MALAYSIA Inside Islamic Finance Newsislamicfinancenews.com/sites/default/files/newsletters/v2i24.pdf · Mohammed Al Hashimi, CEO of AMLAK Finance – at MEED’s 2nd Major New Oppor-tunity

News Briefs………………………………. 1

• New Asian funds • Sukuk set to surge • Fly to Milan with AMLAK • Fitch Ratings Conference • New Asian funds • All brokerage licences cancelled • IIB stake in Dubai project • ADIB real estate • Global Titans to increase • Labuan regional hub for KFH • Arcapita in US real estate deal • BMA seeks views on consultation • Standardization of Mudarabah • Putrajaya Islamic bonds • Sukuk in P&O takeover • Morgan Stanley in DIFC • Islamic bond sale delayed • Unisem Islamic financing facility • VCBank to launch fund • Islamic investment takes to the skies • Hubline appoints Affin adviser • RHB first Islamic index fund • Extra summits at WIBC • Tie-up for women’s Uni

Country Report………………..…….……... 11 Comparison of Islamic Banking in Iran with Other Islamic Countries

Industry Report …………………………...… 14 Is Civil Banking Litigation in Harmony with Shariah?

Industry Report ……………………………... 18 Riba: Today’s Practical Form and the Reasons Behind its Prohibition

Islamic Finance Forum ..………..………. 20

Takaful News………………………..…….... 22

Takaful Report…..…….....……………...... 25 Islamic Health Insurance (Takaful Sihat) Part II

Moves ………………..………..………….…... 28

Bondweb ……………………………………... 29 Malaysian Islamic Bond Update

Dealogic…………………...……………….….. 30 Islamic Finance League Tables

Subscription Form………….………………. 34

Vol. 2, Issue 24 5th December 2005

Inside Islamic Finance News:

UAE (Abu Dhabi) AMLAK expansion AMLAK plans to expand its Islamic financing solutions aggressively into Abu Dhabi, with full operations expected to be up and run-ning early in 2006. Mohammed Al Hashimi, CEO of AMLAK Finance – at MEED’s 2nd Major New Oppor-tunity Conference in Abu Dhabi – said: “The recent changes in the law in Abu Dhabi

allowing non-nationals to own property, ech-oes a similar move in Dubai in 2002. There, AMLAK was able to move swiftly to become the leading home finance provider in the UAE.” “This move is part of our overall growth strat-egy for the company which we announced at the time of our increase in capital.”

MALAYSIA Sukuk set to surge Demand for Islamic bonds will grow expo-nentially as soon as the Sukuk fund concept becomes more popular, according to Ijlal Alvi, CEO of International Islamic Financial Market. There is tremendous growth potential in the Sukuk market, as increasing numbers of institutions are realizing. It is anticipated that in 2005, Sukuk investments will in-crease to US$9 billion (a 35% increase on 2004).

MALAYSIA Bank Islam recapitalization on course

BIMB Holdings, the parent company of Bank Islam Malaysia, is all set to move forward and will submit its recapitalization proposal to the Securities Commission soon.

The proposal – involving a rights issue and a restricted issue – will enable the group to raise funds to recapitalize Bank Islam. Man-aging Director and CEO Datuk Noorazman Aziz, speaking after the group’s AGM, said the bank must now move forward by improv-ing income, cost rationalisation and looking into new businesses.

BIMB Holdings is currently negotiating with two potential foreign partners (one of whom

has been confirmed to be Bahrain’s Unicorn Investment Bank) to take up a stake in the bank. “We are also carrying out due diligence on the foreign partners to know what quality values they can offer and to ascertain whether they want to acquire a stake in the bank or its holding company,” Noorazman said. An announcement will be made in two months’ time and new funds are expected to be available by May 2006.

Ijlal Alvi was speaking on the subject: “Towards Global Standard for Islamic Sukuk Issuance and Trading” at the Kuala Lumpur Islamic Finance Forum 2005. Limited awareness of Sukuk in the western world, the lack of a critical mass, the lack of regulatory support or a separate legal frame-work for Sukuk are all factors constraining the use of Sukuk currently. In addition, the current limited number of issues restricts active trading of Sukuk on the secondary market.

