the real assets and theirusufructs such as sukuk issued based onmusharakah, mudarabah and ijara aretradable. Debt instruments can be tradedonly at their nominal value along withrecourse to the original debtor. Instrumentsrepresenting a pool of different categories ofasset are subject to the rules relating to thedominant category in the underlying pool.

Due to the limited number of sukuk issuesand the shortage in the supply of suchinstruments vis-à-vis their demand onaccount of the huge liquidity available withthe Islamic banks, there has been a ‘buy and hold till maturity’ trend amongst majorinvestors. Regulators in key jurisdictionshave also been slow to provide the enablingframework for the development of a sukuksecondary market. However, this scene ischanging rapidly with the increasingamount of global sukuk issuance, andinterest in sovereign sukuk issuanceproviding opportunities for investors andfund managers to leverage and diversify the size of their portfolios of tradableShari’ah-compliant instruments.

The creation of a robust and viablesecondary market for sukuk is essential for the development of the Islamic capitalmarkets. After the emergence of sukuk,particularly ijara and the mixed sukuk,secondary market trading in Islamicfinancial markets is taking place. As the sizeand number of sukuk issuances increase,along with their competitive pricing, this

will also facilitate their trading in asecondary market. Other factors, such asregulation, the presence of standard sizeinstruments, standard settlement proceduresand the presence of market makers who areprepared to step in and provide liquidity tothe market itself, will further boost thetrading prospects of sukuk. Lately, thesituation has eased and active trading hasstarted. For example, the PCFC Sukuk andthe Nakheel Sukuk are being regularlytraded in the secondary market.

Islamic financial institutions need toundertake more securitisation on the basis of mixed portfolios. Further, if theymaintain some inventories of goods tradedunder murabaha, salam and istisna, therelated sukuk could also be negotiable, thusfacilitating liquidity management by thebanks. The enhanced supply of suchnegotiable instruments will also make the Islamic financial market much more efficient.

Why is LIBOR, an interest ratebenchmark, being used for pricingin Shari'ah-compliant products?

Reference to rates or benchmarks is agenuine need for all types of businesses,enabling competing market players to price their goods and services. Accordingly,Islamic financial institutions (IFIs) also need to price their products by reference to benchmarks. LIBOR is the most well known.

Conventional benchmarks are being used by IFIs in pricing products and services inalmost all jurisdictions because they areobliged to work in direct competition with

the interest-based banks, both at nationaland global levels. It is also customary tomake comparisons on the rate of returnwith conventional products and services. The use of a conventional benchmark suchas LIBOR does not necessarily mean thatIslamic and conventional banking aresimilar. The subject matter in the twosystems is different – the creation of moneywithout the backing of real underlyingassets is a dominant factor in conventionalbank transactions while the Islamic banktransactions normally have to pass throughthe ownership of the real assets or theirusufructs. This makes a great deal ofdifference in terms of rights and liabilities of the parties.

It is important to understand that LIBOR is only a benchmark that is used as areference point in the calculation of returnand that reference to LIBOR in the Islamicfinancial system does not imply that IFIs are actually charging interest as in theconventional system. Hence, the Shari’ahdoes not prohibit reference to LIBOR as abenchmark for pricing products, so long asthe other conditions of a valid contract arefulfilled in accordance with the Shari’ah.However, it is a compromise based on theprevalent circumstances of the Islamicfinance industry being so much smaller than the conventional industry and thatthere is no other agreed benchmarkavailable to IFIs. It will require sustainedefforts on the part of economists, bankers,policy-makers and Shari’ah scholars todevelop benchmarks reflective of realeconomic sector activities in everyjurisdiction; until such benchmarks aredeveloped, any reference rates can be usedby IFIs for the pricing of their products andfor conducting business in accordance withthe Shari’ah principles.

Questions & AnswersMuhammad Ayub, IIBI’s director of training, development and Shari’ah aspects, answers readers’ questions on various issues of Islamic finance. If you have any questions you would like answered, please contact us; details can be found on page 4.



NEWHORIZON Rajab–Ramadan 1429 CALENDAR

Diary of events endorsed by the IIBI

8: 1st Annual World Islamic BankingConference: European Summit (EuroWIBC), LondonConference to focus on issues anddevelopments of the dynamically evolvingmarket for Islamic finance in the Europeancontext. Contact: Sharon PereiraTel: +971 4 343 1200 Email: [email protected]

8: Structuring Shari’ah-CompliantFinancial Instruments, LondonConference to discuss new and innovativeShari’ah-compliant structures whilstunderstanding the key dynamics behindcompliance and enforcement in theWestern world.Contact: Susan Jacques Tel: +44 (0) 20 7878 6889 Email: [email protected]

14–16: 2nd International Takaful Summit,LondonSummit to explore the current state of this vibrant sector of Islamic finance on aglobal scale.Contact: Reza Adil Tel: +44 (0) 79 2808 5268 Email: [email protected]

28–30: Structuring Islamic Funds andREITS, SingaporeCourse to focus on Shari’ah-compliantinvestment funds, hedge funds and the newreal estate investment funds.Contact: Marilou ValdezTel: +65 6305 9622Email: [email protected]

31–1 August: Islamic Project andInfrastructure Finance, SingaporeWorkshop to focus on Shari’ah-compliantfinance tools and products used in projectand infrastructure finance. Contact: Marilou ValdezTel: +65 6305 9622Email: [email protected]

