GLOBAL PERSPECTIVE ON ISLAMIC BANKING & INSURANCE

ISSUE NO. 185OCTOBER–DECEMBER 2012

DHU AL QADDAH 1433 –MUHARRAM 1434

PUBLISHED SINCE 1991NEWHORIZON

POINT OF VIEW:DO YOU NEED A FATWA?

TAKAFUL:A REPORT FROM THEINTERNATIONAL TAKAFULSUMMIT

IN THE SPOTLIGHT:AN INTERVIEW WITH MRCHAKIB ABOUZAID, TAKAFULRE

ACADEMIC ARTICLE:FINANCIAL INCLUSION – THEISLAMIC FINANCEPERSPECTIVE

FOOD FOR THOUGHT:AWQAF FUNDS – A TOOL TOENHANCE THE PERFORMANCE OF LOWERINCOME MUSLIMS

ANALYSIS:THE CASE FOR ISLAMICASSET MANAGEMENT

4TH ANNUAL IIBI-ISRAWORKSHOP

New Horizon 185_NewHorizon 28/11/2012 12:16 Page 1

“ AN EXCELLENT SUMMIT! ”

“EXCELLENT CONTENT ” “ ‘A MUST GO’ EVENT ”

“ ANOTHER OUTSTANDING SUMMIT ”Dawood Taylor, Senior Regional Executive – Takaful Prudential

Duncan Garland, Executive Director Willis Group

Susan Dingwall, Partner Norton Rose

The largest international gathering of the takaful industry reconvenes once again on the 18th-19th of February 2013. The 7th edition of this must attend series entitled 'New Frontiers' is set to look at the numerous global opportunities for growth in existing markets as well as the potential proliferation in new territories. The summit will be addressed by a distinguished international cast of practitioners who will impart their vast knowledge and experiences on those attending. The summit will also feature the 6th International Takaful Awards which is the only dedicated recognition of excellence for the Takaful industry.

18 - 19 February 2013 , Intercontinental Citystars, Cairo

www.takafulsummit.com

Summit Supported by

Ministry of FinanceArab Republic of Egypt

Featuring the 6th International Takaful Awards

Lead Partner Platinum Partner

Gold Partner

Media Partners

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SIG

NM

PIR

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NEWHORIZON Dhu Al Qaddah 1433–Muharram 1434

CONTENTS

12 Do You Need a Fatwa?

Trevor Norman asks whether everyShari’ah-compliant product needs a separatefatwa.

14 A Report from theInternational TakafulSummit

A selection of highlights from the 2012International Takaful Summit.

16 An Interview with Mr Chakib Abouzaid, CEO,Takaful Re

Chakib Abouzaid looks back at thechallenges the takaful industry has facedand shares his thoughts on the potential forfuture growth.

18 Financial Inclusion:The Islamic FinancePerspective

Zamir Iqbal and Abbas Mirakhor considerthe issue of financial inclusion and the rolethat Islamic finance can play in bringingabout greater social justice, inclusion andthe sharing of resources.

24 Awqaf Funds: A Toolto Enhance thePerformance of LowerIncome Muslims

Shabana Hasan argues that awqaf can fillthe gap left by the larger Islamic financeinstitutions which fail to address the needsof small business and relatively low-growthareas of the economy.

26 The Case for IslamicAsset Management

Datuk Noripah Kamso, Chief Executive,CIMB Principal Islamic Asset Managementargues that to reach its potential the Islamicasset management industry needs toestablish global platforms and stopconcentrating on purely domestic funds.

27 Legal Complianceversus MoralResponsibility in IslamicBanking and Finance

This report of the 4th Annual IIBI-ISRAInternational Thematic Workshop coversthe topics of moral failures in banking andfinance; product development and Shari’ah

05 NEWS A round-up of the importantstories from the last quarteraround the globe.

11 SUKUK UPDATEHighlighting some of the keydevelopments in the sukuk marketduring the last quarter.

36 IIBI LECTURESReports of the July 2012 lectureby Mr Mohammed Amincomparing the performance of theIslamic Bank of Britain and theBank of London and the MiddleEast and the September 2012lecture by Prof Habib Ahmed onintegrating waqf for realising thesocial goals of Islamic finance.

40 AWARDSList of IIBI post graduate diplomasand diplomas in Islamic banking.

41 DIARY OF EVENTS

governance; best practice for Shari’ah auditand the way forward for the Islamic financeindustry. One of the highlights of theWorkshop was the issue of a suggested‘Code of Moral Conduct’ for individualsinvolved in Islamic finance.

Mosque Arches, Morocco

NEWHORIZON October–December 2012

Mohammed Amin in his July lecture, said, ‘Islamic banks have tosucceed or fail as banks and all banks have the same purpose as anyother business, which is to make money’, but do their methods standup to moral scrutiny; are they harming others through their actions.The news that banks had been ‘fixing’ the LIBOR rate is the latest ina stream of revelations about the immoral conduct of individualsresponsible for maintaining the integrity of financial institutions.

The measures being taken by the authorities to remedy the situationdo not address these moral failures. Despite the public perceptionthat big banks are responsible for causing the financial crisis, weshould accept, like it or not, that it is the immoral conduct andpractices of individuals that are responsible. The efforts of theauthorities will almost certainly fail unless the culture that hasdominated the banking industry for the last 20 or 30 years can bechanged to incorporate a moral code that emphasises justice indealings over excessive self-interest.

In an attempt to inculcate a culture of personal responsibility overfinancial gain, individuals in the world of sport have taken a stand topromote moral values. For example, Hashim Amla, the SouthAfrican cricketer does not wear shirts with the logo of sponsor,Castle Beer, and Frederic Kanoute, a Muslim player for Spain’sSevilla Futbol Club, does not wear team shirts that display the logoof a gambling website. Majid Haq, a young Scottish spin bowler, wasallowed to cover the Caledonian Brewery logo on his strip; and thereare also rumours that footballers at Newcastle United Football Clubwill refuse to wear team kits carrying the logo of the money-lender,Wonga.

In a similar moral stand, Shari’ah scholars, senior industrypractitioners and academicians of Islamic finance decided to take asmall, but important, step toward supporting the idea of a Code ofMoral Conduct that was proposed at the 4th Annual IIBI-ISRAThematic Workshop. The Code recognises that individuals must lookclosely at their intentions and actions to ensure that they do notharm individuals, society and the environment and hold themselvespersonally accountable. The Code also recognises that individualswill face difficult choices and challenges in upholding the moralvalues and true spirit of the socio-economic justice that is the overallobjective of the Shari’ah and undoubtedly also the aspiration of allpeople. It is our hope that this modest initiative will help cultivate aculture in finance which values social justice over personal profit.

EDITORIAL

Mohammad Ali Qayyum,Director General, IIBI

Andrea Wharton

Rahim Ali

IIBI

Mohammad ShafiqueMohammed AminM Iqbal AsariaRichard T de BelderAjmal BhattyStella CoxMuhammad NasirIqbal KhanDr Imran Ashraf Usmani

Institute Of Islamic Banking andInsurance7 Hampstead Gate1A FrognalLondon NW3 6ALTel: +44 (0) 207 2450 404Fax: +44 (0) 207 2459 769Email: IIBI@islamic-banking.com

Institute Of Islamic Banking andInsurance7 Hampstead Gate1A FrognalLondon NW3 6ALTel: +44 (0) 207 2450 404Fax: +44 (0) 207 2459 769Email: IIBI@islamic-banking.com

Farhan Rafiq QuadriInstitute of Islamic Banking andInsurance7 Hampstead Gate1A Frognal London NW3 6ALUnited Kingdom Tel: + 44 (0) 207 2450 404Fax: + 44 (0) 207 2459 769Email: IIBI@islamic-banking.com

©Institute of Islamic Banking andInsuranceISSN 0955-095X

Surat Al Baqara, Holy Quran

NEWHORIZON Dhu Al Qaddah 1433–Muharram 1434 NEWS

FNB’s Shari’ah Board Resigns En Masse

Risk Sharing – A Solution to the Global Financial Crisis

In the first week of July theentire Shari’ah Board of SouthAfrica’s First National Bank(FNB) resigned. Members ofthe Shari’ah Board had becomeincreasingly concerned that,following management changeswithin the bank, the Islamicoperations of the bank werebecoming less ‘conservative’.

In a press release issued on 5 July2012 Mufti Ebrahim Desai said,‘Under the new non-Muslimsenior executives we discerned achange of attitude and lack ofdrive to be committed to themore conservative approach weadhere to. In order to steer theship into clearer waters, ameeting was held with the

Shari’ah Board, the Bank’ssenior executives andprominent businessmen fromthe Muslim community.Concerns were ironed out anda new pathway chalked outgoing forward.

‘It is with utter disappointmentthat we subsequently learnt

The International Shari’ahResearch Academy for Islamicfinance (ISRA), in collaborationwith the Islamic Research andTraining Institute (IRTI) andDurham University, jointlyorganised a one-day strategicroundtable discussion at LanaiKijang in Malaysia. This secondroundtable brought togetherreputable Shari’ah scholars,Islamic economists andpractitioners in Islamic financeto discuss risk sharing in Islamicfinance and to explore ways inwhich this risk-sharing ethoscould play a part in finding asolution to the global financialcrisis.

Key to the discussions was apaper by the distinguishedeconomist, Professor AbbasMirakhor, titled ‘Risk Sharing:The Operational Essence ofIslamic Finance’. The debatewas facilitated by Sheikh NizamYaquby (Bahraini Shari’ahAdvisor), Dr Khawla al-Nobani(Managing Partner of DirayahIslamic Financial AdvisoryServices, Jordan) and Mr. RafeHaneef (CEO of HSBC AmanahMalaysia), who commented onProfessor Mirakhor’s paper andshared their viewpoints. Thiswas followed by an opendiscussion on the topic amongparticipants, including Shari’ahscholars and economists. At theend of the day, the participantsagreed on the following KualaLumpur Declaration:

‘After lengthy deliberations onthe issue of risk sharing, theparticipants acknowledged thatthe financial crisis which startedin 2008 highlighted the fact that

the most salient feature of thedominant conventional financialsystem is the transfer of risksaway from financial institutionsonto customers, governmentsand the public at large. Islamicfinance is in a unique position tooffer an alternative to thepresent interest-based debtfinancing regime that hasbrought the whole world to theedge of collapse.

‘Bearing this in mind, the secondannual ISRA-IRTI-DurhamStrategic Roundtable Discussion(2012) agreed on the following:

• The Shari’ah emphasises risksharing as a salientcharacteristic of Islamic

financial transactions.This is not onlyexemplified inequity-based contracts,like musharakah andmudarabah, but even inexchange contracts, suchas sales and leasing,whereby risk is shared byvirtue of possession. • Risk transfer and risk

shifting in exchangecontracts violate the Shari’ahprinciple that liability isinseparable from the right toprofit.

• Sales must be genuinetransactions in open markets.

• Although the Shari’ahrecognises the permissibilityof debt, it is acknowledgedthat excessive debt hasdetrimental effects on society.

‘The recommendations of theRoundtable Discussion are asfollows:

1. Governments shouldendeavour to move awayfrom interest-based systems

towards enhancingrisk-sharing systems bylevelling the playing fieldbetween equity and debt.

2. Accordingly, governmentsshould increase their use offiscal and monetary policiesbased on risk sharing.

3. Governments could issuemacromarket instrumentsthat would provide theirtreasuries with a significantsource of non-interest-rate-based financing whilepromoting risk sharing,provided that these securitiesmeet three conditions: (i)they are of lowdenomination; (ii) are soldon the retail market; and (iii)come with strong governanceoversight.

4. There is a need to broadenthe organisational structuresbeyond traditional bankingmodels to formats such asventure capital and waqfs tofulfil the social goals andrisk-sharing features ofIslamic finance.’

Sheikh NizamYaquby

that we were clearly lied to bythese executives of the bankat that meeting. Ourcomplaint thereafter to moresenior executives fell on deafears. Independent clients ofFNB, who were part of thediscussions andcorrespondences, haveexpressed their shockingdismay at the Bank’s conduct.’

He went on to say, ‘Thosewho wish to deal with FNBIslamic Finance may do so onthe clear understanding thatwe cannot vouch for theirproducts. Those productsthat we had endorsed willremain valid for as long asthere are no changes.However, as we no longersupervise the implementation,we cannot endorse the same.’

In the immediate aftermathof the resignation FNBapplied a sticking plaster inthe form of the appointmentof Mufti Zaid Haspatel andShaykh Mahomed ShoaibOmar to oversee Shari’ahcompliance until they areable to appoint a permanentShari’ah Board. Theydescribe these two individualsas ‘a committee ofexperienced scholars’.

Interestingly, a few weeksafter the resignation MuftiEbrahim Desai, along with agroup of fellow SouthAfrican scholars, published aproposal to reform the wayin which Shari’ah boards areappointed. The proposalenvisages the establishmentof an independent Shari’ahcompliance body, funded byMuslim investors andworking independently of themanagement of banks, whichwould appoint Shari’ahboards.

restructuring or exitingbusinesses that do not meet itsinvestment criteria. HSBCremains committed to deliveringworld-class Shari’ah-compliantproducts and services forcustomers in Malaysia,Indonesia and Saudi Arabia(through SABB) and Islamicinvestments and globalwholesale Islamicfinancing/sukuk solutions(through HSBC Saudi ArabiaLimited).’

Some commentators in theMiddle East and GCC regretHSBC’s decision. They believethat some customers will not becomfortable banking with localbanks; that they preferred to dobusiness with a global bank thathas a solid reputation.Unfortunately it would appearthat there are just not enough ofthese customers to make itworthwhile for HSBC to runShari’ah-compliant retailoperations except in a very fewregions.

At the beginning of OctoberHSBC announced that it wouldbe restructuring its Islamicfinance business, focussing on itsbusiness in Malaysia and SaudiArabia, with a limited presencein Indonesia. The hope is thatthey will be able to serviceglobal wholesale customers andtheir investment businessthrough their Saudi Arabianoperations. Indifferent results inthe Middle East and GCC andthe decision by the authorities inQatar to rescind approval forIslamic window operations haveundoubtedly played a part inHSBC’s decision. (Theregulatory change in Qatar camejust months after HSBC Amanahopened its first retail branch inthe country.) HSBC had alreadysold its branch operations inPakistan in September.

The announcement said, ‘As aresult of a strategic review of itsIslamic finance business, theHSBC Group (HSBC) hasannounced that it will focus itsIslamic finance offering oncustomers in Malaysia andSaudi Arabia and maintain alimited presence in Indonesia.HSBC will continue to offerwholesale Islamic financing/sukuk products to its globalclient base through itsoperations in Malaysia andSaudi Arabia. Following therestructuring, HSBC will retain83% of the Group’s Islamicbusiness revenues.

‘In Saudi Arabia, Islamicfinancial products will beoffered through The Saudi

British Bank (SABB), in whichHSBC Holdings plc indirectlyholds a 40% shareholding.HSBC Saudi Arabia Limited, inwhich HSBC Holdings plcindirectly holds a 49%shareholding, will offer Islamicinvestments and wholesaleIslamic financing/sukukproducts to customers globally.

‘The Group will cease to offerShari’ah-compliant productsand services in the UK, the UAE,Bahrain, Bangladesh, Singaporeand Mauritius, with theexception of wholesale Islamicfinancing/sukuk products thatwill continue to be offered inthese jurisdictions and globallythrough HSBC Saudi ArabiaLimited.

‘This announcement representsfurther progress in HSBC’sexecution of the global strategyset out in May 2011 anddemonstrates the Group’scommitment to driving growthand improving returns by

NEWHORIZON October–December 2012NEWS

HSBC Announces Restructuring of its Islamic Operations

HSBC AmanahBranch in Qatar

NEWHORIZON Dhu Al Qaddah 1433–Muharram 1434 NEWS

In July Pakistan’s Securities andExchange Commission (SECP)introduced new takaful rulesintended to boost competitionand increase the sector’s marketshare (currently just 2–3% ofthe total insurance market inPakistan according to Ernst andYoung) by allowing the entry ofconventional insurers. The ruleswould allow conventionalinsurers to offerShari’ah-compliant productsalongside their conventionalofferings, providing that clientmoney is segregated.

In fact the SECP is simplyexercising an option that wasenshrined in the takaful rulesthat were first introduced in2005, which said that window

operations could be allowedafter a five-year grace period,perhaps motivated by thetakaful industry’s failure tomatch the growth of takaful inother majority Muslimcountries. Pakistan’s fiveexisting takaful operators have,however, challenged thisdecision by filing a petition in a court in Sindh province. Atthe beginning of August theSindh High Court restrained theSECP from implementing theTakaful Rules, 2012. Sources inPakistan suggest, however, that,while the petition may delay theopening of takaful windows andperhaps lead to someamendments in the rules, it isunlikely to stop the changegoing ahead.

Working with UK-basedGatehouse Bank and Saudi-basedSidra Capital, Volaw has beeninvolved in the first propertyacquisition of the Sterling UnitedKingdom Real Estate Fund(SURF), a Jersey fund establishedas an Expert Fund. SURF aims topurchase Shari’ah-compliantcommercial real estate in the UKto acquire a diverse real estateportfolio covering the office,retail, logistics, studentaccommodation and lightindustrial sectors, to reach itstarget equity size of £100million.They have already made theirfirst acquisition in Huntingdonnear Cambridge at a cost of£23.55 million.

Hani Othman Baothman,Managing Director and CEO ofSidra highlighting the reasonswhy Sidra have chosen tobecome involved in SURF, said,‘By diversifying our risk acrossmultiple asset classes, SURF’smixed portfolio will provide aneffective hedge againstinflation.’ He added that heconsidered the UK to be one ofthe most mature, transparent,well-regulated and liquidmarkets in the world.

Speaking about the attractionsof the UK property market,Richard Thomas, CEO ofGatehouse said, ‘The UK realestate sector provides a

ADIB Launch Community Banking

Abu Dhabi Islamic Bank(ADIB) has launched ADIBCommunity Banking toaddress the bankingrequirements of non-profitorganisations and governmentand private organisationsfocused on serving the UAEcommunity. The bank willprovide customised bankingservices to community-oriented entities and charitableinstitutions as part of its socialresponsibility initiatives.

Explaining the rationalebehind this new business line,

Trad Almahmoud, CEO ofADIB Group said: ‘ADIBCommunity Banking is a uniqueand specialised customersegment that complements ourmission and shared values inserving the communities inwhich we operate. Its primaryobjective is to supportnon-profit organisations byhelping to redeploy their incomemore effectively. As a bank, weare providing clearopportunities to theseorganisations by cross-sellingour products and services butwhat we are primarily looking

to do is to create new productsfor them.’

ADIB Community Banking willbe led by AbdulrahmanAbdulla, Head of StrategicClients Group at ADIB. He hasthree decades of experience inthe banking industry and played a key role in establishing ADIB PrivateBanking Group. Abdulrahmanis responsible for all of thebank’s strategic clientrelationships and is ViceChairman of ADIB Securities,the group’s brokerage.