www.islamicfinancenews.com

Page 2 5th December 2005 ©

NEWS BRIEFS

Mr Daud Abdullah (David Vicary) Managing Director

Hong Leong Islamic Bank

Dr Mohd Daud Bakar Chief Executive Officer

International Institute of Islamic Finance

Prof Dr Mohd Ma’sum Billah Associate Professor

International Islamic University of Malaysia

Dr Humayon Dar Vice President

Dar Al Istithmar

Mr Badlisyah Abdul Ghani Head

CIMB Islamic

Ms Baljeet Kaur Grewal Chief Economist

Aseambankers Berhad

Mr Sohail Jaffer Partner & Chief Executive Officer

FWU Group

Dr Monzer Kahf Consultant/Trainer/Lecturer

Private Practice

Mr Mohd Ridza bin Mohammed Abdullah Managing Partner

Mohamed Ridza & Co

Prof Bala Shanmugan Director of Banking & Finance Monash University Malaysia

Mr Muhammad Nejatullah Siddiqi Author, Scholar, Speaker, Trainer

Mr Dawood Taylor

Head of Takaful Ta’awuni Division Bank Aljazira

Mr Abdulkader Thomas

President & Chief Executive Officer SHAPE – Financial Corp.

Mr Paul Wouters

Of Counsel Bener Law Office

Prof Rodney Wilson

Director University of Durham

Dr Nordin Mohd Zain

Executive Director Malaysia Accounting Standards Board

Mr Sohail Zubairi

Vice President & Head Shariah Coordination

Dubai Islamic Bank

ISLAMIC FINANCE NEWS Advisory Board:

BAHRAIN Al Amin profits double Net profits for Al Amin Bank, a subsidiary of the Al Baraka Banking Group, grew to US$11.8 million from US$6.4 million for the same period last year. This represents a near doubling in profits for the first nine months of the year. Overall assets increased by 33% to US$292 million, from US$220 million in 2004. “The record-breaking profit figure was a result of the strong growth of the bank’s invest-ment funds, where the bank’s investments grew to US$232 million compared to US$162 million a year earlier,” said the bank’s General Manager Mohamed Al Mu-taweh.

QATAR QIIB in Tabarak f inancing Qatar International Islamic Bank (QIIB) and Tabarak Group have penned a deal to fi-nance the purchase of residential units in Tabarak Residential City in Cairo and else-where in Egypt. The financing covers tourist residential units: Qatari nationals must pay within a period of 96 months and expatriates within 72 months, with a 10% down payment.

IRAN Supertanker operator seeks financing Iran’s National Iranian Tanker Company will invest upwards of US$2 billion over the next four years, in the hope of becoming the world’s fourth largest by 2009.

“We have a significant new building programme underway, including plans for 10 LNG carriers and 10 chemical tankers by 2009,” said Chairman Mohammad Souri. “By the year 2010, Iran will require more than double the amount of vessels to handle its petro-chemical exports. This year we need 73 and in five years we would require 184.” Perhaps Islamic financing will be required?

DUBAI Fly to Milan with AMLAK “Fly to Milan” is the latest promotion from Amlak Finance and Al Fattan Properties. Home buyers in the Al Fattan Marine Towers will be provided with two business class tickets, two days and one night accommodation in a five-star hotel, and the chance to personally choose their furniture designs from Best Italian Interiors Design in Milan, Italy. They will have a personal assistant and a limousine plus driver for the two-day stay in Milan. CEO of Amlak Finance, Mohammed Al Hashimi, said: “Amlak will always bring innovation into the service we provide to our clients. Strategic relationships with brand names like Al Fattan continue to add value to our portfolio. The flight and the furniture design are all included in the promotion.”

SAUDI ARABIA New Asian funds Two new investment funds targeting Asian markets are to be launched by Saudi banks. Banque Saudi Fransi’s “Al-Nagaa” will be a long-term capital appreciation, investing in the stocks of companies in the Asia-Pacific region which conform to Shariah law. Saudi British Bank’s China – India flexible fund (managed by HSBC) will invest mainly in the region’s two fastest growing economies: China and India.



NEWS BRIEFS MALAYSIA Qatar top of l ist for RHB Group RHB Group is conducting a feasibility study in the hope of gaining entry to the Gulf, starting with Qatar. Malaysia’s leading banking and financial services provider held a series of roadshows in the region, where it hopes to introduce its niche products and services. CEO of RHB Securities Dr Zaha Rina Zahari said that there were an increasing number of Malaysian contracting, construction and ser-vices firms in the region requiring banking services: “Trade financing and correspondent banking are some of the services we wish to pro-vide to Malaysian firms here in this region … We can also raise funds for them via the bonds.” RHB established its Islamic banking window in 1993, which has now become a fully fledged Islamic banking unit with an asset size of US$132.57 million (RM500 million).