July

London

© istockphoto | Matt Kunz

Bahrain

X

12–13: 5th Middle East Insurance Forum(MEIF 2008), BahrainForum to assess potential and seize newgrowth opportunities in the Middle Eastinsurance market.Contact: Sharon PereiraTel: +971 4 343 1200 Email: [email protected]

August

8–10: IIBI Training: Structuring InnovativeIslamic Financial Products, Cambridge, UKWorkshop to focus on continuingdevelopments in innovation in Islamicfinance structures and the underlyingtechniques evolving in the modern economy.Contact: Mohammad ShafiqueTel: +44 (0) 20 7245 0404Email: [email protected]

October

14: The Rise of Islamic Finance and EthicalInvestments, LondonConference to discuss the burgeoninggrowth of Islamic and ethical investmentsand to focus on the most pressing issues inthe Islamic finance industry.Contact: Anna KoniecznyTel: +44 (0) 20 7426 3345Fax: +44 (0) 20 7426 3326Email: [email protected]

November

3: 3rd World Islamic Infrastructure FinanceConference (WIIFC 2008), DohaConference to focus on the key aspects andissues of the industry worldwide, its currentdevelopments and future prospects.Contact: Sharon PereiraTel: +971 4 343 1200 Email: [email protected]

23–25: 15th World Islamic BankingConference (WIBC 2008), BahrainConference to discuss the key issues,developments and challenges of Islamicfinance worldwide.Contact: Sharon PereiraTel: +971 4 343 1200 Email: [email protected]

© istockphoto | Douglas Freer


NEWHORIZON July–September 2008GLOSSARY

amanahLit: trustworthiness. Technically, it describes a businessdeal where one party keeps another's funds or propertyin trust.

arbounAn Islamic version of option, a deposit for the deliveryof a specified quantity of a commodity on apredetermined date.

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

fiqhIslamic jurisprudence. The science of the Shari’ah. Thisis an important source of Islamic economics.

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

HadithA record of sayings, deeds or tacit approval of theProphet Muhammad (PBUH).

HajjAn annual pilgrimage to Mecca and other holy places.The fifth pillar of Islam, Muslims have the duty toperform Hajj at least once in their lifetime.

halalActivities which are permissible according to Shari’ah.

haramActivities which are prohibited according to Shari’ah.

hawalaLit: bill of exchange, promissory note, cheque or draft.Technically, a debtor passes on the responsibility ofpayment of his debt to a third party who owes theformer a debt. It is a mechanism for settlinginternational accounts, by book transfers.

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

ijara sukuk A sukuk having ijara as an underlying structure.

ijtihadLit: effort, exertion, industry, diligence. Technically,endeavour of a jurist to derive or formulate a rule of lawon the basis of evidence found in the sources.

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

maysirGambling - a prohibited activity, as it is a zero-sumgame just transferring wealth, not creating new wealth.

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

murabahaA contract of sale between the bank and its client for thesale of goods at a price plus an agreed profit margin forthe bank. The contract involves the purchase of goodsby the bank which then sells them to the client at anagreed mark-up. Repayment is usually in installments.

musharakahAn agreement under which the Islamic bank providesfunds which are mingled with the funds of the businessenterprise and others. All providers of capital areentitled to participate in the management but notnecessarily required to do so. The profit is distributedamong the partners in predetermined ratios, while theloss is borne by each partner in proportion to hiscontribution.

qard hasanAn interest-free loan given for either welfare purposes orfulfilling short-term funding requirements. The borrower isonly obligated to pay back the principal amount of the loan.

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

salamSalam means a contract in which advance payment ismade for good delivered later on.

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

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

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

ta’awuniA principle of mutual assistance.

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

UmrahLit: visiting or attending. It is a mini-pilgrimage toMecca which is not compulsory, but highlyrecommended and can be performed at any time of theyear.

wa’adA promise to buy or sell certain goods in a certainquantity at a certain time in future at a certain price. It isnot a legally binding agreement.

wakalaA contract or agency in which one person appointssomeone else to perform a certain task on his behalf,usually against a certain fee.

zakatAn obligation on Muslims to pay a prescribedpercentage of their wealth to specified categories in theirsociety, when their wealth exceeds a certain limit. Zakatpurifies wealth. The objective is to take away a part ofthe wealth of the well-to-do and to distribute it amongthe poor and the needy.

Path Solutions offers a wide range of Islamic, AAOIFI and IAS compliant integrated solutions covering Core

Banking, Customer Services Management, Investment Banking, Funds Management,

Treasury and Trading in GCC and Global Capital Markets.

Our offerings also include project management, consulting services and outsourcing that address

the whole spectrum of the global finance industry and in specific the Islamic finance industry.

Richwith

Knowledge

The greatest poverty is the lack of intelligence.Gain a wealth of expertise with Dow Jones

Islamic Market Indexes.Now a winner of numerous awards on the quality

of its Islamic indexes, Dow Jones Indexes was the

first to launch shariah compliant indexes in 1999,

and it currently offers a galaxy of nearly 70 shariah

compliant measures covering equity and fixed

income securities across the globe. The Dow Jones

Islamic Market Indexes are the largest, most visible

and widely used set of shariah compliant indexes in

the world.

Find out precisely why our Islamic indexes are the

best measures of the market by visiting

www.djislamicmarkets.com.

“Dow Jones”, “Dow Jones Indexes” and “Dow Jones Islamic Market

Indexes” are service marks of Dow Jones & Company, Inc. Dow

Jones does not sell, nor does it sponsor, endorse, or make any

recommendation regarding the purchase or sale of any security.

Dow Jones Indexes. The markets’ measure.

saudi arabia: gateway to islamic finance interview: a

Documents