In addition to their range ofcurrent products and services, the strategy withinADIB Community Bankingincludes introducinginvestment products, such assukuk and advanced servicessuch as cash managementsolutions, endowmentmanagement options andbusiness planning andadvisory services. ADIB also intends to play animportant role in sponsorship and partnershipopportunities as itsrelationships grow.

New Takaful Rules inPakistan Challenged

Volaw Advises the SterlingUnited Kingdom Real Estate

Fund

Bank Negara Malaysia (BNM)has introduced a frameworkfor agent banking, which willallow banks to offer bankingservices through non-bankretail outlets. It is believed thatthis may particularly helpIslamic banks as thepercentage of Muslims in rural

areas is typically higher than inthe major cities.

Authorised banking agents willprovide the basic bankingservices of accepting depositsand facilitating withdrawals.Other basic banking servicesthat can be provided by the

agents are fund transfers, billpayments and financingrepayments. All transactionswill be conducted on a real-timebasis to protect the interest ofthe public.

This change in the rules followsa pilot scheme in which three

financial institutions took part.During the pilot more thanone million transactions worthmore than RM190 millionwere conducted through 2,322agents.

The guidelines issued by BNMoutline the requirements to be

NEWHORIZON October–December 2012NEWS

compelling investmentopportunity, which has arisenfollowing heavy falls incommercial property values dueto the impact of the financialcrisis. As yields return to thelong-term historical average andrental growth establishes itself,SURF’s real estate investments

should generate solid returns forits investors.’

Volaw will administer thestructure and will be responsiblefor its ongoing administration.Trevor Norman, Volaw’sDirector of Funds and SPVGroup, commenting on Volaw’s

qualifications for undertakingthis role, said, ‘Our experience inmatching our wealth structuring,UK property investment andfunds expertise to our knowledgeof Shari’ah finance createssignificant advantages for ourclients. We have been involved inseveral large-scale UK property

transactions recently using Jerseystructures, which are ideallysuited for this purpose. We lookforward to working withGatehouse Bank again on future transactions as the market for Shari’ah-compliantreal estate investment continuesto grow.’

Morocco Demonstrates Strong Interest in Islamic Finance

Key findings from Morocco’sfirst independent market studyof the potential for Islamicfinance points to very stronglocal interest with more than80% of the Kingdom’sconsumers indicating that theyare likely to take upShari’ah-compliant financingloans. The study wasindependently commissionedand published by IFAAS (IslamicFinance Advisory & AssuranceServices), an Islamic financeconsultancy with offices in theUK, France and Bahrain.

The report sets out the marketopportunities for financialinstitutions interested indeveloping an offering for theMoroccan consumer market. Itprovides a full analysis of the

consumer demand for Islamicretail banking, finance andtakaful and measures the likelyconsumer response to and take-up of such products.

Commenting on the findings,Farrukh Raza, managingdirector, IFAAS said, ‘Thefindings from the report revealthat consumer interest in Islamicfinance has the potential to bemuch bigger than currentlyexpected. The challenge fordecision makers is to ensure thattheir early critical decisions arebased on accurate marketinformation to ensure long termsuccess.

The study was conducted viarandom, face-to-face, streetinterviews with a weighted

sample size of more than 800individuals, structured toprovide an accurate picture ofthe Moroccan consumer market.The samplecomprised bothmen and womenaged 18 to 55years, from avariety ofsocio-economiccategories, livingin urban and ruralareas andincluding bothbanked andunbanked groupsof the population.In terms ofgeographicalcoverage, thestudy wasconducted in

towns and surrounding ruralmunicipalities of Casablanca,Rabat, Marrakech, Agadir, Fez,Tangier and Oujda.

New Banking Rules in Malaysia Set to Expand Rural Access

NEWHORIZON Dhu Al Qaddah 1433–Muharram 1434 NEWS

observed by financialinstitutions in theareas of governanceand oversight,management ofagents, customerprotection, awarenessand education. All

developed a comprehensiveprofit distribution and poolmanagement framework inconsultation with the industryand added that the frameworkwill be issued most probably bythe end of September 2012.

The almost quarterly issuance ofsovereign sukuk worth US$4 billion (USD 4 billion approx)has helped to address theliquidity management issue of theIslamic banking industry inPakistan. The next step is to raiseawareness of Islamic banking andin pursuit of that goal the SBPwill shortly launch a mass mediacampaign to create awarenessabout Islamic banking.

Referring to challenges facingthe industry, Mr Muktadir said

that one of the main challengeswill be to develop suitablyqualified and trained people tohandle this. Another will be thediversification of the asset mix,tapping into non-traditionalsectors such as agriculture andsmall and medium enterprises(SMEs). ‘Presently the IBIs’exposure in these sectors isnominal; that needs to beincreased significantly, whichwould not only improve theirreputation amongst the masses,but would also provide themwith an attractive avenue todevelop and expand their assetportfolios,’ he said, adding thatthe SBP would be willing toprovide the necessary support toIBIs to build portfolios in thesenon-traditional, but strategicallyimportant, sectors.

Kuala Lumpur,Malaysia

Kazi Abdul Muktadir, DeputyGovernor, State Bank of Pakistan(SBP) has said the central bank isdeveloping a new five�year(2013–17) strategic plan for theIslamic banking industry. ‘Thenew plan will set the strategicdirection for the Islamic bankingindustry. This will define thestrategies and action plans tomove the industry to the nextlevel of growth and SBP willexpect the active and meaningfulinvolvement of the industry indevelopment of the plan.’

He said the Islamic financeindustry is likely to increase itsshare in the banking system to15% during the next five years.Growing from scratch in 2002,he said that Islamic bankingnow constitutes more than 8%

of the country’s banking systemwith a network of 964 branchesand over 500 windows acrossthe country. In addition Pakistancurrently has five takafuloperators and an estimated 30Islamic mutual funds.

Mr Muktadir also disclosed thatthe State Bank is developing acomprehensive Shari’ahgovernance framework tofurther strengthen the Shari’ahgovernance in Islamic bankinginstitutions (IBIs). Theframework will explicitly definethe roles and responsibilities ofdifferent organs of IBIsincluding the board of directors,Shari’ah advisors/committeesand executive management forensuring Shari’ah compliance.He said that the State Bank has

authorised banking agents willhave to display a national agent banking logo togetherwith the logo of the financialinstitutions.

The jury is out on just howsuccessful agent banking will be.

The main concern seems to bearound profitability due to therelative poverty of many ruralareas. To some extent thesuccess of the scheme willdepend on how well bankscan control the costs ofrunning an agent network.

Pakistan to Implement New Shari’ah Governance Framework

Leadership Change at IILM

The International IslamicLiquidity Corporation hasannounced the immediatereplacement of CEO, MahmoudAbuShamma with Rifaat AhmedAbdel Karim. No statementswere issued either from theIILM or Mr AbuShamma as tothe reasons for his suddendeparture – about half way

through what is believed to havebeen a three-year contract.

The IILM’s job was never goingto be easy and the fact that theyhave twice postponed the launchof their first short-term sukukmay give some indication of thereasons behind the change ofleadership. Mr AbuShamma had

previously worked in HSBC’sIslamic banking operation, whileProfessor Datuk Rifaat was thefirst Secretary General of bothAAOIFI and the IslamicFinancial Services Board,organisations perhaps moreaccustomed to conducting thedelicate negotiations needed tobring together different

countries and Islamic schools ofthought to achieve consensus. Itwill be interesting to see whetherthis change can expedite theissuance of the IILM’s firstsukuk and begin to deliver onthe IILM’s key role of extendingthe range of high-qualityliquidity instruments available toIslamic financial institutions.

At the beginning of August2012 Islamic wealth managerLotus Capital and Nigeria’sbourse (NSE) launched a debutindex of Nigerian StockExchange-listed companies thatcomply with Islamic investmentprinciples. The NSE LotusIslamic index, which covers 15equities with a combined marketcapitalisation of around 2.87billion naira ($18m), excludesbanks, companies with highlevels of debt or leverage andother stocks that conflict withIslamic principles. It is believedthat this move is aimed atattracting more Middle Easterninvestment into Nigeria

With the well-documentedconsumer dissatisfaction withthe UK banking sectorcontinuing, the Islamic Bank ofBritain plc (IBB) stepped up itsefforts to attract consumersinterested in offerings fromethical providers by launching aTwo Year Fixed Term Deposit(FTD) account with an expectedprofit rate of 4%. The minimumdeposit for savers wishing totake advantage of thelimited-term offer was £1,000.The offer was a limited-periodRamadan promotion. IBB havereported that the offer led to a10-fold increase on applicationsin the previous month, with55% of applicants coming fromnon-Muslim customers.

India’s soul searching about theintroduction of Islamic bankingcontinues with the IndianMinistry of Finance recentlyasking the Reserve Bank of Indiato reconsider the issue, althoughit would probably be introducedwith a non-religious tag, such as

‘participatory banking’. Such amove would undoubtedly makebanking more attractive toIndia’s very large Muslimpopulation, but the main driverfor a decision in favour of Islamicbanking would probably beeconomic – the desire to attractinvestment from the Middle East.

Regional newspapers havereported that investors fromBahrain and the United ArabEmirates have applied for alicense to set up an Islamic bankin Iraq. It is understood thebank will have a paid up capitalof $240 million.

According to the Financial TimesDeutschland, Turkey’s KuveytTurk investment fund plans toopen the first Islamic bank inGermany in October. It isunderstood that the first branchwill be in Frankfurt am Mainwith others planned for citieswith large Muslim populations.

Qatar’s Masraf Al Rayan haslaunched a brokerage operation.Called the Al Rayan FinancialBrokerage Company (ARB), it isa wholly owned but completelyindependent subsidiary operatingunder the Qatar FinancialMarket Authority (QFMA) andis a member of the QatarExchange. Initially the companywill offer its clients the ability tobuy and sell shares by visiting themain office in Al Emadi FinancialSquare, by contacting the ARBcall centre or via its online ‘E-trade system’. In the secondphase, ARB will add morefeatures such as IPhone/IPadapps, the more advanced E-tradePlus and a customer standalonemy-port system.

It is reported that Omaniinsurance companies areunhappy about the proposalsfrom Oman’s Capital Markets

Authority (CMA) on theestablishment of takafuloperations in the country. TheCMA are proposing that takafuloperations in Oman should bestandalone companies with aminimum capital ofRO 10 million (almost$26 million) and a three-memberboard. Local insurance operatorsapparently see this as a barrier toentering the takaful industry,which will tend to favour foreigncompanies. They are equallyunhappy about the two-weekconsultation period on theproposal; they say it is notenough

Bank Muamalat Malaysia hassigned a memorandum ofunderstanding with the Bank ofShi Zui Shan of China to set upan Islamic bank in China. Theplan initially is to use the Bankof Shi Zui’s 23 branches inNingxia province to openIslamic window operations,followed by a wholly Islamicbank in about two years’ time.

Bank Nizwa, Oman’s firstIslamic bank is seeking a waiverfrom Oman’s central bank toallow it to open purely as aretail bank. The bank believesthat it will take time to developthe corporate loans portfoliothat central bank regulationsinsist must form a proportion ofbank business.

The World Bank and IslamicDevelopment Bank have signeda Memorandum ofUnderstanding (MoU) to set outa framework for collaborationbetween the two parties andlend support to global, regionaland country efforts in thedevelopment of Islamic Finance.By sharing knowledge and ideas,the two organisations hope tobe able build capacity in theIslamic finance industry with a

view to promoting economicstability, achieving developmentgoals and alleviating poverty.

Following shareholder approvalat an Extraordinary GeneralMeeting Ithmaar Bank, aBahrain-based Islamic retailbank, has announced that it willmerge with one of itsBahrain-based associates, FirstLeasing Bank. The merger issubject to final regulatory andlegal approvals. The mergerinvolves a 4:1 share swap andhas a nominal value ofapproximately $60million. Themerger is expected to becompleted by the end of 2012.

The government of Oman arereported to be taking advice onamendments to tax laws tocreate a level playing field for itsnascent Islamic financialinstitutions. The consultativeprocess is being facilitated byKPMG who are expected toreport in approximately sixmonths, although any legislationis likely to take longer to enact.

The Egyptian Islamic FinanceAssociation formed in February2012 is set to launch a list ofShari’ah-compliant equities inan effort to help raise awarenessof Islamic finance in Egypt. Thelist will be approved by theAssociation’s Shari’ah board,which will be basing itsdecisions on AAOIFI standards.

NEWHORIZON October–December 2012NEWS

In Brief

In issue number 184 on page29 there was an error in thelayout of MohammedAmin's accounting articleunder the heading Analysis.The short section headed'Conclusion' should havebeen included in the boxedexample section highlightedin yellow.

NEWHORIZON Dhu Al Qaddah 1433–Muharram 1434 SUKUK UPDATE

Sukuk Market Continues to Grow

After strong first half performance thesukuk market continued to grow in July2012, which recorded the best monthlyperformance this year and the secondhighest month ever for the market.Commenting on this performance, PaulBateman, Senior Risk Manager at the Bankof London and the Middle East commented,‘Islamic bond issuers have responded to thecompelling factors that are putting pressureon them to bring new transactions. Thecurrent low interest rate environment haspushed down borrowing costs to veryattractive levels, which borrowers want tolock in by issuing long-dated, fixed-rateobligations. In addition, the rebound ineconomic performance seems to beoccurring faster in parts of the Middle Eastregion than in the West, causing a flow ofcapital to push up local bond prices. Thelack of supply of dollar-based Islamic bondsis a technical factor that supports currentpricing and will likely continue to do sountil a marked increase in issuance occurs.’

There is some suggestion that the currentdemand for sukuk is being driven byinvestor nerves about Europe and thecontinuing Euro crisis. It is possible thatthey see sukuk, based on real assets, as asafer home for their funds.

Ernst and Young in their latest report on thesukuk market largely concur with theseviews and expect the sukuk market to growfrom its current level of US $300 billion toaround US $900 billion by 2017. They do,however, point out that growth is somewhatconstrained by the absence of a global,standardised sukuk trading platform.

Meanwhile Standard & Poors have published areport ‘Beyond Borders’ suggesting thatanother driver of growth in sukuk issuancecould be the GCC’s burgeoning requirementfor infrastructure finance. They also believethat GCC companies looking for projectfinance will be increasingly attracted to

Malaysia for their fund-raising activities,because Malaysia has a clear andwell-established framework for sukuk issuance.

New Bond and Sukuk Framework forMalaysia

Once again Malaysia seems to be taking alead with the recent announcement of abond and sukuk framework to allow retailinvestors direct access to the markets. Thenew framework allows bonds and sukuk tobe traded on Bursa Malaysia (the Malaysianstock exchange) or via banks throughover-the-counter trades. Initially, the schemewill be limited to government-issued bondsand sukuk, with a second phase toincorporate issues from public listedcompanies and licensed banks. The newframework regulations are expected to beissued in January 2013.

Turkey’s First Sovereign Sukuk

In mid September Turkey’s first sovereignsukuk was almost five times oversubscribed.More than half the investors (58%) werefrom the Middle East, with European andAsian investors accounting for 13% and12% respectively. Turkish investors took up9% and the balance (8%) by US. Thefive-and-a-half year bond was priced toyield 2.803% more or less equivalent toTurkey’s sovereign Eurobond due in 2018.Commenting on the issue, Jason Kabel,Head of Fixed Income at Bank of Londonand The Middle East said, ‘It is encouragingthat a country outside of South-East Asia orthe GCC is issuing a sukuk of this size in USdollars. The interest in this sukukdemonstrates the huge demand for USdenominated sukuk in the internationalmarket. We expect to see more governmentsand institutions take advantage of thisdemand over the last quarter of 2012.’

Thomson Reuters Launch Global SukukIndex

Perhaps reflecting the growing importanceof the sukuk market worldwide, Thomson

Reuters have launched the ThomsonReuters Global Sukuk Index in an attemptto bridge the challenge of informationasymmetry in the global sukuk market.Rushdi Siddiqui, global head of Islamicfinance at Thomson Reuters commenting onthe somewhat turbulent state of the sukukmarket said that the launch was a responseto the need for an independent benchmark,including independent pricing, to measureaccountability and performance. It was alsohoped that the benchmark would help toencourage the growth of secondary markets.

Ireland’s Electricity Supply Board ConsiderIssuing a Sukuk

Ireland’s Electricity Supply Board (ESB) isrumoured to be considering issuing a sukukin Malaysia. The company recently raised€600 million through a conventional,five-year bond, but their capitalrequirements for the year to June 2013 arelikely to exceed €900 billion. Any sukukwould be backed by ESB’s assets worth€12 billion including seven thermal and 10hydro power stations. Apparently anapplication has been submitted toMalaysia’s central bank and the timing of anissue will depend on when that is approved,but it could be as early as January 2013.

Qatar International Islamic Bank List Sukukon Irish Stock Exchange

Qatar International Islamic Bank (QIIB) hassuccessfully priced a US$ 700m five-yearsukuk issued at par with a 2.688% annualprofit rate, which will be settled semi-annually. The transaction represents QIIB’sfirst international debt capital marketsissuance. The Trust Certificates will be listedon the Irish Stock Exchange. QIIB areworking towards extending theirinternational sukuk issuance throughstrategic partnerships and possibly evenacquisitions in key markets around the world.The geographic split for the allocation was50% for the Middle East, 30% for Asia, and20% for UK/Europe/US Offshore investors.

Sukuk Update

NEWHORIZON October–December 2012POINT OF VIEW

In common with their conventional financecounterparts, Shari’ah compliant financialproducts created primarily for sale toMuslims will be structured so as to complywith the rules and regulations relating tofinancial products in the jurisdiction inwhich the product is being created andthose pertaining to where it is to be sold. Inaddition, in order to confirm that theproduct is structured in accordance with theprinciples of Islamic finance, it is normalpractice for the product to be certified assuch by the issuance of a fatwa.

A fatwa is a religious opinion or ruling onIslamic law issued by an Islamic scholar, orgroup of scholars. It is an interpretation bythe scholar(s) of the Shari’ah on theapplication of its texts and principles to theparticular product. These principlesthemselves are a framework of IslamicJurisprudence derived from The Qur’an andthe Sunnah and as such a fatwa has a veryimportant role in Islamic law andjurisprudence. Whilst a fatwa may berequired as a ruling on many aspects of aMuslim’s personal and professional life, thisarticle will concentrate on the role of afatwa within the context of Islamic financeand where scholars or Shari’ah advisorshave issued a fatwa to certify thecompliance with Shari’ah law oftransactions and products within the Islamicbanking and finance sector.