QATAR All brokerage l icences cancelled Doha Securities Market (DSM) has announced that all listed banks offering brokerage services will have their licences terminated. Dilala Brokerage and Dilala Islamic Brokerage will become responsi-ble for all new investor accounts from the 1st January 2006, and will take over all existing accounts held by brokerage banks by the 1st March 2006 In the month of January, banking brokerage firms will only be allowed to conduct business for existing clients. In the month of February, all banking brokerage firms will have to transfer the shares of their cli-ents to the Central Registration Department of the DSM and will not be permitted to conduct any purchase transaction for their clients. From the 1st March 2006, the brokerage banks will completely cease to operate.

DUBAI DIB to arrange Enoc finance Enoc has appointed Dubai Islamic Bank to arrange a US$500 million Islamic facility. This facility will enable an upgrade of the 120,000 bpd Jebel Ali refinery, to include installing a 70,000 bpd hydro-treater and a 36,000 bpd crude catalytic reformer.

BAHRAIN I IB stake in Dubai project A 50% equity stake in an US$80 million office tower project at Busi-ness Bay in Dubai will be taken by Bahrain-based International In-vestment Bank (IIB). The Shariah compliant investment, co-sponsored by the Al Masa Group, will be placed with GCC investors.

BAHRAIN Shamil Bank profits up 21% Shamil Bank reported a net profit of US$25.6 million for the nine-month period ending on the 30th September, up 21% on the US$21.1 million earned in the same period in 2004. In the third quarter alone, the bank generated a net profit of US$4.4 million. Consolidated total assets slumped to US$1.314 billion during the same period, from last year’s US$1.617 billion. Total operating in-come was up by US$6.89 million to US$53.2 million, a rise of 14.9% on last year.

DUBAI ADIB real estate Abu Dhabi Islamic Bank (ADIB) plans to establish a real estate com-pany capitalized at US$136.138 million (Dh500 million). The Bourouj Real Estate Company will be a fully owned subsidiary of ADIB, working as its real estate arm. It will not be placed for public subscription.

SAUDI ARABIA ICIEC 10th Anniversary The Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC) will celebrate its 10-year anniversary at the building of Islamic Development Bank. The organization has provided insurance services for over 200 ex-porting companies, banks and investors in one-third of member countries. The corporation is working to support exports form Muslim countries to world markets and encourages foreign investments to member countries by providing necessary securities for the benefit of exporters, investors, and banks.

MALAYSIA Fitch Ratings Conference Rating Islamic banking and REITs were among the topics discussed at the Fitch Ratings Asia Conference 2005 in Kuala Lumpur.

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24th – 27th July 2006, ISTANBUL



NEWS BRIEFS MALAYSIA Seven challenges for Malaysia Deputy Prime Minister Datuk Seri Najib Tun Razak, delivering the keynote address at the Kuala Lumpur International Islamic Finance Forum 2005, said that Malaysia faces stiff competition to its position as the world’s premier Islamic financial centre. “What I mean is that Malaysia may have made a head start but this will not be with us forever,” he said. To maintain its lead, Najib out-lined seven major challenges that need to be addressed. • Islamic finance players in Malaysia must realize that the industry

is no longer the exclusive domain of Islamic institutions.

• The potential size of the Islamic finance market is huge, with esti-mated assets in Shariah compliant accounts worldwide totalling US$200 billion–US$500 billion (RM754 billion–RM1,885 billion).

• The new status of Islamic finance means research, study and investment in human capital must be undertaken.

• Awareness of Islamic finance needs to be raised through re-search, education and training.

• Islamic banks must exploit modern technology.

• Supervisory and regulatory procedures must be implemented to bring Islamic banks up to international standards.

• Key performance indicators applicable to all Islamic financial institutions, both locally and globally, must be addressed urgently.

The Kuala Lumpur Islamic Finance Forum ended on 1st December 2005, after three days discussing topics such as Islamic finance in China, Islamic derivatives, Shariah compliance audit, pricing and performance analysis, and the Islamic capital market.

MALAYSIA Labuan regional hub for KFH Kuwait Finance House (Malaysia) (KFH) has applied for Bank Negara approval to make its Labuan branch a regional finance hub for the Asia Pacific. Deputy Chief Executive Officer Jamelah Jamaluddin said KFH had a soft launch for its first branch in Kuala Lumpur in August, and was awaiting Central Bank approval to issue new products. The KL branch has a paid-up capital of US$100 million (RM377 million). Although KFH’s current focus is on investment banking, it also wants to increase its retail and commercial banking aspects. Jamelah com-mented on Malaysia’s advantage over most countries, thanks to its supportive regulators and advanced Islamic banking system.

DUBAI New EIB credit cards Emirates Islamic Bank (EIB) chose the recent second Islamic Retail Banking Conference to launch its innovative new Islamic credit card programme.

Khairil Anuar Mohd Noor, the bank’s Head of Marketing, believes customers can make savings on their credit card of up to 70% com-pared to other traditional credit cards, while still complying with Shariah law.

There will be no interest on the outstanding balance and no hidden charges, only annual fees, with a minimum monthly repayment of 10% of the outstanding balance.

Khairil Anuar commented: “the demand for Shariah compliant credit cards is growing at a very fast rate. Its numerous features and advan-tages, especially its interest-free aspects, have proven to be very popular and has even instigated a rush of non-Muslim applicants for the product.”

DUBAI Co-op Islami signs up Team Creatif

The leading real halal producer and retailer Co-op Islami has signed a US$272,275 (Dh1 million) contract with Team Creatif, the French specialist in brand positioning, in order to enhance its presence inter-nationally.

Co-op Islami’s commitment to the concept of “Real Halal” and the principles of Islamic Shariah is strong. The company applies more than the minimum Shariah requirements in halal production, apply-ing the Islamic rites comprehensively.

BAHRAIN Arcapita in US real estate deal

Bahrain-based investment firm Arcapita Bank will sell three real es-tate portfolios in the United States to ProLogis, a leading global pro-vider of integrated distribution facilities and services, for an aggregate transaction value of approximately US$800 million, in a deal expected to be closed in January 2006. The 71 properties comprise recently built, fully leased industrial distri-bution facilities, located in key distribution markets across the United States. Arcapita seeks to provide innovative Shariah compliant invest-ment opportunities that generate superior risk-adjusted returns.

SAUDI ARABIA Credit Suisse to offer brokerage

Credit Suisse has teamed up with Saudi partners in order to offer brokerage services in the Kingdom. It has been granted a licence by the Saudi regulatory board, the Capital Markets Authority (CMA). HSBC and Deutsche are other foreign banks to be granted the li-cences by CMA.

MALAYSIA Global Titans to increase

CIMB-Principal Asset Management’s Global Titans Fund, which sold out a few months after it opened in July, has received approval from the Securities Commission to increase the fund size by 100 million units. CIMB-Principal has seen overwhelming demand for the fund, be-lieved to be the first truly global fund in Malaysia which gives local investors access to American, European and Japanese equity mar-kets. In another development, CIMB’s Islamic finance arm, CIMB Islamic, has been named as the Most Outstanding Islamic Financial Institu-tion by Kuala Lumpur Islamic Finance Forum 2005 at the event in Kuala Lumpur. Head of CIMB Islamic Badlisyah Abdul Ghani said: “We managed and closed about US$2.5 billion in deals so far this year and hope to close another four deals before year-end.”



NEWS BRIEFS

MALAYSIA Putrajaya Islamic bonds

Putrajaya Holdings will issue up to RM2.2 billion Murabahah Me-dium-Term Notes (MTN) to refinance existing borrowings and fund new projects. Alliance Merchant Bank, CIMB and RHB Sakura Merchant Bankers are the joint lead arrangers and managers of the deal. The profit payments for the first five years of the notes will be funded either with internal generated funds or from proceeds of future bond is-sues under the Murabahah MTN programme. Putrajaya Holdings is midway through the development of the fed-eral government administrative capital, due for completion in 2007. Chief Executive Officer Datuk Mohamad Othman Zainal Azim said: “Proceeds from the Islamic bonds will not only enable us to embark on new projects but also assist in our efforts to promote Putrajaya at the international level.” (See Ratings Update.)

BAHRAIN Islamic credit card workshop The Bahrain Institute of Banking and Finance will run a workshop – to be led by a number of specialists in Islamic banking – on Shariah com-pliant plastic card operations. The workshop, to be held on the 14th and 15th December, will look at the risks involved in credit cards, pricing and charges, accounting, proc-essing and innovations in the area, amongst other issues.