The requirement for a fatwa for each andevery individual product or structure withinIslamic finance is often seen as one of themajor obstacles to institutions entering theIslamic finance market as the institution willneed to employ relevant scholars, normallyin the form of a Shari’ah Supervisory Board(SSB) to review the product and issue thefatwa. This can be costly to the institutionboth in terms of time and fees, costs which

normally will ultimately be borne by theconsumer and has led to some criticism thatShari’ah-compliant financial products aremore expensive than their conventionalcounterparts.

Indeed, it is not uncommon for a product tobe examined and opined on by more thanone SSB, particularly where a product issponsored or originated by one institutionand this is then sold to, or distributed by,another Islamic Finance Institution, (IFI). Ifthere are different Shari’ah views this mayrequire structures and documents to bereviewed and changes agreed, which canlead to further delays and related costs,which in turn may lead to the product itselfnot achieving the forecast returns or resultsthat had been anticipated when the productwas originally proposed.

But is all this certification necessary,particularly when transactions areundertaken between two IFI’s or where thepurchaser is a sophisticated investor whounderstands the product he is investing in?

Many Islamic financial products follow asmall number of very standard transactionmodels for which there are Shari’ahstandards in accordance withannouncements by AAOIFI – theAccounting and Auditing Organisation forIslamic Financial Institutions. These modelshave been used in a large number oftransactions for over 20 years, with littlechange in their use or the structure of theunderlying documentation for which thereare many internationally acceptedprecedents and as such it is hardlysurprising that some investors questionwhat value a fatwa adds to this process. Insome cases, however, these changes mayrepresent variances in different commercialarrangements.

Similarly, some investors argue that it is amatter for their personal judgement todetermine whether or not they consider aproduct to be Shari’ah compliant. Islamicfinance is by its very nature a ‘faith-based’commitment and therefore it is a matter forthe individual concerned to be happy thatthey are investing in an appropriate manner.As noted above, a fatwa derives from theinterpretation of the Shari’ah by a scholaror group of scholars and how this applies to the particular product or transaction. A commonly heard expression is that ‘the Shari’ah is infallible, it is man’sinterpretation that is fallible’ and there havebeen many examples where the validity of aparticular financial product and/or therelevant fatwa has been questioned, butnevertheless the product still seems to findwilling investors.

Two examples of this are some of theIslamic hedge fund structures that werebeing promoted in 2007/8 and the Islamicmortgage structures being promoted bysome banks in the UK and elsewhere. In thecase of the hedge fund, a swap mechanismwas used to create a return within aShari’ah-compliant structured productwhere that return could be seen as beingderived from a non-compliant investmentstructure. For the Islamic mortgage, thecriticism is that the rental being charged bythe bank to the borrower under thediminishing musharakah contract is notbased on the actual rental value of theproperty being acquired, but is actuallyderived from the cost of funds beingborrowed and therefore the time value ofmoney. This would imply that the contractis based on riba and therefore should not beallowed. Such structures are sometimesjustified on the basis of exceptions grantedby scholars under the doctrine of necessity,dharura, i.e. there is no alternative

Do you need a fatwa?

Trevor Norman, Director of Islamic Finance and Funds Group at Volaw Trust &Corporate Services Limited in Jersey, looks at whether every Shari’ah-compliantfinancial product needs a separate fatwa.

NEWHORIZON Dhu Al Qaddah 1433–Muharram 1434 POINT OF VIEW

available. But whilst the doctrine of dharurahas enabled the industry’s evolution andallowed for certain financial structures toevolve from concept to mainstream status,continued reliance and usage of thisdoctrine could very well threaten thecredibility and future of Islamic finance.

One criticism that is regularly made is thatthe fatwa as published with the financialproduct is often very short and gives littleexplanation about how the SSB has reachedits conclusions leading to calls for greatertransparency in the process that led to thefatwa. Added to this is the complication ofthe different schools of Islam, such thatwhilst the basic principles are commonlyagreed, there can be significant differencesbetween the schools on certain points ofdetail, details that can be criticallyimportant in some financial structures. Themost commonly quoted example being inthe tolerance of certain types of hedging inMalaysia, whereas this is seen asunacceptable by scholars in most GCC

countries. It follows that a fatwa issued by ascholar from a particular school of thoughtmay not be relevant to a Muslim fromanother school.

It has been suggested that these differenceshave allowed certain institutions toundertake ‘fatwa shopping’ whereby theyactively sought to use the differences ininterpretations by different schools and/orscholars to seek out scholars who wouldapprove their products as being Shari’ahcompliant. In such cases it was claimed theinstitutions were seeking a fatwa to fit theirneeds, rather than adapting their structuresand needs to comply with the requirementsof the fatwa. There seems to be littleevidence that fatwa shopping actually tookplace, indeed, in the authors experience, it ismore important to have a product approvedby as wide a group of scholars as practical,particularly those from different schoolsand/or countries, as this can have a positiveeffect on the ability to market the product toa wider range of Muslims around the world.

These discussions should not be seen asquestioning the importance of a fatwa as ameans of certifying the work ofprofessionals and institutions in devisingShari’ah compliant financial products,particularly where the structure involves theuse of complex financial techniques, orequally where the product is to be sold toretail investors who may not have sufficientrelevant knowledge themselves to evaluatewhether a product is Shari’ah compliant.

Innovation is needed to meet the growingdemand for Shari’ah compliant financialproducts. Institutions and their advisers facean uphill struggle in ensuring that theseproducts meet increasingly stringent rulesand regulations within the financialmarkets, whilst continuing to use the long-established forms of Islamic financecontracts and agreements on which AAOIFIand others have published guidance.However, these institutions often find itdifficult to get real engagement with thelimited pool of scholars who areappropriately qualified and experiencedenough to assist with ensuring that thisinnovation complies with the principles ofShari’ah and give guidance where problemsare identified. If these same scholars wereless involved in preparing fatwas for themore commonly accepted products becausethere was greater consensus in theacceptability of these structures, it would behoped that they should be able to devotemore time to the more innovative andcomplex areas requiring development andapproval within the world of Islamicfinance.

The real importance of a fatwa as a meansof confirming that a financial productcomplies with the principles of the Shari’ahseems to have been somewhat lost and afatwa has become more of a marketing toolin the same way a conventional bond needsto have a rating if it is to be accepted by thefinancial markets. Increased transparency isneeded so that retail investors in particularcan understand the financial products beingoffered to them and the processes behindthe granting of a fatwa to enable them tomake a more informed decision in thefinancial products they select.

Trevor Norman joinedVolaw in 1988 and wasappointed a director in1989. He is a Fellow ofThe Institute of CharteredAccountants in Englandand Wales, havingqualified as a CharteredAccountant in 1983. Hegained an Honours Degreein Business Studies in1980 and is a member ofthe Society of Trust andEstate Practitioners(STEP), the InternationalTax Planning Associationand the Institute ofDirectors. Trevor is anacknowledged industryspecialist in Islamicfinance having worked ona wide variety of Shari’ah-compliant productsincluding several realestate funds, variousspecialist Shari'ahscreened equity funds andthe award-winningCaravan I securitisationsukuk.

NEWHORIZON October–December 2012TAKAFUL

The 6th International Takaful Summit washeld in London in July 2012, concentratingon the theme, ‘Takaful and Retakaful –Planning to Overcome the Challenges toGrowth.’ The report below highlights aselection of the discussions and findingspresented at this year’s event.

The International Takaful Report2012–2013

While the Shari’ah industry is growingworldwide, according to some sources fasterthan the conventional insurance industry,there is often a sense of disappointment thatit is not growing faster and particularly insome countries, where logic suggests thereshould be good business opportunities. Thereality is that growth is obstinately stately.The keynote presentation at July’s TakafulSummit in London based on a reportproduced by Bilal Khan and Badrul Hasanthrows some light on the reasons why thismay be. Bilal Khan and Badrul Hasan areboth Shari’ah scholars, Islamic financelawyers and directors of Dome Advisory.

While there have been numerous reports onthe commercial aspects of the takafulmarket, The International Takaful Report2012–2013 focuses on the Shari’ah andregulatory background. The reportpresented at the conference is apparently a

precursor of a much weightier document,which will be entitled the LegalPractitioner’s Guide to Islamic Insuranceand Reinsurance. The presentation focusedon the GCC countries – the UAE, Qatar,Bahrain, Oman, Kuwait and the Kingdomof Saudi Arabia (KSA).

The report highlights the fact that the legaland regulatory landscape across the regionis very fragmented and that there is noconcept, such as exists within the EU, toenable an operator licensed in one GCCcountry to automatically operate withinanother country in the region. To addadditional spice to the mix free trade areassuch as the Dubai and Qatar FinancialCentres have different rules from their hostcountries. For example, companiesoperating in the free trade areas are notrequired at the moment to have aproportion of their staff drawn from thelocal population.

In addition some jurisdictions have beentrying to discourage new entrants to thetakaful and retakaful markets. The UAEimposed a moratorium on new entrants in2008 and Saudi Arabia is activelydiscouraging new entrants. Thus anyonewishing to enter these markets must eitheracquire another company already operating

there or set up some sortof partnershiparrangement.Acquisitions are,however, fraught withdifficulties as mosttakaful and retakafuloperations in the GCCare relatively new, whichmakes it difficult to valuethem and conduct ameaningful due diligenceexercise.

The opening of Islamicwindows by existingoperators is also

complicated. For example, Islamic windowsare definitely not permitted in the UAE andBahrain, but in Qatar the situation is farfrom straightforward. In the light of thatcountry’s 2011 decision to instruct banks toclose down window operations, it is,however, unlikely that permission would begiven for Islamic insurance windowoperations, although there is nothing statingclearly that this is the case.

At the present time insurance regulators inthe GCC do not review operators to ensurethey are Shari’ah compliant, but again thereare signs that changes may be in thepipeline. The UAE, for example, has enactedmeasures that will lead to the establishmentof a Supreme Committee for Fatwa andShari’ah Supervision to oversee takaful and retakaful operations. This SupremeCommittee has, however, yet to be set up.

The lack of clarity, evolving legislation andregulation plus the virtual impossibility ofestablishing regional, let alone internationaltakaful and retakaful operations are perhapsamong the reasons inhibiting strongertakaful growth.

It is perhaps difficult to reconcile the ideathat takaful growth is not reaching its fullpotential given some of the statistics quotedat the conference – growth rates that areoutpacing conventional insurance. Forexample, in 2010 takaful grew 28% in theUAE compared to 10% for conventionalinsurance and 43% in Egypt compared to4%. It sounds very impressive, but takaful isgrowing from a very small base, whichmeans that in terms of actual growth inpremiums takaful is still a fraction of thegrowth in conventional insurance.

Opinions of Contributors to Family Takafulin Saudi Arabia

Perhaps rather more thought provoking arethe results of a survey conducted amongholders of takaful policies in Saudi Arabia.

A Report from the International Takaful Summit

Sheikh Bilal Khan receives theaward for best young takafulscholar from Lord Sheikh

NEWHORIZON Dhu Al Qaddah 1433–Muharram 1434 TAKAFUL

The study was conducted by Dr HashemAbdullah AINemer among 300 individuals,who were contributors to family takafulschemes offered by five different takafuloperators in Jeddah.

It seems that takaful customers are verysimilar to insurance customers in general.When they were asked why they had takenup takaful insurance the results were asfollows:

To benefit insured and the insured’sfamily 85.3%

To help other participants in need 1.3%To comply with Shari’ah requirements 35.7%

Dr AINemer concluded based on theseresults and further questions about thesharing of underwriting surpluses andunderlying knowledge about the principlesof takaful that the main reason forcontributing to a takaful scheme were forthe expected financial return and that ‘there is no effect at all for religiousmotivation.’

Positioning Takaful for the Non-MuslimMarket

If takaful’s supposed USP (unique sellingpoint), its Shari’ah compliance, is not in factthat important to policy holders, where dotakaful companies turn to boost theirgrowth rates? Dr Volker Nienhaus, VisitingProfessor, Reading University, in hispresentation suggested that there may beopportunities for takaful operators in non-Muslim markets by transforming theiroffer into a socially responsible/ethicalalternative. That would assume that theycould compete with conventional operatorsin terms of innovative products and pricing,but critically it would require greater careand disclosure about investments. Shari’ahscreening would certainly exclude manyinvestments that socially responsible/ethicalinvestors would consider unacceptable, butnot all. For example, businesses involvingthe exploitation of natural resources – oil,gas, minerals and timber would usually beShari’ah compliant, but might not beconsidered acceptable by ethical investorsfor social or environmental reasons.

Dr Nienhaus believes that to be successfultakaful operators would need to review thecomposition of their Shari’ah boards andsuggests the following would need to betaken into consideration:

• inclusion of people with competency inimpact analysis (irrespective of theirreligion or knowledge of Shari’ah)

• translation of Arabic terminology into‘plain English’

• explanation of the ethical/SRI qualities ofparticular products (that exceed the mereexclusion of haram businesses) in fulldetail

• selection of Shari’ah experts with only areasonable number of other boardmemberships or – more radical – makingShari’ah scholars redundant through theuse of standard Shari’ah contracts; thecompetitive advantage is not in thecontract design but in the asset quality(within the universe of generally acceptedShari’ah compliant assets [lists providedby specialised information serviceproviders]);

• employment of external Shari’ahconsultancy firms for the (few) remainingproduct design issues and emphasis onportfolio management and impactanalysis.

The Mutual Model

Another theme that featured in severalpresentations was the usefulness of thefriendly society and mutual models for thetakaful industry. In The InternationalTakaful Report 2012–2013 Bilal Khan andBadrul Hasan discuss ‘the potential for theindustry to harness the friendly society andmutual models that have enjoyed long-standing success in the UK and Europe andwhich represent a much simpler Shari’ah-compliant structure than the commonTakaful models in use today.’ They commentthat friendly societies and mutuals sharemany of the virtues espoused by the Shari’ahand are part of the same ethical tradition ofenvironmental and social stewardship aswell as cooperation and solidarity betweenindividuals and communities.’

In particular the authors draw attention tothe fact that friendly societies in the UK,

although regulated by the Financial ServicesAuthority (FSA) do not have to hold interestbearing instruments as capital or to chargeinterest on loans to members. In addition allcontributions to friendly societies must bemade on a voluntary rather than acontractual basis and as the payment ismade to contributors’ families in the case ofadversity or on the death of the contributorthere is no element of gambling on anuncertain future event. It is also incumbenton friendly societies to engage in social andbenevolent activities, allowing them todonate surpluses to charities. Any UK basedfriendly society would be able to operatethroughout the EU without requiringfurther permission from other membercountries. While there could be issuesaround raising the capital that the FSAwould require, the authors of the reportbelieve that these could be overcome.

They say, ‘This is an opportunity for theindustry to present the true essence ofIslamic finance and extend its arm insolidarity to offer comprehensive andparadigm-shifting solutions to the viciouscycle of modern day economic crises.’

The lack of clarity, evolvinglegislation and regulation plusthe virtual impossibility ofestablishing regional, let aloneinternational takaful andretakaful operations areperhaps among the reasonsinhibiting stronger takafulgrowth.

NEWHORIZON October–December 2012IN THE SPOTLIGHT

Could we begin with an explanation of howtakaful differs from conventional insurance?

Takaful differs from conventional insurancein that it is based on tabarru (donations); allpolicies and investments are under thesupervision of a Shari’ah board comprisinga minimum of three Shari’ah scholars; allinvestments must be Shari’ah compliant andshareholder and policyholder funds must besegregated. Today takaful is a hybridsolution, a combination of a mutualorganisation and a shareholder operation.Retakful operates in a similar manner,except that it is in effect, insuring theinsurers. In fact at first the takaful industryhad to operate without fully Shari’ah-compliant reinsurance, although today thereare 14–15 retakaful operations.

What are the fundamental similarities anddifferences between retakaful andreinsurance?

Let me start with the similarities. We aredoing exactly the same underwriting and riskassessment as the conventional reinsuranceindustry. Technically speaking we are nodifferent except for the type of risk we areunderwriting; we cannot underwrite anyharam businesses. The main difference is thatwe have a completely different businessmodel; it is based on brotherhood andsolidarity and this is what makes ourbusiness really mutual. In addition, ourbusiness is based on donations to a pool, notpremiums. The pool is the property of thepolicyholders and the takaful company is thecustodian of that pool with a duty to make itprofitable for those policyholders.Shareholders are rewarded throughinstruments such as wakala; in effect anupfront fee, and obviously improvements inthe profitability of the pool will also increasethe returns for the shareholders.

What developments have you seen intakaful since it first started in the late 1970sand where, geographically, has it been mostsuccessful?

There have been three waves ofdevelopment. The first wave, during the late1970s to 1985, began in Sudan and SaudiArabia with the concept of Islamicinsurance. By the mid 1980s we had the firsttrue takaful companies and the beginning ofretakaful. To some extent the second stageof development was driven by takafullegislation in Malaysia; this effectivelyclarified the concept of takaful and how itshould operate. This legislation was aresponse to the volumes of businessbeginning to develop in Asia and theperceived need to bring it into themainstream of Islamic finance. The thirdwave of development between about 2001and 2008, when the financial crisis began tohave an impact, was marked by many newcompanies entering the market in responseto the increasing levels of takaful business.

Today takaful in Malaysia continues to bevery successful in terms of an increasingmarket share of the overall insurancemarket and in terms of the surpluses beinggenerated by takaful businesses. One of themost successful markets, however, is Brunei,where 70% of insurance business is takaful.Saudi Arabia is also a takaful success story,although the model is slightly different; it isa cooperative model.

On the back of these successes by 2005takaful companies had begun to open incountries such as Kuwait and the UnitedArab Emirates, but the timing was notgood. Before they had a chance to becomeestablished, the global financial crisis hitand this has slowed their progress. Theinvestors who had been looking to investtheir profits were hit by the real estate crashand falling stock markets. As a result thereare a number of takaful companies that arereally struggling; they have failed togenerate adequate profits and to gainmarket share.

Retakaful is a relatively recent development,post 2001, but there are now 15 fully-fledged retakaful companies in the market,

13 of whom are ‘A’ rated. This is a verypositive development for the market.

The main problem for the takaful industry,however, is the limited size of the market.The market penetration is relatively low, forexample, just 8% of the total insurancemarket in Kuwait. There is, therefore, roomto grow takaful, but it is up to the operatorsto grasp the opportunity. The majorpotential market is among the currentlyuninsured, but at the moment takafulcompanies are concentrating their efforts onwinning existing business away fromconventional companies. This limitedgrowth is also affecting retakaful.

You have mentioned that the limited size ofthe market poses an obstacle to growth, butdid you experience any other obstacles togrowth in the early years and are there anyother factors that are slowing progress inthe current market?

We face many challenges. Many of theproblems that we face come from theconventional insurance industry. The peoplecoming into the takaful and retakafulmarkets from the conventional sector bringtheir views of how to do business with themand it will take some time to change theirmindsets; we need to re-educate them. Theshortage of people experienced in takaful isa problem across the whole MENA (MiddleEast and North Africa) region. Indeed,many of the people coming from theconventional sector are not even Muslim.We need to teach them that the whole spiritof takaful is different from conventionalinsurance.

If you work for a takaful company you haveto set an example in terms of transparency.Unfortunately this has not always been thecase. We have to be both transparent andShari’ah-compliant in all of our actions.

Market growth is another issue. Takaful,especially in the Middle East, is relativelynew; we need to work hand in hand with

An Interview with Mr Chakib Abouzaid, CEO, Takaful Re

NEWHORIZON Dhu Al Qaddah 1433–Muharram 1434 IN THE SPOTLIGHT

governments to develop the market and toovercome the reluctance of localpopulations to buy takaful policies. Anotherchallenge is that investment is relativelylimited when compared to the conventionalsector.

On the positive side, takaful is nowconsidered to be a serious player in theinsurance market and that is evidenced bythe number of conventional insurancecompanies entering the market. This wasnot always the case.

My main concern, however, is the lack ofdifferentiation between takaful andconventional insurance and this comes backto the mindset of people in the takafulindustry. I often use the analogy of organicfood and ordinary food. If, as an organicproducer, you do not take all the necessarysteps to guarantee food is organic, andindeed be seen to do that, then people willnot trust you. It is the same for the takafulindustry, we have to be, and be seen to be, really strict in terms of Shari’ahcompliance.

What do you think is the growth potentialfor the retakaful market in the next 10 yearsand beyond that?

There are three components to the Islamicinsurance industry – takaful, the SaudiArabian cooperative system and the Iranianmarket, which is not purely takaful, butIran is a Muslim country and Shari’ah is acornerstone of their system, so we include itin the Islamic insurance industry. Today theindustry, including all of these components,is worth about $12 billion US. Growth inthe past five years has been in the region of18–20%, but I do not think that level ofgrowth will continue. If, however, weassume a minimum 10–12% growth, I thinkthe industry will double in size in less thanseven years. I am optimistic, however, thatgrowth will be somewhat higher than that,say 15%, mainly because marketpenetration is currently running at quite alow level. For example, in Saudi Arabiamarket penetration is about 1% and I thinkit will be possible to achieve 5% penetrationwithin 10–15 years to some extent boostedby government spending. The situation is

similar in other oil-producing countries suchas the UAE and Qatar.

In addition, there is a rise in the number ofmiddle-class households in these countriesand these households have insurance needs,for example car, home and medicalinsurance. I think this demand will continueto expand and that the takaful share of thetotal insurance market in the Arab worldwill increase, not least because the ArabSpring means that we have governmentsacross the MENA region that are trying to

enforce Islamic financial regulations. Thiswas not the case two years ago – takafulcompanies were struggling; it was evenforbidden to talk about takaful and Islamicfinance in some countries such as Tunisia.

I do not think a forecast of 15–16% growthis over optimistic; I am being realistic. Havingsaid that, it will only grow if it isdifferentiated from conventional insurance, ifit is professional and transparent, if corporategovernance is strong and if people working inthe industry have the right mindset.

Chakib Abouzaid is the founder and Chief Executive Officer of UAE-based Takaful Re, andpreviously was General Manager, Middle East of Best Re. He has spent more than 20 yearsin the insurance and reinsurance industry and his experience extends across markets in theMiddle East and Africa.

NEWHORIZON October–December 2012ACADEMIC ARTICLE

Background

There is evidence suggesting that financialdevelopment and improved access tofinance, also referred to as financialinclusion in a country, is likely not only toaccelerate economic growth, but also toreduce income inequality and poverty.Enhancing the access to and the quality ofbasic financial services such as theavailability of credit, mobilisation ofsavings, insurance and risk management canfacilitate sustainable growth and

productivity, especially for small andmedium-scale enterprises. Despite itsessential role in the progress of efficiencyand equality in a society, 2.7 billion people(70% of the adult population) in emergingmarkets still have no access to basicfinancial services (Demirguc-Kunt andHonohan, 2007) and a great part of thethem come from countries withpredominantly Muslim population. Inconventional finance, financial access isespecially an issue for the poorer membersof society including potential or would be

entrepreneurs. They are commonly referredto as ‘non-banked’ or ‘non-bankable’ and,in the case of potential entrepreneurs, theyinvariably lack adequate collateral to accessconventional debt financing.

Conventional finance has developedmechanisms such as micro-finance, small-medium-enterprises (SME) and micro-insurance to enhance financial inclusion.Conventional techniques have been partiallysuccessful in enhancing access, but are notwithout their challenges.

Financial Inclusion: The Islamic Finance Perspective

By: Zamir Iqbal and Abbas Mirakhor

Challenges with the ConventionalApproach to Financial Inclusion

The experience with micro credit ormicro finance has been mixed as thereis a growing consensus thatexpectations were too high and thereare serious challenges in achieving asustainable impact on povertyalleviation. The key challenges facingthe microfinance industry aresummarised below:

High Interest Rates – Conventionalmicrofinance institutions are oftencriticised for charging very high interestrates on the loans to poor. These highrates are justified on the basis of hightransaction costs and a high riskpremium. This, however, imposesundue pressure on the recipient toengage in activities that producereturns higher than the cost of funding,which may not be possible in manycases.

Not every poor borrower is a micro-entrepreneur – Merely making the capitalaccessible to the poor is not the solutionwithout realising that not every poorborrower or recipient of micro credit hasthe skill set or the basic business sense tobecome an entrepreneur.

Diversion of funds – There are chances thatthe funds will be diverted to non-productiveactivities such as personal consumption. Insome cases, micro credit may lead the poorinto a circular debt situation, whereborrowing from one micro lender is used to pay off the borrowings from anotherlender.

Large scale fund mobilisation – While somemicrofinance institutions (MFIs) have had asignificant impact on poverty, others havebeen less successful, making it difficultbecause MFIs generally cannot mobilisefunds on a large scale and pool risks oververy large areas in the way that moretraditional, formal financial institutions can.

Product Design – The financial needs ofpoor households may require differentproduct features with alternativepayment and delivery structures totypical debt-based lending to microborrowers

Absence of private sector participation –As mentioned above, due to limitedsupply, coverage, products sets andfunding by the informal, semi-formal and non-commercial sectors, theeffectiveness of MFIs is oftencompromised.

Recent evidence from three randomised impact evaluations suggests that while increasing access to credit does not produce the kind ofdramatic transformations expected byearlier literature, it does appear to havesome important, although more modest,outcomes.

In practical terms, the Qur’an makes clear that creating a balanced society that avoids extremesof wealth and poverty, a society in which all understand that wealth is a blessing provided by theCreator for the sole purpose of supporting the lives of all of mankind, is desirable.

NEWHORIZON Dhu Al Qaddah 1433–Muharram 1434 ACADEMIC ARTICLE

This article provides Islam’s perspective onfinancial inclusion and argues that the coreprinciples of Islam lay great emphasis onsocial justice, inclusion and the sharing ofresources between the haves and the havenots. Islamic finance addresses the issue offinancial inclusion from two directions –one through promoting risk-sharingcontracts, which provide a viable alternativeto conventional debt-based financing andthe other through specific instruments ofredistribution of wealth among society. Bothrisk-sharing financing instruments andredistributive instruments complement eachother to offer a comprehensive approach toenhance financial inclusion, eradicatepoverty and build a healthy and vibranteconomy.

What is Financial Inclusion and Why is itImportant?

Understanding the linkage between financialinclusion and economic development isimportant. There is voluminous literature ineconomics and finance on the contributionsof finance to economic growth anddevelopment. The main reason why‘finance’ or ‘financial inclusion’ or ‘access tofinance’ matters is that financialdevelopment and intermediation has beenshown empirically to be a key driver ofeconomic growth and development.Development economists suggest that thelack of access to finance for the poor deterskey decisions regarding human and physicalcapital accumulation. For example, in animperfect financial market, poor people mayfind themselves in the ‘poverty trap’, as theycannot save in harvest time or borrow tosurvive starvation. Similarly, withoutpredictable future cash flow, the poor indeveloping countries are also incapable ofborrowing against future income to invest ineducation or healthcare for their children.

Modern development theories analysing theevolution of growth, relative incomeinequalities and economic developmentoffer two tracks of thinking. One track citesimbalances in redistribution of wealth andincome in the economy as an impediment togrowth while the other track identifiesimperfections in financial markets as the key

obstacle (Demirguc-Kunt and Honohan,2007). Proponents of the redistribution ofwealth argument claim that redistributioncan foster growth. A focus on redistributivepublic policies such as land or educationreform, saving or fertility changes can leadto a reduction in income inequalities andpoverty.

The other school of thought attributesmarket failure and imperfect informationleading to financial market frictions as theobstacle to growth (Stiglitz and Weiss,1981). Financial market frictions can be the critical mechanism for generatingpersistent income inequality or povertytraps. Financial market imperfections, such as information asymmetries andtransactions costs, are likely to be especially binding on the talented poor and the micro and small enterprises thatlack collateral, credit histories andconnections, thus limiting theiropportunities and leading to persistentinequality and slower growth.

The Concept of Financial Inclusion in Islam

Economic development and growth, alongwith social justice, are the foundationalelements of an Islamic economic system. Allmembers of an Islamic society must be giventhe same opportunities to advancethemselves; in other words, there is arequirement for a level playing field,including access to the natural resourcesprovided by Allah (swt). For those forwhom there is no work and for those thatcannot work (including the handicapped),society must afford the minimumrequirements for a dignified life byproviding shelter, food, healthcare andeducation. Islam explicitly emphasisesfinancial inclusion, but two distinct featuresof Islamic finance – the notions of risk-sharing and redistribution of wealth –differentiate its path of developmentsignificantly from the conventional financialmodel.

Islam ordains risk sharing in three mainways:

• contracts of exchange and risk-sharinginstruments in the financial sector;

• redistributive risk-sharing instrumentsthrough which the economically moreable segment of society share the risksfacing the less able segment of thepopulation;

• the inheritance rules specified in theQur’an through which the wealth of aperson at the time of passing isdistributed among present and futuregenerations of inheritors.

The Islamic system advocates risk sharing infinancial transactions. A financial systembased on risk sharing offers variousadvantages over the conventional systembased on risk shifting. Use of risk-sharinginstruments could encourage investors intosectors such as micro, small and mediumenterprises (MSME), which are perceived as high risk sectors. Given an enablingenvironment, investors with matching riskappetite will be attracted to providingcapital for these sectors. This argument canbe supported by the growing market forprivate equity. With increased availability of funds for these sectors, one could expectan increase in financial inclusion in thesystem.

As will be argued here, the second set ofinstruments meant for redistribution areused to redeem the rights of the less able inthe income and wealth of the more able.Contrary to common belief, these are notinstruments of charity, altruism orbeneficence, but instruments of redemptionof rights and repayment of obligations.

In practical terms, the Qur’an makes clearthat creating a balanced society that avoidsextremes of wealth and poverty, a society inwhich all understand that wealth is ablessing provided by the Creator for the solepurpose of supporting the lives of all ofmankind, is desirable. The Islamic viewholds that it is not possible to have manywealthy people who continue to focus alltheir efforts on accumulating wealth whilesimultaneously creating a mass of theeconomically deprived and destitute. Therich consume opulently while the poorsuffer from deprivation, because their rightsin the wealth of the rich and powerful is notredeemed. To avoid this, Islam prohibits

NEWHORIZON October–December 2012ACADEMIC ARTICLE

wealth concentration, imposes limits onconsumption through its rules prohibitingoverspending (israf), waste (itlaf),ostentatious and opulent spending (itraf). Itthen ordains that the net surplus, aftermoderate spending necessary to maintainmodest living standards, must be returnedto those members of society who, for avariety of reasons, are unable to work orbecause the resources they could have usedto produce income and wealth were utilisedby the more able.

The Qur’an considers the more able to betrustees/agents in using resources on behalfof the less able. In this view, property is nota means of exclusion but inclusion in whichthe rights of the less able in the income andwealth of the more able are redeemed. Theresult would be a balanced economywithout extremes of wealth and poverty.The operational mechanism for redeemingthe right of the less able in the income andwealth of the more able are the network ofmandatory and voluntary payments such aszakat (2.5% on wealth), khums (20% ofincome), and payments referred to assadaqat.

The most important economic institutionthat translates the objective of achievingsocial justice in Islam into fact is that of thedistribution/redistribution rule of theIslamic economic paradigm. Distributiontakes place post production and sale, whenall the elements of the production processare given what is due to them,commensurate with their contribution toproduction, exchange and the sale of goodsand services. Redistribution refers to thepost-distribution phase when the chargesdue to the less able are levied. Theseexpenditures are essentially repatriation andredemption of the rights of others in one’sincome and wealth. Redeeming these rightsis a manifestation of belief in the Oneness ofthe Creator and its corollary, the unity ofthe creation in general and of mankind inparticular. It is the recognition andaffirmation that Allah (swt.) has created theresources for all of mankind who must haveunhindered access to them. Even theabilities that make access to resourcespossible are due to the Creator. This wouldmean that those who are less able or unable

to use these resources are partners of themore able.

Government as the Risk Manager andPromoter of Risk Sharing

It could well be argued that incontemporary societies, risk management isthe central role of government andtherefore, government is the ultimate riskmanager in a society. In most economies,governments play a major role in bearingrisk on behalf of their citizens. For example,governments provided social safety nets andinsurance for a variety of financialtransactions. The history of government'srole in the economy spans more than acentury as economists have attempted tojustify the role as being necessitated by thedivergence between public and privateinterests. Some six decades ago Arrow andDebreu (1954) focused on finding theprecise conditions under which public andprivate interests would converge asenvisioned in Adam Smith's invisible-handconjecture. The result was an elegant proofthat competitive markets would indeed havea stable equilibrium provided some stringentconditions were met. It was clear, however,that even under the best of actualconditions, markets did not perform asenvisioned either by Smith or Arrow-Debreu. Consideration of the violations ofthe underlying conditions spawned avoluminous body of literature on the theoryand empirics of market failure. This conceptbecame the starting point for the analyticreasoning that justifies government'sintervention in the economy to protect thepublic interest (Stiglitz, 1993).

The reason that contemporary societiesimplement social safety nets, such as socialsecurity, health care and publicunemployment insurance programmes, isthat individual households face substantialrisk over their life span such as mortalityrisk, wage and other income-related risksand health risks. Since private insurancemarkets do not provide perfect insuranceagainst all risks, there is said to be a marketfailure and government intervention is calledfor to correct it. What has become clear inthe wake of the global financial crisis is that,even in the most advanced industrial

economies, existing social safety nets havebecome incapable of coping with the adverseconsequences of the crisis. Not only has thecrisis shaken the previous level of confidencein markets, nearly all analyses of its causesattribute it to market failure in onedimension or another. This has intensifiedcalls for government interventions to counterthe adverse effects of the crisis on incomeand employment, to strengthen social safetynets and to reform the financial sector. Themost important lesson of the crisis has beenthat people in general carry too large a riskof exposure to the massive shocksoriginating in events that are beyond theirinfluence and control. Attention has,therefore, been focused on ways and meansof expanding collective risk sharing.

To date it has been assumed thatgovernment interventions in the form ofactivities such as providing social safetynets, public goods and deposit insurance,were solely for the purpose of addressingvarious kinds of market failure. While this isa crucial justification for intervention, thereis an important dimension of government'srole that has not attracted much attention.Much of the activity in the provision ofsocial safety nets, from a minimal amount insome countries to substantial amounts inwelfare states, is also about collective risksharing. This dimension has beenparticularly neglected in the analysis ofgovernment provision of social insuranceand services in which the sole focus hasbeen on the issue of the trade off betweenequity and efficiency; the issue at the heartof the state vs. market debates.

Concluding Remarks

Risk sharing serves one of the mostimportant desiderata of Islam: the unity ofmankind. Islam is a rules based system inwhich a network of prescribed rules governsthe socio-economic-political life of society.Compliance with these rules renders thesociety a union of mutual support byrequiring humans to share the risks of life.Risk sharing intensifies human interaction.The dazing pace of financial innovationsover several decades prior to the crisiscreated opportunities and instruments forrisk shifting – where risks were shifted to

NEWHORIZON Dhu Al Qaddah 1433–Muharram 1434 ACADEMIC ARTICLE

investors, borrowers, depositors and,ultimately, to taxpayers – rather than risksharing. The financial sector becameincreasingly decoupled from the real sectorwith the growth of the former outpacingthat of the latter by double-digit multiples(Epstein, 20067; Mirakhor, 2010; Menkoffand Tolksorf, 2001).

Instruments of Islamic finance allow risksharing and risk diversification throughwhich individuals can mitigate theiridiosyncratic risks. On the other hand,mandated levies, such as zakat, are meansthrough which the idiosyncratic risks of thepoor are shared by the rich as an act ofredemption of the former's property rights inthe income and wealth of the latter. Otherrecommended levies, beyond those mandated,such as sadaqat and qardh hassan, also playthe same role. They help reduce the poor'sincome/consumption correlation. In otherwords, the poor are not forced to rely ontheir low level income (or no income at all) tomaintain a decent level of subsistence livingfor them and their families. It is possible thatat some point in time even these levies can becodified, becoming instruments to beincluded in the full spectrum Islamic financemenu of instruments for risk sharing. In theevent, Islamic finance becomes a riskmanager for society.

Its instruments of risk sharing will helpblunt the impact of economic shocks,disappointments and suffering onindividuals by dispersing their effects amonga large number of people. It will haveinstruments of finance available for allclasses of people to allow them to reducetheir idiosyncratic risks and smooth theirconsumption. It will ensure that innovators,entrepreneurs, small and medium size firmshave access to financial resources withoutthe need to take all risks on themselves or,alternatively, abandon productive projectsaltogether. It will have instruments ofinsurance that not only provide protectionagainst health and accident risks, but alsoinsure against risks to livelihood and homevalues to protect people's long-term incomeand livelihood. Such a full-spectrum Islamicfinance can then truly be said to have‘democratised finance’ without transferringthe risks of any venture to a particular class

or to the whole society. This would be insharp contrast to the results of the‘democratisation of finance’ project, whichled to the recent global crisis in theconventional financial system in which therisks of financial innovations were shiftedaway from financiers. The consequence wasthat while the gains of this ‘democratizationof finance’ project were privatised, its painwas socialised (Sheng, 2009).

Given the rules governing property rights,work, production, exchange, markets,distribution and redistribution, it isreasonable to conclude that in an Islamicsociety, a rule-complying and Allah-conscious society, absolute poverty couldnot exist. It can be argued that there is notopic more emphasised in Islam thanpoverty and the responsibility of individualsand society to eradicate it. The Prophet saidthat poverty is near disbelief and that

poverty is worse than murder. It is almostaxiomatic that in any society in which thereis poverty, Islamic rules are not beingobserved. It means that the rich and wealthyhave not redeemed the rights of others intheir income and wealth and that the statehas failed to take corrective action.

The views expressed in this article do notrepresent the views of the management andexecutive directors of the institutions bywhom the authors are employed and areentirely the views of the authors.

works as LeadInvestment Officer in the Treasury of theWorld Bank in Washington, D.C. He haspublished several articles on Islamicfinance in reputable journals and haspresented papers at international forums.He has extensive experience with capitalmarkets, exotic derivative products, riskmanagement, financial sectordevelopment and financial modelling. Hisresearch interests include Islamicfinance, financial engineering, structuredfinance and international banking.Currently, he is also serving asProfessional Faculty at the CareyBusiness School of Johns HopkinsUniversity.

is the first holder ofthe chair of Islamic Finance at theInternational Centre for Education inIslamic Finance (INCEIF) in Malaysia. Hewas born in the Islamic Republic of Iranand attended Kansas State University,where he received his Ph.D. ineconomics in 1969. From 1969 to 1984,he taught at a number of universities inthe US and in Iran. He served on thestaff of the International Monetary Fund(IMF) from1984 until 1990 and as anExecutive Director at the IMF from 1990to 2008 and also as Dean of theExecutive Board for much of that time.He has received several awards,including the Islamic Development BankAnnual Prize for Research in IslamicEconomics in 2003. Dr. Mirakhor is theco-author of many books and articles inIslamic economics, including Essays onIqtisad: Islamic Approach to EconomicProblems (1989), Theoretical Studies inIslamic Banking and Finance (1987),Introduction to Islamic Finance: Theoryand Practice (2007, 2011), New Issues inIslamic Finance and Economics:Progress and Challenges (2009), Stabilityof Islamic Finance (2010), and RiskSharing in Islamic Finance (2011).

Over 20 years service to the Islamic fi nance industryIIBI education and training programmes have helped thousands across the world to develop their knowledge of the guiding moral principles and ethics on which Islamic banking and insurance is based as well as providing the essential skills needed for professional practice.

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NEWHORIZON October–December 2012FOOD FOR THOUGHT

The Development of Islamic Finance

The recent religious revival amongstMuslims has triggered a movement towardsthe implementation of Islamic principles infinance. This in turn has led to the recentphenomenon of the development of Islamicfinance. In addition to the growth of whollyIslamic financial institutions (IFIs), theenactment of banking acts in manycountries has allowed for the set up ofspecial branches or windows based onShari’ah law within conventional banks,who have been keen to jump on thebandwagon. These include global banks,such as Standard Chartered Bank, HSBCand Citibank, all of which haveimplemented a dual banking system withintheir operations.

Islamic Finance – A Barrier for SmallBusinesses

Despite their resounding success in manyparts of the world, however, IFIs are stillvery reluctant to endorse a wide-scale shifttowards Islamic entrepreneurship throughmechanisms such as micro-finance. It iswidely accepted that the equitabledistribution of income and maximisingsocio-economic benefits are the primarygoals of Islam. Unfortunately, however, theinstitutionalisation of Islamic savings is abarrier, which relatively small businesses inparticular find difficult to surmount.Notably, IFIs tend to focus on ostentatiousprojects where the process of empoweringsmall businesses to become economicallyviable is not a part of the equation. This iscounterproductive; economic developmentis hampered, given that resources do notflow naturally into areas where growth isrelatively low. Accordingly, it is imperativethat key Islamic goals are embedded into anIslamic financial system. In particular, it isvital for Islamic savings to flow into areas of

low growth in order to ensure that,ultimately, economic growth is distributedboth widely and fairly. This suggests thatwhat is needed is a socially-responsiblefinance model with a strong Islamicfoundation of brotherhood to fill up the gapin this area.

Possible Channels for the Small BusinessSector – Awqaf

One of the main possible channels forIslamic savings is the small business sector,through which humanitarian, social anddevelopmental objectives can be addressed.There are diverse institutions andarrangements that Islam has fundamentallyencouraged, which redistribute income andwealth to meet the basic needs of all insociety. One such key institution is waqf. Awaqf-based model, which is based on theconcepts of solidarity and brotherhood, cansuccessfully address the social gaps createdby IFIs. The contribution of awqaf (pluralof waqf) in Muslim societies of the past hasbeen significant, as is evident from the sizeof such institutions. For example, the firstland survey conducted in Egypt duringMuhammad Ali’s rule (1805–48), reportsthat 600,000 out of a total of 2.5 millionfeddan (acres of cultivable) land wereawqaf.

Presently, there are three types of waqfbeing administered – the family waqf, thecharitable waqf, and a combination of thetwo. A reduction in the disparity gapbetween the rich and the poor can beachieved through the proceeds from thesecond and third types of waqf. These formsof waqf fall under the category of awqafinstitutions, which are considered to bephilanthropic. Moreover, in themacroeconomic framework, the possibilitiesof using this type of waqf will be broaderthan zakah as, unlike the latter, the

beneficiaries of waqf funds are not limitedto specific categories of people.

In order to determine which awqafinstitutions can be used for the mitigation ofpoverty, it will first be necessary to identifyand distinguish between the religious andphilanthropic awqaf institutions. Examplesof religious awqaf institutions are those inwhich assets are used in relation tomosques, madrasahs (religious schools) andMuslim cemeteries, while examples ofphilanthropic awqaf institutions are thosewhere the assets or properties are used orotherwise given away for the use of adefined group of beneficiaries, such asfamily members or the general community.This is further illustrated in the table below.

Table: Religious vs. Philanthropic Awqaf

Type/Beneficiaries Religious Philanthropic

Family A BGeneral Public C D

(Source: Ahmed, 2004:73)

For the purpose of poverty alleviation andproviding opportunities to lower incomegroups of Muslims, the only type of waqfthat is relevant is D. This type of waqfincome will benefit the poor directly and/orindirectly.

A Model with Religiously-PermissibleInstruments

A model utilising religiously-permissibleinstruments through the proceeds fromawqaf funds can play a prominent role inalleviating poverty and creatingopportunities to poorer Muslims. Themodel through which the necessary socialand physical infrastructure can beconstructed is founded on Islamic principleswith no collateral required. The proposed

Awqaf Funds: A Tool to Enhance the Performance of the Lower-Income Muslims

By: Shabana M. Hasan

NEWHORIZON Dhu Al Qaddah 1433–Muharram 1434 FOOD FOR THOUGHT

model rests onthe followingtwin objectives –a socialcommitment toprovidingopportunities forlower-incomeMuslims andprofit-orientatedactivity based onIslamicprinciples. Withthis model, it ishoped that thefinance sectorcan play asocially beneficialrole in societyand thatprofitability willensure asustainedacceptance of themodel. Further itmeets the dualobjectives thatIslamicenterprisesshould seek tomake profits andfulfil theircharitableobligations. Theproposed waqf-based model is further illustrated in thefigure.

The proposed waqf-based model is a non-financial institution; it is merely a societyestablished to promote the economicinterests of members of Muslim society whocannot otherwise be reached by the existingbanks or financial institutions. It is intendedto be established as a collective religiousobligation (fard kifayah) on the largercommunity (ummah). The establishment ofsuch co-operatives will subsequently lead toincome growth, poverty alleviation, self-employment, asset ownership and a moreactive participation of poorer Muslims inthe labour force. The proposed model willalso lead to substantial economicdevelopment for lower-income Muslimentrepreneurs and is also considered to be in

accordance with the tenets of the Islamicreligion.

Concluding Remarks

The reforms and restructuring of bankingregulations in many parts of the world havebetter positioned countries to assist in thegrowth of Islamic finance. This is likely togenerate many future prospects for theestablishment of small-scale businesses, whichare founded upon Qur’anic principles andwhich themselves are likely to demonstratethe practical application of Islamictechniques. The establishment of small-scalebusinesses by poor Muslims, however, cannotbe achieved by the IFIs alone, especially inlight of the current debate that suggests theIFIs, beyond a very narrow role, do not meetthe requirements for distributive justice and

social equity. This has consequently led to theproposal for the development of a waqf-based model as illustrated above. Notably,however, if the proposed model is acceptedand implemented, it is believed that thiswould help to renew the confidence of thecommunity and further confirm theimportance of the waqf institution as animportant tool for poverty alleviation.Ultimately, it is hoped that this proposedmodel will combat unfavourable economicdiscrimination and alleviate the povertycurrently endemic in major sections of societythroughout the world, whilst simultaneouslybenefitting the countries as a whole byproviding a robust and just defence againstthe instability and upheavals in the creditmarket.

The views and opinions expressed in thisarticle are those of the author and do notnecessarily reflect the official policy orposition of ISRA and should not beattributed to it.

Shabana M. Hasan joined ISRA as aresearcher in December 2010. Prior to that,she had just completed an MSc in Islamicfinance (with distinction) from theUniversity of Durham, United Kingdom.She also holds a Diploma in Accounting &Finance from the Temasek PolytechnicSingapore followed by a Bachelor ofEconomics (Hons) from the InternationalIslamic University of Malaysia (IIUM), witha specialisation in Islamic Economics.

Datuk Noripah Kamso is the ChiefExecutive of CIMB-Principal IslamicAsset Management Sdn. Bhd. Previouslyshe served as the CEO of CIMB-Principal. She has more than 23 yearsexperience in corporate credit andlending and 9 years in the derivativesbroking business as CEO of CIMBFutures Sdn. Bhd.

NEWHORIZON October–December 2012ANALYSIS

Background

There has been criticism of Islamicinvestment in the past on the grounds that itis only for Muslims; that it is complicated;that it can be costly and that the screeningof equities for Shari’ah compliance mean itis restrictive and liable to perform less wellthan conventional asset management.Throw in the beliefs that there is a shortageof skilled Islamic investment professionals;that Islamic investment products are lessliquid than their conventional counterpartsand that there are no hedging facilities andyou end up with low investor confidence inIslamic investment products.

According to Ms Noripah Kamso, ChiefExecutive of CIMB Principal Islamic AssetManagement, these criticisms are mythrather than reality and stem from lack ofeducation and awareness. The only majordifference between Islamic and conventionalinvestment products is the screeningprocess. She maintained that it is neithercomplicated nor more expensive thanconventional products. Furthermore thereare scalable products in the marketinternationally. For example, there are closeto 800 mutual funds internationally,covering all asset classes and they includesukuk, equity, balanced, Islamic moneymarket, private equity, property and evenhedge funds.

Equity Investments

On a long-term basis Ms Kamso said thatIslamic fund performance will beatconventional performance. She commentedthat in the last six years it has been verydifficult for asset managers to manage theirportfolios due to the level of marketvolatility driven by inflationary fears, thesub-prime mortgage scandal in the US, theglobal financial meltdown, the bursting ofthe Dubai property bubble, the tsunami inJapan, the Arab Spring and finally the

Eurozone sovereign debt crisis. Do thevolatile conditions represent an opportunityor a real challenge? Ms Kamso believes thatit has, in fact, been a real opportunity forIslamic investment. For example in the six-year period to November 2011, if thecumulative performance of the Dow JonesIslamic and conventional indices arecompared, the Islamic index showed agrowth of 14.24%, while the conventionalindex fell 2.3%.

The main reason for this performancepremium lies in the screening process andparticularly its financial element, whichtends to create a more stable portfolio ofinvestments, because it favours companieswith lower leverage and those where capitalis deployed productively. This effectivelycreates a risk overlay at the portfolio level,delivering both short and long-term returns,which are more than comparable withconventional investment portfolios.Furthermore it meets the requirement forinvestments to be both socially responsibleand ethical.

The return on sukuk investments is alsocomparable to investments in conventionalbonds. Sukuk investments are also assetbased with profits being used to reinvest inproductive economic activity and for thebenefit of society.

Size and Potential of the Islamic InvestmentIndustry

The potential for retail and high-net-worthinvesting is $400billion. On the institutionalside, there are pension funds, sovereignwealth funds and central banks in Islamiccountries. If you take just the Abu DhabiInvestment Authority, the Saudi ArabiaMonetary Authority and the QatarInvestment Authority, these three combinedaccount for 30% of the assets undermanagement by global sovereign wealthfunds.

International Investment Capability andCIMB Principal Islamic Asset Management

In the three years since it started its Islamicasset management operations CIMBPrincipal has reached a total of $1 billionassets under management. The customer baseis formed of largely institutional investorssuch as South East Asian central banks andpension funds. Investments are split fairlyequally between equities and sukuk.

The industry has, however, reachedsomething of a plateau. Ms Kamso believesthat this is because asset managers haveconcentrated too heavily on domestic funds;she believes that there is a need to establishglobal platforms that comply withregulations set by bodies such as the EU(European Union), opening up the marketbeyond particular countries and Islamicinvestors. CIMB, for example, have takensteps to internationalise their operationswhen, earlier in the year, they established thefirst Malaysian-based international Islamicfunds platform domiciled in Dublin, Ireland.

The Case for Islamic Asset Management

Datuk Noripah Kamso, Chief Executive, CIMB Principal Islamic Asset Management

Datuk Noripah Kamso receives theAsia 2012 Best Asset ManagementHouse award from Lord Sheik

NEWHORIZON Dhu Al Qaddah 1433–Muharram 1434 IIBI WORKSHOP

The 4th Annual IIBI-ISRAInternational ThematicWorkshop was hosted for thesecond time by SNR Denton atthe London offices of theirinternational law practice on 10September 2012. The thematicworkshop is an annual eventjointly organised by the Instituteof Islamic Banking and Insurance(IIBI) and the InternationalShari’ah Research Academy forIslamic Finance (ISRA).

This year’s workshop,concentrating on the theme,‘Legal Compliance versus MoralResponsibility in IslamicBanking and Finance’ was acontinuation of the themediscussed in the 2011 workshopon ‘Form over Substance inIslamic Finance’. The workshopwas attended by a number ofbankers, lawyers, regulators,executive officers of financialinstitutions, Shari’ah advisorsand academicians from aroundthe world, including the USA,UK, Italy, Malta, Libya,

Gambia, Burkina Faso, UAE,Bahrain, Malaysia andIndonesia.

The workshop involved threepanel discussions on ‘MoralFailures in Banking andFinance’; ‘Product Developmentand Shari’ah Governance’ and‘Best Practice for Shari’ahAudit’. A fourth panel sessiondiscussed the way forward forthe Islamic finance industry anddebated recommendations forstandard setting bodies.

In light of the important natureof the theme of the workshop, aconsultation paper was preparedby IIBI and ISRA and distributedto the speakers prior to theworkshop for the purpose ofoutlining the important areas fordiscussion throughout the day.Included as part of thisconsultation paper was a draftMoral Code of Conduct – avoluntary code for practitionersin Islamic financial servicesspecifying their commitment

toward conducting themselves ina manner befitting a moralattitude in line with the principlesof the Islamic tradition.

Welcome Address

Mr Rahim Ali, Researcher, IIBI,opened the workshop byreflecting upon the significanceof the IIBI-ISRA InternationalThematic Workshop as anannual platform that hassuccessfully brought togethersenior experts from Islamicfinance and industrystakeholders from around theWorld to engage comfortably indiscussion on pressing matters inthe Islamic finance industry. Healso highlighted the ability of theworkshop to be able to generateopen debate on sensitive issues,such as Form over Substance in2011 and Legality againstMorality in 2012, as importantfor the healthy development ofthe industry.

Delivering the welcome addresson behalf of IIBI, Mr Iqbal

Asaria CBE, Associate, AfkarConsulting, praised IIBI for itsrole in thought leadership. MrAsaria reminded participantsthat the founding principle ofthe Institute was to develop acentre of excellence in Islamicfinance that would be able torespond to the needs andchallenges of the industry. Inrelation to the workshop itself,he reminded them that the firstand perhaps most importantwork of Adam Smith – regarded

4th Annual IIBI-ISRA International Thematic Workshop:Legal Compliance versus Moral Responsibility in Islamic

Banking and Finance

After 40 years of development and experimentation, concerns have grown thatpractitioners in Islamic financial services, including Shari’ah scholars, are accepting aminimalist approach to supervision and self-regulation. Criticisms that Islamic financehas failed to give appropriate consideration to the economic outcomes of transactionsand their financial implications for the wider society have persisted. A key factor in theunderdevelopment of such considerations has been the justification of currentpractices through the notion of ‘compliance’ with Shari’ah. To address the perceivedconflict between what is legally compliant and what is desirable, IIBI and ISRAorganised the 4th Annual IIBI-ISRA International Thematic Workshop on the themeLegal Compliance and Moral Responsibility.

Mr Iqbal Asaria

by many as the father of moderneconomics – was the Theory ofMoral Sentiments; therefore,morality was at the centre of theframework through whichbanking, finance and economicscan flourish. In light of this, MrAsaria expressed his delight thatthe theme selected for the 2012workshop was both relevantand appropriate for discussionamongst Islamic financepractitioners.

Mr Richard de Belder, SeniorPartner and Global Head ofIslamic Finance, SNR Denton,then delivered the welcomeaddress on behalf of SNRDenton. Mr de Belderhighlighted morality andresponsibility as a feature thatdistinguished Islamic financefrom conventional approachesto finance and banking. Hewarned, however, that thechallenge of Islamic finance is todevelop methods that can meetits ideals and, therefore, Islamicfinance practitioners shouldreflect upon the direction thatthe industry has taken since itsdevelopment in the 1970s andassess whether Islamic finance ismoving closer toward its moralgoals.

Keynote Address

The workshop began with twokeynote speakers; the first wasMr Alberto Brugnoni, Founderand Chairman of ASSAIF, Italy,the oldest Islamic financeconsultancy in Europe thatprovides strategic institutionaladvice and concentrates onprojects that are spiritually andeconomically beneficial tosociety. The second keynoteaddress was delivered by MrNeil Miller, Global Head ofIslamic Finance, KPMGBahrain. Both have a longhistory of involvement instructuring Islamic financeproducts.

Mr Alberto Brugnoni’s addresson ‘Moral Responsibility inFinance – A Qur’anicPerspective’ began with theassertion that Islamic financehas become more of a brandand less of what the essence ofIslamic banking should be. Hepointed to the fact that thefinancial obligations andimplications experienced by theordinary end users do not differmuch from conventionalpractices.

He reminded the participantsthat the moral obligations andresponsibilities in Islamicfinance find their sources andtheir spiritual realities enshrinedin the Qur’an and Hadith andthat there was a need to fullyappreciate and give full credit toa well-defined spiritualframework when developingfinancial products. He warnedthat ‘to circumvent or ignore thespiritual framework and tomimic the conventionalenvironment is, in the long term,a route to failure’.

Mr Brugnoni then turned to theprohibition of riba which he

described as necessary topreserve people’s rights and toensure the welfare of society.After expanding on theprohibition of riba, MrBrugnoni turned his focus to thestate of economic affairs. Hehighlighted the economicproblem exposed by the currentfinancial crisis. He argued thatits origins lay in the recklesscreation and distribution ofcredit, which was only madepossible by the fictional mannerin which money is brought intoexistence. He argued that this isthe very essence of what Godhas forbidden, i.e. riba, yet it ispivotal to the way that thebanking and finance systemoperates. He continued byquestioning the position ofIslamic banking on this matter.

Islamic economic theory, heargued, is very clear on thenature of money, its featuresand how it should be created.This involves the need formoney to possess an embeddedvalue, a linkage to the realeconomy and the need for it tobe the product of effort andwork. In spite of this, hecontended, Islamic banking hassimply imitated the conventional

method of money creation inwhich it continues to operateunder the fractional reservesystem.

His keynote address ended withthe stark warning that, ‘Bendingthe Islamic finance rules,watering its values and de factoreplicating a guaranteed andfixed environment toaccommodate the requirementsand expectations of the marketsand banks can only addconfusion to an already veryconfused financial world. In theend, it will spell the end ofIslamic finance.’

The second keynote address wasdelivered by Mr Neil Miller,Global Head of Islamic Finance,KPMG. He began by saying thathe had been deeply troubled bythe impact of the globalfinancial crisis and alsoexpressed concern at the factthat Islamic banking hadsuffered from financialdifficulties as a result.

Mr Miller elaborated on thereasons why he believed thatIslamic financial institutionswere susceptible to the financial

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Mr Richard de Belder

Mr Alberto Brugnoni

Mr Neil Miller

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crisis. Firstly, he argued, Islamicfinance practitioners benefitedfrom timing and luck ratherthan skill or judgment, becausemany Islamic financialinstitutions were not establishedbefore the new millenniameaning that they were notactively acquiring interests intoxic assets at the height of theirproliferation and creation.Secondly, as private equityvaluations and real estate pricesdropped, Islamic financialinstitutions were over-exposedto these asset classes. Finally, hesaid that the governance andrisk management standards ofIslamic financial institutionswere not sufficiently strong androbust.

In defence of Islamic financeprinciples, Mr Miller affirmedthat ‘the applications of Islamiceconomic principles offer acredible alternative toconventional finance providedthat they are properlyemployed’. Mr Miller asked,however, whether the Islamicfinancial community is doingenough to differentiate itselffrom the conventional financialcommunity. He suggested thatIslamic finance has too closelyaligned itself with conventionalpractices thus hampering thedevelopment of original ideas, which would otherwisetransform the industry and help to achieve its higher goals.

Nevertheless, he stressed that‘there is a value propositionembedded in the Islamic view ofeconomic behaviour of financialintermediation that provides anethical platform by reference towhich financial and commercialactivities should be enteredinto’. Mr Miller indicated thatindividuals working in Islamicfinancial services perhaps

require clearer guidance abouthow they are expected tobehave. In light of this, hecontinued by saying that thesenior management of Islamicfinancial institutions should beobliged to inculcate the ‘moralrealignment of the firm anddemonstrate its observance bytheir own behaviour’.

Furthermore, he suggested thatthe founding shareholders ofIslamic financial institutionsshould embed within theconstitution of the company‘purposes that defineshareholder value by referenceto criteria that might, but forthe embedded instruction,expose the directors to claimsthat they were not acting in thebest interests of the company’.By doing so, he maintained,directors can engage in activitiesthat have a social purpose evenif doing so is less financiallyremunerative than other coursesof actions.

Session 1: Moral Failures inBanking and Finance

The first panel session on‘Moral Failures in Banking andFinance’ was chaired by Mr FazlSyed, an international lawyerinvolved in Islamic finance andChair of the Business andEconomics Committee, MuslimCouncil of Britain. He openedthe session by stating thatimmoral practices incontemporary finance havegenerated huge interest in‘moralising internationalfinance’. Quoting a seniorMethodist Minister, hecontinued by saying that ‘trust isthe basis upon which all decentsocieties work and our trustwith practitioners of bankingand finance has broken andtherefore we are in a crisis oftrust’.

The first presentation wasdelivered by Dr MuhammadSyafii Antonio, Founder andRector, Tazkia IslamicUniversity College of IslamicEconomics, Indonesia, whodiscussed the lessons to be learntby Islamic finance fromexperiences with the financialcrisis. Dr Antonio began withthe fact that financial crises havenot been confined to 2008 andthe 1997–98 crisis in South-EastAsia as recent memory maysuggest. From 1907 to 2008there have been 32 majorfinancial crises across the world.

He expressed the view thatIslamic finance must learn toincorporate moral components(akhlaq) and the objectives(maqasid) of Shari’ah in orderto avoid a future crisis. As a firstpriority, he argued that Islamicfinance must learn that moralfailures in finance and bankingcan largely be attributed to thefinancial targets imposed byshareholders and managementthat do not care for the interestsof society.

To enhance Islamic financepractice, Dr Antonio suggestedthat improvements can be madeto the governance framework ofIslamic financial institutions;namely, Shari’ah SupervisoryBoards (SSB). He suggested thatwhere an individual hasrepresentation on several SSBs,it would be difficult for them tobe able to carry out their dutiescomprehensively and ensureeach institution is successfullycatering to the principles ofShari’ah. As a solution, hesupported the Malaysian andIndonesian approach whichlimits the maximum number ofrepresentations on a SSB.

Mr Iqbal Asaria, Associate,Afkar Consulting, then spoke on

the subject of whether Islamicfinance can suffer the sameimmoral practices and financialcrises witnessed in conventionalfinance. Mr Asaria began hisdiscussion by introducing thenotion of alchemy – a process ofconverting inferior materials togold. He argued convincinglythat finance developed its ownidea of alchemy, which was toconvert inferior sub-prime debtinto AAA-rated securities.

Mr Asaria then turned hisattention to whether Islamicfinance was involved in thispractice. He stated that the bulkof Islamic finance is based onmurabaha and ijaratransactions, which in fact, arethe closest modes of finance toconventional finance as theyshare similar risk and returncharacteristics and benchmarkswith conventional finance. Heargued that if this constitutesover 80% of Islamic financebusiness, then the Islamicfinance industry remainssusceptible to the same failuresas conventional finance.

In conclusion, Mr Asaria statedthat Islamic finance has thesame potential for moral failuresfrom which conventionalfinance has suffered.Furthermore, if Islamic financehad been large enough at thetime, it would most likely havesuffered the same problems.

After learning about theexperiences of moral failures inbanking and financial crises, Mr Joseph DiVanna, ManagingDirector, Maris Strategies andauthor of Understanding IslamicBanking: The Value Propositionthat Transcends Cultures andother books was asked toexplain the value proposition ofIslamic finance. Mr DiVannalaid out his concept of a value

proposition as ‘a perceived valuein underlying value for money,convenience and adherence toprinciples and beliefs’. Islamicfinance, he argued, takesunderlying principles and putsthem into the context of modernsociety.

He stressed the importance ofunderstanding the relativity ofthe value proposition wherebythe value proposition is relativeto the community that is beingserved. For example, he saidthat while a $3 cup of coffee isnormal to a 25 year old bankerin New York, it is inconceivableto a banker in Kenya where acup of coffee is expected to be$0.20. The power of Islamicfinance, he argued, is the factthat it is interpretive and itsvalue proposition can span amultitude of moral compasses.He continued by explaining thatsociety influences our valueproposition and ourinterpretation of that valueproposition.

Mr DiVanna revisited theconcept of building trust inbanking and finance earlier

discussed by Mr Fazl Syed byclaiming that banks had knownhow to build trust and actmorally for over a hundredyears. Unfortunately, during thelast 50 years the relationshipbetween banks and society hasdeteriorated and the industryhas lost its moral compass.

Professor Habib Ahmed, SharjahChair of Islamic Law andFinance, Durham University UK,delivered the final presentationof the session with a discussionon how ethics is defined inIslamic finance. He began byprofessing the opinion that acontract is not automaticallyethical when it is given legalvalidity. To support this view,Professor Habib cited therecognised concept of ‘HukmTaklifi’ in Shari’ah, whichinvolves a classification of actsinto five groups – Obligatory;Recommended; Permissible;Reprehensible and Prohibited.

The current practice of Islamicfinance, he argued, whichconcentrates on that which isprohibited is merely oneclassification, whereas the ethics

lie within these otherclassifications. He also arguedthat when considering theseclassifications, it is possible tohave an act this is both legal andunethical. In order to definewhat is ethical, he also turned tothe objectives (maqasid) ofShari’ah, which is principallybased on enhancing welfare andpreventing harm. He assertedthat it is not possible to achievethis when one only concentrateson prohibitions from a legalperspective.

An additional problem heidentified was that despiteIslamic finance managing toimplement a process forscreening transactions at thecontract level, there is littleconsideration and effort beingput into the pre-contract andpost-contract stages. He arguedthat pre contract issues (such asthe intention of the party) andthe post-transaction impact iswhere the implications of harmand welfare can be measuredand more accurately evaluated.

Session 2: Product Developmentand Shari’ah Governance

Mr Richard de Belder, SeniorPartner and Global Head ofIslamic Finance, SNR Denton,was chair of the second sessionon Product Development andShari’ah Governance. Hehighlighted the consensusamongst Islamic financepractitioners that there exists aneed to find solutions that workcommercially while remainingjust for all the parties involved.He underlined this with thepassage of the Qur’an ‘…Deal not unjustly, and yeshall not be dealt withunjustly…’ which he highlightedas a fundamental basis uponwhich Islamic finance shouldoperate.

The first speaker, Mr AsimKhan, Managing Director, Daral-Istithmar, discussed the keyShari’ah aspects that financialinstitutions should considerwhen developing Islamicfinancial products. Mr Khanargued that, from a Shari’ahperspective, Islamic finance isconcerned with transactions and not counterparties andtherefore, the participation ofconventional institutions in the industry should bewelcomed.

Regarding the Islamic productdevelopment process, Mr Khanasserted that there are threefundamental areas that anyinstitution wishing to developan Islamic financial productmust consider. These include thepurpose of the transaction andthe structure’s compliance withShari’ah. It is also vital that thelegal documents capture thepurpose, economics andstructure that the Shari’ahSupervisory Board hasapproved.

Stifling the development ofIslamic finance, however, Mr Khan argued was the factthat conventional institutionsoften underestimate theimportance of a fatwa, i.e. legalopinion. Mr Khan also notedthat conventional financialinstitutions often fail torecognise the pressing need forongoing monitoring of Islamicfinancial products which ensurecontinuing compliance withShari’ah. Conventionalinstitutions are often unaware ofthis because such monitoringdoes not usually take place with conventional financialproducts.

Following Mr Khan’s discussionon product development, DrMarjan Muhammad,

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Researcher, ISRA, presented theMalaysian approach to Shari’ahgovernance. Dr Marjan beganby explaining that Malaysia hasadopted a two-tier Shari’ahgovernance infrastructureinvolving a centralised Shari’ahAdvisory Council (SAC) at theregulatory level and a secondtier constituting a Shari’ahCommittee (SC) for each Islamicfinancial institution at theorganisational level.

Dr Marjan turned her attentionto the new Shari’ah GovernanceFramework (SGF) that wasissued by the Central Bank ofMalaysia in 2010 and tookeffect in January 2011. Sheexplained that there were fourfoundations upon which theSGF had been designed. Firstly,increased oversight andaccountability has meant thatthe Board of Directors areresponsible overall; while theShari’ah Committee areaccountable with respect to legalopinions and the managementare accountable for providingadequate support.

Secondly, emphasis onindependence means that theShari’ah Committee must berecognised by the Board as anindependent body. Theguidelines also insist that anyrequests for information by theShari’ah Committee are met andrestrictions are placed on theappointment and removal ofmembers of the Shari’ahCommittee.

The third principle focuses oncompetency whereby keyinternal stakeholders arerequired to undergo continuoustraining. There is also aperformance assessment for theShari’ah Committee.

Finally, to increase consistency,

the Shari’ah Committee areduty-bound to ensure that theydo not undermine SAC rulings.Dr Marjan also introduced theAssociation of Shari’ah Advisors(ASAS), which was establishedin 2012 with the objective ofinculcating and maintainingpublic confidence and trust inIslamic finance, particularlywith respect to Shari’ahproducts and services.

The next speaker, Mufti AbdulKadir Barkatulla, anindependent Shari’ah Scholar,insisted that the involvement ofShari’ah scholars in Islamicfinance should not be confinedto product development, butthat they should have a criticalrole in the setting up of anIslamic financial institution.This can involve, for example, ascreening of the entity’s articlesof association. He agreed withMr Neil Miller’s earlierassertion that there is a need toembed and incorporate themedium and long-term

objectives of Islamic values rightfrom the outset.

He then turned to the issues ofgovernance in which hehighlighted that there iscurrently no uniform model ofShari’ah governance. Hesuggested that it would bedifficult to develop an extensivemodel of governance due to thediversity in cultural, financialand political situations acrossthe world and also because ofthe shortage of experts inShari’ah. He welcomed,however, the initiatives in theFar East to developcomprehensive models that maybe replicable elsewhere in thefuture.

The next presentation by Mr Michael McMillen, Partner,Curtis, Prevost-Mallet, Colt &Mosle LLP, one of the mostdecorated lawyers specialising inIslamic finance, discussed themanner in which the applicationof Shari’ah rulings can evolve

over time. His presentationfocused on the Dow Jones fatwawhich was issued in 1998 andpermitted a degree of activitythat was not Shari’ah compliantafter considering the nature ofthe underlying circumstances.This precedent set forth sometests to determine the level ofimpurity that would betolerated. Mr McMillen stressed that the Dow Jonesfatwa was important because it institutionalised these tests.

The tests set forth in this fatwahave taken on much broaderapplications over time. Forexample, the Dow Jones fatwawas specifically interested inindices, but the principles havesince been applied toinvestments in all types oftransactions with extendedcoverage to acquisitions,investments and trade. Heexplained that many of theseevolutionary changes developedas a result of the issues that

The Panel on Product Development andShari’ah Governance

were encountered in the processof undertaking and completingtransactions.

Mr McMillen also expressed hisviews about the standardisationof documentation in Islamicfinance. He agreed with thegeneral view that there are manypositives that come withstandardisation; however, hedebated that the interests of thepoor, who have less bargainingpower, are too often given littleregard. He also stated that astumbling block tostandardisation is the fact thatall the risk allocations have tobe agreed upon, whereby all theparties know what their riskposition is and agree on thatallocation of risk. Islamicfinance, in his opinion, is notclose to achieving this.

On the subject of Shari’ahgovernance, Dr Murat Unal,CEO, Funds@Work, alsocontributed to the discussion byrecommending a number ofimprovements to the existingmodels of governance. Firstly,similar to the approach adoptedin Malaysia, Dr Muratsuggested that there should bean introduction at country level,or ideally a global level, of aregister of scholars in which arecord is kept of who is joiningand/or leaving a supervisoryboard in order to increasetransparency.

Dr Murat also shared empiricalresearch conducted byFunds@Work, which shows thatalmost 50% of all boards acrossthe world (around 1500+) haveShari’ah Scholars who are alsoinvolved in setting standards atAAOIFI. Dr Murat raised thequestion of whether it isappropriate for scholars who siton the boards of financialinstitutions to be the same as

those who set standards andgovern the industry.

Another improvement aimed atenhancing innovation throughthe generation of new ideas,whilst simultaneouslydeveloping the next generationof Shari’ah scholars, would be arule that each Shari’ahSupervisory Board should havea minimum of two youngscholars. This apprenticeshipmodel, he argued, would alsoallow for better successionplanning and assist seniorscholars in passing theirknowledge to the nextgeneration.

Dr Murat was also of the viewthat there should be aseparation of Shari’ah auditingand consultancy/advisory. Aninstitution that advises onShari’ah-related matters, hereasoned, should not at thesame time be the one that auditsShari’ah compliance as thismight create potential conflictsof interest.

Session 3: Best Practice forShari’ah Audit

Mr Warren Edwardes, CEO,Delphi Risk Management,opened the third session on BestPractice for Shari’ah Audit witha reminder of the importance ofintention in the Islamictradition. Upon discovering thewell-known prophetic traditionwhich states, ‘Indeed all actionsare judged only by intention…’a couple of years ago, he wassurprised that intention had notbeen more widely discussed inpast Islamic finance gatherings.He noted that this situation isbeginning to change.

Mr Khairul Nizam, DeputySecretary General, AAOIFI,provided the first presentation

with an overview of Shari’ahaudit standards promoted byAAOIFI. He began byexplaining the distinction inAAOIFI governance standardsbetween Shari’ah Review andthe Internal Shari’ah Review.

He explained that the Shari’ahReview is conducted by (or onbehalf of) the SSB. The SSB hasto give an annual report onwhether the financial institutionhas complied with Shari’ah.This requires them to carry outa review on the way the Islamicbank conducts itself. On theother hand, Internal Shari’ahReview is a part of the internalaudit. Islamic banks arerequired by the standards toinclude an audit of Shari’ahaspects as an additionalcomponent of the usual internalaudit.

Mr Nizam then focussed onexternal audit. According toAAOIFI standards, theresponsibility of an externalauditor is to form an opinion onwhether the transactions of the

Islamic bank are in compliancewith the fatwa, rulings andguidance issued by the Shari’ahBoard. He emphasised that theexternal auditor is not there toassess the competence of theShari’ah Board members; butrather, the external auditors areresponsible for ensuring that thefatwa issued by the Shari’ahBoard are followed and there isa structure to support that. Headded that when an externalauditor audits an Islamic bank,the auditor is expected to looknot only at the financialperformance, but to also look atthe operations in general.

Following Mr Nizam’spresentation, Dr Asyraf WajdiDusuki, Head of ResearchAffairs, ISRA, discussed theShari’ah audit framework forIslamic finance as practiced inMalaysia. Dr Asyraf opened hispresentation by arguing that thedebates on ‘legal versus moralresponsibility’ or ‘Shari’ahcompliance versus Shari’ahbased’ would not be required ifthe industry better understood

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the Shari’ah complianceframework.

Dr Asyraf argued that everycontract has its own nature andpurpose. For example, for a salecontract to remain valid, it mustfulfil the sale objective which isto transfer ownership. If the salecontract is not for transferringownership, i.e. if the asset isfictitious, if you transfer all therisk to the other party, thisnaturally creates legal problems.He explained that in the processof structuring products, a lot ofconsideration is given to the ex-ante process. He stressed,however, that the ex-postactivity, which involves thewhole operation and executionof the transaction, is equallyimportant.

Regarding audit, he explainedthat the approach in Malaysiadiffers to the approach adoptedby AAOIFI in that theMalaysian approachdistinguishes between Shari’ahaudit and Shari’ah review withboth being classified under thecomponent of governance.

He clarified that Shari’ah auditis meant for auditing andensuring that there is adherenceto compliance after a producthas been issued. Dr Asyrafadded that the most importantelement in Shari’ah audit is toidentify the Shari’ah compliancerisks. Shari’ah audit was definedas ‘a systematic process ofobtaining and evaluatingsufficient and reliable evidenceby a qualified and independentShari’ah auditor as a basis toform an opinion as to whetherthe operations and activities ofthe entity being audited is incompliance with establishedShari’ah criteria and reportingthe opinion thereon to thestakeholders of the entity’.

By contrast, the Shari’ah reviewprocess is understood inMalaysia as a continuousprocess and starts before anydiscussions take place at theShari’ah committee level. Itinvolves a review of the productstructure and examines thejustifications for its approval.

Mr Mohammed Amin, IslamicFinance Consultant and FormerTax Partner and Head of IslamicFinance, PwC, then addressedthe issue of whetherconventional auditors shouldundertake Shari’ah audit. Hesuggested that it is notappropriate to rely on internalShari’ah expert employees asthey usually are not independentfrom management. He thoughtit appropriate, therefore, forexternal auditors, such asKPMG and PwC, to play a role.He argued that, although suchinstitutions do not normallypossess expertise in Shari’ah,they do, however, understandbanking and are experts inassessing internal control, whichis the primary function of audit.

He expressed the view thatexternal auditors should carryout Shari’ah audit on the basisof detailed guidance from theSSB. Mr Amin, however,emphasised the point that theonly party that should report onShari’ah compliance to externalstakeholders should be the SSB.In his view, external auditorsshould not report on whether anIslamic financial institution hascomplied with Shari’ah, becausethey are not experts on Shari’ah;but rather, the external auditorsshould report to the SSB afterhaving carried out aninvestigation upon the SSB’srequest. Subsequently, the SSBcan issue its own opinion byusing the report compiled by theexternal auditor.

The final presentation wasdelivered by Dr Adnan Aziz,CEO, Islamic GlobalDistribution Platform, on thetopic of whether Shari’ah auditcould be improved to promotethe welfare objectives ofShari’ah. He began by askingwhether Shari’ah audit issufficiently defined toincorporate Maqasid al-Shari’ah(i.e. objectives of the Shari’ah)values, and whether the currentpractice of Shari’ah auditsufficiently pursues Maqasid al-Shari’ah in order to enhance thewelfare of society.

He argued that compliance withthe law constitutes the letter of the law; whereas, the spirit ofthe law is determined throughreasoning and that every lawhas a purpose and reason. Heexplained that the scholars ofShari’ah widely agree that theprimary objective of Shari’ah isto provide benefit to theindividual or society.

After examining the variousdefinitions of Shari’ah auditprovided by regulatory bodies,he commented that there is nomention of Maqasid al-Shari’ahand that the main objective wasmerely legal compliance. As aconsequence, the focus is on thelegal form alone and moralresponsibility has beenneglected.

Dr Aziz neverthelessacknowledged that legalcompliance has always beennecessary, but he contended thatthe industry is now sufficientlymature to be able to introduceparameters for evaluatingMaqasid al-Shari’ah. He alsoexpressed the opinion thatShari’ah audit can be refinedfurther by having Maqasid al-Shari’ah embodied within thebasis and framework of Shari’ah

audit. He suggested, however,that greater research is requiredbefore all stakeholders will beable to agree on a sociallyconscious framework for moralconduct.

Session 4: The Way Forward –Developing a Framework forFinancial Transactions

The final session of theworkshop was chaired by MrAlberto Brugnoni who wasjoined by panellists Mr NeilMiller, Mr Michael McMillen,Mr Khairul Nizam and ISRAExecutive Director, DrMohamed Akram Laldin. Thepanel discussion was focussedon standards for the Islamicfinance industry relating toproduct development, Shari’ahgovernance, Shari’ah audit andmoral behaviour.

Mr Brugnoni proceeded byasking questions, first to thepanellists and then to theWorkshop participantscollectively, on specificrecommendations for standard-setting bodies. Regardingproduct development, thepanellists were asked whetherthere should be screeningcriteria that incorporateMaqasid al-Shari’ah. Dr Akramsupported the idea by stating itis a necessary requirement. He did add, however, that itmay be difficult to identify thepeculiarities and priorities whenassessing Maqasid al-shari’ahfor each transaction. Mr Millercontended that there appears tobe no scholarly agreement onwhat the parameters of Maqasidal-Shari’ah are. Mr McMillenagreed. Mr Miller continued bysaying that, as a result, it wouldbe extremely difficult to legislatein writing the ideas that describeMaqasid al-Shari’ah. He alsoargued that there is the risk that

the industry would beconstrained if legal parametersbecome too prescriptive. Bycontrast, Mr Nizam gave hissupport to the idea and said thatAAOIFI include this in theirstandards.

The panel were then askedwhether Shari’ah SupervisoryBoards (SSB) should includemembers who are experts inareas other than Shari’ah, e.g.accountants, economists andbankers. Dr Akram declared hissupport for this idea by statingthat screening processes can bestrengthened by including theinput of experts other than legaljurists. Mr Miller and MrMcMillen also agreed, but saidthat care should be taken toclarify their status within theSSB and the financial institution.Mr Nizam also agreed with theinclusion of diverserepresentation within SSBs,although he added that themajority of the SSB membersshould be experts in Shari’ah

and also that the legal rulingsshould lie with these legaljurists.

A third question focussed onwhether Shari’ah external auditguidelines should be providedby national regulators. AlthoughDr Akram and Mr Millerinitially suggested that this maybe a good idea, Mr MohammedAmin commented from theaudience that there is no needfor such guidelines. He regardedthe ‘idea of creating more rulesas to how people should dotheir jobs’ as ‘unnecessary’. MrMiller clarified his opinion bysaying that regulators shouldensure that external Shari’ahaudit is undertaken, rather thanregulators creating rules abouthow external Shari’ah auditshould be conducted.

Finishing on the theme of theworkshop, moral responsibility,the panel and attendees wereasked to consider the rationalefor adopting a Moral Code of

Conduct in Islamic finance. MrBrugnoni asked the panellistsdirectly whether each would bewilling to make such a personaldeclaration set out in the drafton page 35; all panellistsaccepted and agreed inprinciple. Turning to those inattendance, there was a strongagreement by all.

From the audience, Ms SaharAta, Lecturer, London School ofBusiness and Financecommented, ‘This has been along time coming’. Mr Fazl Syedalso supported the initiative, butrecommended that after havingnow agreed in principle, the nextstep should be furtherconsultation. After adequateconsultation, he believed that itwould then be possible for theindustry to proceed andimplement the code. Mr Amincommented that the text of thecode could be reduced and thereshould eventually be a movetoward enforcement. Forexample, if someone is found to

be violating the code, Islamicfinancial institutions shouldrefuse to employ them, in thesame manner that doctors whoact in breach of the HippocraticOath are struck off.

A Moral Code of Conduct forIslamic Finance

As mentioned and discussedduring the workshop, theInstitute of Islamic Banking andInsurance (IIBI) and theInternational Shari’ah ResearchAcademy in Islamic FinanceMalaysia (ISRA) have drafted a‘Moral Code of Conduct inIslamic Finance’ based around abehavioural code laying downprinciples to be subscribed to bythe various stakeholders inIslamic financial services. Thisincludes, in particular, theleaders, senior managers andShari’ah advisors within theindustry.

The paper set out the rationalefor a moral code of conduct inIslamic finance, particularly withthe background of mountingcriticism of moral failures inbanking. In financial services,there are codes for professionalethics, but it is uncommon forthere to be a moral code ofconduct for professionals thatdefines their personal behaviourand conduct. A moral code ofconduct is not, however, a novelidea. In fact, one of the oldest isthe Hippocratic Oath framedmore than 2,500 years ago forqualified physicians and stilladopted by doctors todayrequiring them to act in the bestinterests of their patients andwhen unjust circumstances arisethey should strive to correct theinjustice causing harm to theirpatients. The marriage vows areanother example that require theparties to make a pledge toremain faithful fulfilling

NEWHORIZON October–December 2012IIBI WORKSHOP

The Final Panel Debates Recommendations

NEWHORIZON Dhu Al Qaddah 1433–Muharram 1434 IIBI WORKSHOP

obligations such as sharing,generosity, honour and care foreach other. The proposal for aMoral Code of Conduct inIslamic finance by IIBI and ISRA is to help develop a similar movement in thisdirection for the Islamic financeindustry.

Although it is commonlyassumed that the Shari’ahframework of rules andguidance is an adequatesafeguard against moral hazardin the Islamic financial servicesindustry, it should also beaccepted that practitioners offinancial services are notinfallible. If this is accepted,then there can be nodisagreement that there is a need for limitations andguidance, which can assist theirdecision making, in a moralsense, especially when suchdecisions can harm andendanger the lives andproperties of other people,society and future generations.

In an industry the purpose ofwhich is to adhere to moraltraditions and seek the overallShari’ah objective of publicgood over the selfish interests ofindividuals, it has unfortunatelynot been easy to identifywhether the variousstakeholders take personalresponsibility for understandingShari’ah rules and subscribingtoward establishing the Maqasidal-Shari’ah (objectives ofShari’ah) for the public good. Bychoosing to accept and adoptthe Moral Code of Conduct, itis hoped that it may enableindividuals to search their ownconsciences and freely choosebetween moral behaviour for abetter way of life aligned to theinterest of society as a wholeand immoral behaviour that hasthe opposite result.

NEWHORIZON October–December 2012IIBI LECTURES

The Islamic Bank of Britain and the Bankof London and the Middle East face thesame commercial challenges asconventional banks. In this analysisMohammed Amin reviews the publishedaccounts of the two organisations to seehow they have performed, in what waysthey are different from conventional banksand focuses on areas where they need toimprove their competitiveness.

Background

Mohammed Amin opened his lecture bysaying that most people seem to have missedthe point that Islamic banks are banks.Islamic banks have to succeed or fail asbanks and all banks have the same purposeas any other business, which is to makemoney. If a business does not make money ithas no justification for its existence. Banksmake money by charging fees for theservices they provide; by investing on theirown account in the hope that theseinvestments will produce an economicreturn, i.e. principal investing and theyengage in transformation of credit risk andmaturity risk.

In credit risk transformation they takemoney from customers for a very low rate ofreturn, because they are allegedly low riskborrowers of money. They then lend thatmoney to other people who are allegedlyhigher risk and charge those people higherrates of interest and then they keep thedifference. That is what conventional banks

do, but it is also what Islamic banks do; theonly difference is that Islamic banks do it ina Shari’ah-compliant way.

Banks also engage in maturity transformation.Banks will take in money, which is repayablevery quickly and the interest payable on thatmoney is very low, currently less than 1%. Ifthe money is lent on a 10-year basis, thecurrent interbank rate is 3.5%. It might lookrisky to take in money repayable on demandand then lend it for 10 years, but providedthey manage the numbers right, they cansurvive and make money doing it.

What Do IBB and BLME Banks Do?

The Islamic Bank of Britain’s (IBB) principalactivities note in their accounts says thatthey are a retail bank; that they offer allkinds of services including current accountsand savings accounts; that they havebranches (which incidentally cost money)and they have other channels – internet,postal, telephone and agents.

The Bank of London and the Middle East(BLME) is quite different. They describethemselves as an independent wholesale bankproviding Shari’ah-compliant bankingservices to businesses and individuals. It isnotable that the IBB say they provide servicesto individuals and businesses, but with BLMEthe word order is reversed; they say theyprovide services to businesses and individuals.That is quite significant, because most ofIBB’s customers are individuals and most ofBLME’s customers are businesses, with astrong focus on Europe, the Middle East andNorth Africa. BLME does not need to be hereas far as its customers are concerned. It isoperating internationally. The only reasonBLME is in London is because it is a goodplace in terms of reputation; it is a great placeto buy professional services – lawyers,accountants and actuaries, for example and itis a great place to hire bankers. IBB has to be

here, because it is offering retail bankingservices to ordinary UK residents, who do notgenerally buy their banking services frombanks in France or Germany.

Who is in Charge?

IBB is the older of the two banks. From2004 to 2006 Michael Hanlon was incharge. They then had Gary Deegan for fouryears. It then changed to Sultan Choudhury.Whether you regard that as a high or lowdegree of change is a matter of opinion. Mr Amin said that personally he did regardit as a high degree of change. At BLME,from day one in 2006, the same person hasbeen in charge, Humphrey Percy.

The other key role at any bank is thefinance director or chief financial officer.IBB started with no director in that role. Itdoes not mean they did not have a head offinance. It is impossible to believe that theFinancial Services Authority (FSA) wouldhave licensed the bank without somebodybeing responsible for the finances, but therewas no person at board level holding theoffice of finance director. For two years theythen had Ashraf Piranie and then againnobody, so again nobody at board levelresponsible for the finances. BLME has hadone finance director all the way throughsince 2006, Richard Williams.

Mr Amin said that from a personal point ofview he found it very strange that a personresponsible for finance at a bank is not aboard level position. It does not matter howgood that person is, if they are not aroundthe boardroom table, they will be regardedas having lower status and they will belistened to less.

The Balance Sheets Examined

There are two interesting statistics. The firstis total assets, everything that the bank

IIBI Monthly Lecture Series – July and September 2012

NEWHORIZON Dhu Al Qaddah 1433–Muharram 1434 IIBI LECTURES

owns. BLME is four times the size of IBB.Second there are shareholder funds. IBB hasshareholder funds of £17 million, which isnot a lot of money for a bank; it is thebanking equivalent of running on ashoestring. BLME has shareholder funds of£239 million.

If the ratio of shareholder funds to totalassets is examined, at BLME it is almost30%, while IBB it is 7.8%. What that tellsyou is that IBB can afford to take far less riskthan BLME. When IBB acquires assets it hasto worry very seriously about those assetsfalling in value. For example, if the value ofIBB’s assets of £217 million fell in value by10%, that is £21 million, it would havenegative shareholder funds of £3 million. If,however, BLME’s assets of £807 million fellin value by 10%, that is £80 million. Itwould be painful, but they would still havepositive shareholder funds. When you havemuch higher equity in relation to total assets,you can afford to take more risks.

The assets are funded partly by theshareholder funds and the rest by otherliabilities. BLME gets its money almostentirely from other financial institutions. Itgoes into to the interbank market andborrows money. It does not borrow interest-bearing loans, because it is a Shari’ah-compliant bank, but it will engage inShari’ah-compliant transactions such aswakala and commodity mudarabah. Therest is funded by money from depositors,not small amounts from low-wealthindividuals, but deposits of at least £25,000.BLME’s business is asset driven.

IBB is different; it has next to nothing in theinterbank market. Its money comes fromcustomer deposits either non-profit-sharingcurrent accounts or proft-sharing accountsbased on mudarabah. In a retail bank, ifpeople put money into either a current orsavings account, the bank cannot turn themaway; it cannot stipulate minimum amountsof deposits. IBB is driven by the fact that ithas these liabilities and it cannot controlthem; if people put money into the bank,liabilities increase. It then has to think aboutwhat to do with the money when it comesin, subject to the fact that it cannot takemuch risk, because it has low equity.

If you look at BLME and its £174 millionwith financial institutions, that is effectivelyits liquidity buffer. Banks need cash they canget hold of very quickly in case people wanttheir money back or because of some otherproblem. IBB has a liquidity buffer of £144million, which is more than it probablywants.

The rest of BLME’s balance sheet, investmentsecurities and financings, are things that itwants to have and it has matched these withborrowings from the interbank market. Thesituation is different for IBB. It cannot avoidhaving £217 million of total assets, which ismoney customers have chosen to put intotheir accounts. It has managed to lend £61million in home purchase plans and it has £7million in commercial property finance, butthe rest has to go into the interbank market,because it has to be very choosy about theassets it acquires.

In summary 67% of BLME’s assets areproper financing and the rest is in theinterbank market. In IBB’s case only £69million (32%) is real financing that makemoney, the rest has to go into the interbankmarket. BLME has a 6.7% return on itstotal assets, while the rate at IBB is 1.7%,partly because IBB has lent a lowerproportion of assets and those assets arelower-yielding assets. BLME’s assets areriskier, but they do deliver a higher return.

BLME’s operating costs are much lowerproportionately than IBB’s. The reason isthat BLME has a lot more assets; it has amuch larger balance sheet and it has beenable to expand it, because it is engaging inlarge-scale transactions. IBB, on the otherhand, has a lot of branches, which equaloperating costs and that is why its operatingcosts are 5.1% of total assets. If itsoperating costs are 5.1% and its return onassets are 1.7%, then you can expect IBB tohave a problem. BLME has a return of6.7% and operating costs are 2.2%.

The average person at BLME is being paid£135,000 per annum and the average at IBBis £35,000 per annum, which is becausethey are different kinds of people. Whilemost of the people at BLME are realbankers, IBB has a large proportion of

branch staff, who do not take real bankingdecisions.

On cost of funds, BLME is paying 1.7% for£568 million of external liabilities, whileIBB is only paying 0.8%. This is becauseBLME is borrowing on the interbankmarket, where banks want to be paid aproper rate and it is also borrowing fromhigh-net-worth individuals who are alsogetting a reasonable rate for their depositsof not less than £25,000. At IBB depositsare coming from people with currentaccounts, who get nothing and fairly smalldepositors, who get a very modest return.

How are IBB and BLME Doing?

IBB has lost money in every single year ofoperation in a very consistent way. It hasnot done stupid things; it is simply runninga branch network, which involves too manyemployees and property-related overheadsfor the volume of business. In addition,because its capital is so low, it is unable tolend most of the money it takes in and toachieve a reasonable economic return.

BLME is different. In some years it hasmade money, although nothing spectacular.In their best year they made £3.5 million.With £280 million of shareholders’ funds, ifit was earning even 1% of shareholders’funds, it would have a profit of £2.8million. Given that banks such as HSBC,Barclays and Lloyds TSB aim to have areturn on equity of 10–15%, it is clear thatBLME’s results are poor, even in the goodyears and there are two years that werecatastrophically bad. In those two years thelosses came entirely from impairmentcharges due to transactions that wentwrong. Without those charges, the profitwould have been roughly the same as in thegood years. It is in the nature of investmentbanking that even one or two transactionsthat do not perform can have a hugeimpact. The outcome is that BLME like IBBhas lost money for its shareholders.

In Summary

Islamic banks are businesses and theirpurpose is to maximise shareholder value.IBB and BLME so far have not succeeded in

NEWHORIZON October–December 2012IIBI LECTURES

maximising shareholder value. They havethe same commercial challenges asconventional banks and to succeed inrunning Islamic banks there is a need for thesame kinds of skills that conventional banksneed.

Professor Habib Ahmed reviews waqf anddiscusses how this very important andhistoric institution can be integrated intoIslamic finance to realise the social goalsof the industry.

Background

Waqf and Islamic finance are in some waysvery complimentary concepts. When Islamicfinance was first mooted, it was thought to

be part of an Islamic economy that wouldfulfil the goals of Shari’ah, including bothlegal and social goals, but many observersfeel that this has not been the case.

Waqf historically has played a veryimportant role in realising socio-economicwelfare goals, but also growth in economiesby acting as a third sector. In the pastgovernments typically did not have a socialand welfare role by, for example, providingeducation and healthcare services. Intraditional Muslim societies waqf performedthis role and it did so very well. Incontemporary society waqf has becomestagnant as a concept and also in practice.

By contrast, when we look at moredeveloped economies today we see that thethird sector has become increasinglyimportant. In the UK, for example there isnow an Office of the Third Sector. We donot, however, see waqf playing the samesort of role in Muslim societies.

The Basic Concepts of Waqf

Waqf shares many of the samecharacteristics of a trust and indeed someWestern scholars say that the concept of atrust is derived from waqf. Similar to theconcept of a trust, waqf has a founder whodonates some assets for a benevolentpurpose. This is done through a waqf deed,which is basically the constitution for thegovernance of the waqf. The deed states theobjectives of the waqf; how the resourceswill be distributed and lays out managementprocedures. Traditionally a waqf wouldhave a manager, who would usually comefrom the family of the person setting up thewaqf and the deed would state howmanagers should be appointed.

A waqf has to have a benevolent objective,but that is a very broad ranging objective,so, historically, waqf have been created for awhole range of purposes. Waqf are usuallyperpetual, but they can be temporary, whichwas verified recently when the Islamic FiqhAcademy put forward a resolution thatmakes temporary waqf permissible. Therecan also be different types of waqf; they canbe for public or philanthropic purposes, forfamily or they can be mixed.

A Brief History of Waqf

The first waqf was a religious waqf, whichwas for the Al-Masjid al-Nabawı̄ in Medinacreated by the Prophet (pbuh), buthistorically most waqf were for socialpurposes, everything from education andhealthcare through animal welfare to theprovision of public utilities. Waqf haveundoubtedly made a major contribution tothe great Muslim societies of the past, but inrecent times the notion of waqf has beensomewhat corrupted and the social role hasdiminished.

The Current Status of Waqf

For a variety of reasons waqf today hasbecome a stagnant institution. Most peopledo not even know about the history of waqfand the important social role they playedand it is no longer performing that socio-economic role. The problem is that waqf areset up in perpetuity and so in many Muslimcountries there are waqf assets, mainlyproperties, which are being completelyunder-utilised; they are no longer being usedfor social purposes and they cannot be usedfor private purposes. The result is that manywaqf properties have been lost.

Waqf is not mentioned specifically in theQur’an or Sunnah; rather it ispredominantly derived from fiqh andtherefore open to ijtihad. Interestingly, a2009 Islamic Fiqh Academy resolutionmade waqf very flexible, breaking awayfrom many of the traditional notions ofwaqf. For example, the resolution declaredthat waqf assets can include not justimmovable properties, but also sukuk andequities.

Integration Between the Islamic FinancialSector and Waqf

Professor Habib suggested there were avariety of ways in which the Islamicfinancial sector and waqf could beintegrated. The first is for the Islamicfinancial sector itself to promote thedevelopment of waqf by financing waqfproperties. In many Muslim countries waqfproperties are in prime locations, but,because they have not been developed, the

Mohammed Amin is an Islamic financespecialist, with a particular interest inaccounting issues and in how Islamicfinance is treated in Western tax andregulatory systems. He is a member of theEditorial Advisory Board of NewHorizonand was previously a partner and UK Head of Islamic finance atPricewaterhouseCoopers LLP.

NEWHORIZON Dhu Al Qaddah 1433–Muharram 1434 IIBI LECTURES

income from them is very small or evennon-existent. The other approach is for theIslamic financial sector to offer itsmanagement services to manage the waqfproperties.

The nature of waqf itself means, however,that there are special considerations inrelation to what can be done in terms offinancing. When a property is given away aswaqf, there is no owner as such; the scholarssay it as though the ownership belongs toGod himself. Given that fact, it cannot beused as collateral and it cannot be sold.

One solution is to finance the waqfproperties directly, but unfortunately mostIslamic banks are not doing that. TheIslamic Development Bank (IDB), however,has a S50 million waqf property investmentfund with the sole purpose of investing inwaqf properties in IDB-member countries.

The other approach to integrating Islamicfinance and waqf is for Islamic financialinstitutions to go into waqf management.Historically, one of the problems thatcaused many waqf to degenerate wasmismanagement and that is one of thereasons why governments stepped in,although Professor Habib suggested thistended to cause more problems, rather thanproviding a real solution. He suggested thattrust management corporations, mirroringthe conventional finance sector, could be theanswer. Such organisations would offercontinuity of management, professionalexpertise and objectivity.

There are two major ways to provide thesesorts of services in conventional finance –banks have specialist trust departments andthere are independent trust managementcompanies. One example of a bank-basedtrust management operation in the Islamicfinance sector was unfortunately a failure. Inaround 2006 Dubai Islamic Bank and theDubai Finance Centre (DFC) came togetherto form a waqf services company to managewaqf properties, but after two years theyhad to close, because they could not generatesufficient business. Another example, thistime an independent trust managementcompany in Malaysia, AmanahRaya, hasbeen more successful. They do not, however,

manage waqf yet. The problem in Malaysiais that if someone creates a waqf, thegovernment basically takes over, but if youcreate a trust then it can be managed by anorganisation such as AmanahRaya.

Waqf-Based Institutions

Another approach is to use waqf in thefinancial sector. This can be done in threeways – waqf-based microfinanceinstitutions; the use of waqf to guaranteesmall and micro enterprises and waqf-basedtakaful, particularly micro takaful with asocial orientation.

Waqf-based financial institutions are notnew; historically they have been used tofinance the poor and needy. There wereexamples of cash waqf in Turkey and in Irantoday there are still qard hasan funds, whichstarted as waqf funds and have become verylarge.

Bringing waqf to microfinance institutionscan be done in three ways. Firstly the cashrealised from a waqf fund can be investedand the returns used for microfinance, butthe returns are likely to be quite small andtherefore the money available forinvestments will be correspondingly small.An alternative is to use the cash realised tofinance projects and businesses in the formof interest-free loans. The third approach,favoured by Professor Habib, is to use waqf funds as capital to initiatemicrofinance institutions and really grow this element of the Islamic financesector, because Islamic banks, with a fewnotable exceptions, are not providingmicrofinance.

The fiqh ruling on waqf guarantees is thatthese should be given free of charge. Today,however, many Islamic financial institutionshave fatwa that allow them to make acharge for providing guarantees.

Islamic financial institutions are in generalwary of lending to small and microenterprises, because the risks are higher.This is usually resolved by governmentscoming in as guarantors, but ProfessorHabib believes that waqf-based institutionscould fulfil that role.

Finally, there is waqf-based takaful, whichexists today in Pakistan. The logic is thatwaqf-based takaful is less controversial thanother prevalent forms of takaful. It is alsopossible that it would allow takaful to bespread more widely at the microenterpriselevel.

In waqf-based takaful participantscontribute to a waqf fund and any surplus isshared between the shareholders of thetakaful operator and the waqf fund.

Conclusion

Historically waqf has played a veryimportant role in providing socio-economicservices. In many countries today, however,waqf is not being used productively, butProfessor Ahmed believes that theinstitution can be revived and integratedwith the Islamic financial sector. If it wererevived, it could provide valuable services tosmall and micro enterprises, currently notwell serviced by Islamic financialinstitutions.

Professor Dr Habib Ahmed is the SharjahChair in Islamic Law and Finance atDurham University. Prior to joining DurhamUniversity in September 2008, ProfessorAhmed worked at National CommercialBank and Islamic Research and TrainingInstitute (IRTI) of the Islamic DevelopmentBank Group in Saudi Arabia.

NEWHORIZON October–December 2012IIBI NEWS

In order to offer wider choice to potential applicants, IIBI launched its Diploma in IslamicBanking (DIB) by distance learning in January, 2010. The course builds candidates’knowledge of Islamic banking concepts as well as their practical applications. It supportscandidates seeking a career in Islamic banking and also their career progression in theIslamic finance industry.

Candidates having a graduate degree may take up the IIBI Post Graduate Diploma inIslamic Banking and Insurance (PGD), however those who wish to build a good foundationof Islamic banking concepts and operations, may opt to take the DIB course and later onprogress to the PGD. DIB holders wishing to take up the PGD course will get an exemptionfrom some of the Post Graduate Diploma modules.

Post Graduate Diploma in Islamic Banking and Insurance (PGD) Awards

To date students from more than 80 countries have enrolled in the PGD course. In theperiod July to September 2012, the following students successfully completed their studies:

Alagie Jeng, UK

Anthony Ejiogu, Divisional Head Financial Control and Strategy, Arab Gambia IslamicBank, Gambia

Assad Al-Kharusi, Manager – Operation & Product Development, Bank Muscat, Oman

Hassan Idris, Senior Banking Officer, Credit Risk Manager, Jaiz International Plc, Nigeria

James Henry Brazier, Co Head of Credit Risk Control North Asia, BNP Paribas, Bahrain

Jawad Raza Valji. Manager – Credits and Marketing, Al Baraka Islamic Bank, Pakistan

Mahamat Lamine Adoum, Court of Justice of Economic and Monetary Community ofWest Africa, Chad

Maher Ghneim, Internal Auditor, Central Bank of UAE, UAE

Mohamed Anwar, Junior Dealer, Gulf African Bank, Kenya

Mohammed Usman, Marketer/Relationship Manager, United Bank for Africa Plc, Nigeria

Nasifa Chaudhry, Financial Advisor, Finanzberatung fur Muslim and Frende

Suleiman Khamis, PayrollAdministrator, London Midland Trains,UK

Syed Nazim Ali Shah, Spain

Zainab Sani, Economist, Central Bankof Nigeria, Nigeria

Mohammad Altaf Madraswala,General Manager, National InsuranceCompany Ltd, Pakistan

Diploma in Islamic Banking (DIB) Awards

Students from 23 countries have enrolled onthis course so far. The following studentscompleted their studies in the period toSeptember 2012.

Thai Ahmed El Heri, Purchasing Officer,Arabian Gulf Oil Company, Libya

Sahla Khan, Consultant, A2ZProject/Academy for EducationalDevelopment, UAE

Nana Mohamed Swalihu, CustomerService Officer, Gulf African Bank Plc,Kenya

Muhammad Shoukat, UK

Junaid Khan, Sales Advisor, Esso, UK

David Kremer, Manager, FMF,Germany

Alaa Mustafa, Marketing Specialist,Islamic Development Bank, Saudi Arabia

IIBI Awards – Diplomas in Islamic Banking

Mohammed Yusuf Korbu, India

The best thing was the structure of the syllabus, which madeit easy for someone who knows nothing about Islamicfinance to understand.

Kingsley Okolie, Chief Operating Officer, Arab GambiaIslamic Bank, Gambia

The use of simple everyday English to illustrate the topicsmade it very simple to understand especially for those whosemother tongue is not the English language. Thecommunication is very good especially the responses fromthe tutor.

NEWHORIZON Dhu Al Qaddah 1433–Muharram 1434 IIBI NEWS

October

14–16: Islamic Finance in a ChangingWorld, Abu Dhabi

The conference will consider the significantpolitical and socio-economic developmentsthat have occurred recently and theirprobable effects on the performance andfuture position of Islamic financialinstitutions (IFI’s), regulatory frameworksand popularity of Islamic products beingoffered to the public, governments andbusiness firms.

Tel: +44 (0)1274 777700Email: IIFC@emeraldinsight.comwww.emeraldinsight.com

17–18: Middle East Takaful Forum,Bahrain

This event will examine the parallels anddifferences between the takaful industry inMalaysia and the Middle East, asking whatthe two regions can learn from each other. Itwill also look at how the industry needs toadapt to an evolving regulatoryenvironment. The keynote speech will bedelivered by Dato’ Haji Syed MoheebKamarulzaman, Chairman of the MalaysianTakaful Association.

Contact: Yasmeen ShahTel: +9714 343 1200Email: yasmeen@megaevents.netwww.megaevents.net

November

6–7: Islamic Banking Summit Africa(IBSA), Djibouti

Focusing on the challenges andopportunities that are forging the banking,finance and investment landscape in Africa,the conference is titled ‘Capturing the AfricaOpportunity in Islamic Finance’. The

keynote address will be given by H.E.Khaled Mohammed Al-Aboodi of theIslamic Development Bank’s Private Sectorgroup, who will analyse how Islamic financecan mobilise trade and investment flowsinto Africa.

Contact: Yasmeen ShahTel: +9714 343 1200Email: yasmeen@megaevents.netwww.megaevents.net

12–13: IFN Forum Saudi Arabia, Riyadh

Similar to the London event in October, thisconference has separate days for issuers andinvestors. Topics in Riyadh will include aglobal perspective on sukuk structures andthe Islamic investment and wealthmanagement marketplace in Saudi Arabia.

Contact: Cindy WongTel: +603 2162 7800 Ext. 46Email: Cindy.Wong@REDmoneyGroup.comwww.REDmoneyevents.com

December

3–4: AAOIFI Annual World BankingConference on Islamic Banking andFinance, Bahrain

This two-day conference, under the auspicesof the Central Bank of Bahrain, will includesessions on Islamic finance in overalleconomic systems, risk management,Shari’ah issues and challenges and newdevelopments in accounting standards forIslamic finance. It will be followed by a oneday workshop on accounting standards on 5 December.

Tel: +973 17244496www.aaoifi.com

4–6: 8th World Islamic Economic Forum,Malaysia

The theme of this conference, ‘ChangingTrends, New Opportunities’ will examine

just what the Arab Spring and the Eurozonecrisis means for Islamic business across theglobe. Sessions will look at growingbusinesses, leadership, women’s roles andIslamic finance. The conference will beopened by the Prime Minister of Malaysia,H.E. Dato’ Sri Najib Tun Razak.

Contact: Jackie MahTel: +603 2145 5500Email: jackie@wief.orgwww.8thwief.org

9–11: World Islamic Banking Conference,Bahrain

Now in its 19th year this conference is titled‘New Strategies for Islamic Finance to Comeof Age – Scaling Up, Innovating Products,Globalising Footprint’. In particular it willaddress topics such as consolidation andmergers to strengthen institutions andensure long-term industry stability. Thisyear the conference will see the launch ofthe Ernst & Young World Islamic BankingCompetitiveness Report 2012/13, whichfocuses on the ways Islamic banks are tryingto penetrate the retail customer market andthe challenge of achieving both excellence inbanking operations and Shari’ahcompliance.Contact: Sophie McLeanTel: +9714 343 1200Email: sophie@megaevents.netwww.megaevents.net

February 2013

26–27: 12th Annual Islamic FinanceSummit, London

Session and speaker details for this annualevent are not yet available, but readers maywish to put this date in their diary.

Contact: Stacey KellyTel: +44 (0)20 7779 8515Email: s_kelly@euromoneyplc.comwww.euromoneyseminars.com

Diary of Events

NEWHORIZON October–December 2012IIBI NEWS

For the 6th consecutive year, IIBIorganised a three-day residentialworkshop on ‘Structuring InnovativeIslamic Financial Products’ atFitzwilliam College, CambridgeUniversity, UK, from 7th to 9thSeptember 2012. Having begun in2007, the workshop has been a source ofknowledge for hundreds of Islamicfinance practitioners all over the world.The primary focus of the workshop hasbeen to examine the various approaches toproduct structuring and to help participantslearn about innovative designs that addressthe challenges of the Islamic financeindustry. The workshop is part of theInstitute’s commitment toward practice-based learning that concentrates onproviding practitioners of Islamic financewith practical skills that they can applydirectly at their place of work and usethroughout their careers.

The tremendous success of the workshophas also been bolstered by the support ofleading bodies in the Islamic financeindustry, including the InternationalShari’ah Research Academy for IslamicFinance (ISRA), the Accounting andAuditing Organisation for Islamic FinancialInstitutions (AAOIFI) and the UK IslamicFinance Secretariat (UKIFS) who haveendorsed and recognised the workshop asproviding essential knowledge and trainingto the people involved in the Islamic financeindustry.

Attendance at this year’s workshop was asdiverse as ever with participants havingtravelled from the USA, UK, UAE, Gambia,Nigeria, Burkina Faso, Kenya, Pakistan,Malaysia and Indonesia. The participantsconsisted primarily of bankers and lawyers,as well as a number of Shari’ah advisors,consultants and researchers.

The workshop was led by Dr Salman Khan,Head of Shari’ah Office at a leading GCC-based Islamic bank (Dubai). He was alsojoined by a host of speakers including DrAsyraf Wajdi Dusuki, Head of ResearchAffairs, ISRA (Malaysia), Mr Iqbal Asaria,Associate, Afkar Consulting (UK), MutfiBarkatulla, Independent Shari’ah Advisor(UK), Dr Marjan Muhammad, Researcher,ISRA (Malaysia), Dr Muhammad SyafiiAntonio, Chairman, Tazkia (Indonesia) andDr Mohamed Akram Laldin, ExecutiveDirector, ISRA (Malaysia).

The workshop began with an introductionto the role of innovation and anexamination of what Islamic finance canoffer that is not offered in the existingmarket space. Thereafter, the workshopbegan an intensive study of the innovativeapplications of the various product typesapplicable in Islamic finance. The secondday involved an appraisal of investmentbanking and corporate products, with aspecific examination of capital marketinstruments. A number of sessions werealso dedicated to an investigation of sukukstructuring and re-structuring as well as thepractice of takaful and the design ofacceptable hedging instruments. The finalday concentrated on innovative approachestoward Shari’ah-based products whichpermeate Shari’ah and moral values.

As with previous years, the workshopinvolved a number of case studies, although

this year included the new feature ofgroup exercises to ensure participantsovercome hurdles to productdevelopment. The workshop closed witha panel session involving three guestexperts in Shari’ah analysis in Islamicfinance. At the workshop close,participants received certificates ofattendance from Mr Mohammad Ali

Qayyum, Director General, IIBI, Dr Mohamed Akram Laldin and MuftiBarkatulla.

Among the comments made by participantswere the following:

An excellent course plus a great mix ofparticipants

Mr Luqyan Tamanni, Manager, BehasaTazkia, Indonesia

The organisation and delivery was excellent

Mufti Aziz ur Rehman, Manager – Shari’ah,Mawarid Finance, UAE

The workshop was very well organised, wellmanaged and it was an excellentopportunity to learn about how to structureinnovative Islamic products. The workshopwas simply outstanding.

Mr Ekramul Karim Chowdhury, Investment& Treasury Operations, Sharjah IslamicBank, UAE

The workshop contents, speakers,participants and venue were exceptional

Mr Mu’min Islam, Attorney, Mfi LawGroup, USA

If you wish to attend the 7th IIBI Three-DayResidential Workshop on StructuringInnovative Islamic Financial Products atCambridge University in the summer of2013, you may contact IIBI at iibi@islamic-banking.com, or +44(0)20 7245 0404.

6th Annual IIBI Three-Day Residential Workshop onStructuring Innovative Islamic Financial Products, Fitzwilliam College, Cambridge University, UK

Templar House, Don Road, St Helier, Jersey JE1 2TR, Channel Islands. Tel: +44 (0)1534 500400 Fax: +44 (0)1534 500450 mail@volaw.com

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