BAHRAIN Standardization of Mudarabah

A joint presentation by the Bahrain Monetary Agency (BMA) and the London Metal Exchange (LME) will be made at the upcoming 12th Annual World Islamic Banking Conference (WIBC) on the standardi-zation of Mudarabah contracts. The session, entitled “Addressing the Challenges of Market Develop-ment and Risk Management,” will focus on the standardization of Mudarabah contracts. The BMA and the LME have an ongoing co-operation to develop contracts and documents which can be used by Islamic financial institutions for conducting transactions in metals also traded on the LME. The theme of this year’s WIBC is “Unlocking Market Opportunities – Consolidation, Innovation and Growth.” The Islamic Development Bank (IDB) will participate as the Multilateral Strategic Partner of the conference, which takes place on the 10th–12th December 2005.

BAHRAIN BMA seeks views on consultation The Bahrain Monetary Agency (BMA) has issued an initial consulta-tion paper on work completed on a new regulatory and supervisory framework for investment business licensees. This consultation is on Volume 4 of the BMA Rulebook, which the BMA hopes to issue by mid-2006. This initial consultation explains the project’s background, its proposed structure and coverage and five draft modules of the proposed rulebook. The rules will provide for investment firms to operate on a fully Shariah compliant basis. Conventional firms could undertake Shariah compliant transactions, but could only be an “Islamic invest-ment firm” if all their operations were Shariah compliant. Comments are sought on the development of the rulebook, espe-cially from existing licencees holding investment adviser, broker and Bahrain Stock Exchange broker licences, as well as from other licencees such as investment banks. The consultation paper is avail-able on the BMA website at www.bma.gov.bh. The consultation pe-riod ends on the 15th December 2005.

DUBAI Linklaters to set up in Middle East Law firm Linklaters will open an office in Dubai early in 2006, subject to receipt of the appropriate licences. Linklaters has advised governments, banks, corporates and project sponsors in the Middle East for 30 years, and is opening a Dubai office in response to an increased client focus on the region, and thus a grow-ing demand for premium legal advice. The office will be in or adjacent to the Dubai International Finance Cen-tre and will be staffed by three partners and a number of associates, led by Ewan Cameron, one of the leading lawyers in the Middle East.

BRUNEI CIMB launches Brunei branch

CIMB has opened a branch in Brunei Darussalam, its fifth operating office in Southeast Asia, in a move develop Islamic banking in the re-gion. Group Chief Executive Dato’ Nazir Razak commented: “Our presence in Brunei Darussalam is a testimony to our commitment to regionalization and in particular the development of regional Islamic banking. Brunei Darussalam and Malaysia share a common aspiration in developing Islamic banking. With our strong market position, expertise and brand in this arena we believe we can add value in the Brunei Darussalam’s market while also acting as a bridge linking the two Islamic markets.” CIMB Brunei is staffed by Bruneians and has the backing of CIMB Group’s regional infrastructure and resources. CIMB Islamic – CIMB’s Islamic banking arm – and CIMB’s regional investment banking busi-ness will both be able to provide advisory services to investors and issuers in Brunei Darussalam.

DUBAI Sukuk in P&O takeover An innovative Islamic bond issue will form part of the US$9.3 billion financing package for the takeover of P&O by DP World.

The two-year bond issue, which is being managed by Barclays Capital and Dubai Islamic Bank, is the largest ever takeover-related transaction in the Middle East. DP World plans to issue US$2.8 billion of Islamic bonds that will be partly convertible into shares in DP World in the event of an IPO within the next three years. The Sukuk opened on the 2nd December.

Nicholas Hegarty, Head of Investment Banking in the Middle East and North Africa at Barclays Capital, commented: “This innovative structure guarantees the [bond] holders a minimum allocation in the IPO, which is very valuable in the current equity capital markets environment in the Middle East.”



NEWS BRIEFS

MALAYSIA Unisem Islamic financing facil ity

Unisem has appointed Standard Chartered Bank Malaysia to act as lead arranger for a US$31.77 million (RM120 million) Syndicated Islamic Corporate Financing Facility. The Islamic facility is based on the Shariah principle of Bai Al Inah, where a vendor sells and buys back an asset on a cash basis. The funds raised will be used to finance Unisem’s capital expenditure requirement to purchase necessary equipment.

MALAYSIA Affin buys stake in Affin Merchant Affin Holdings will buy a 36.84% stake in Affin Merchant Bank from the shipping company MISC. Affin Holdings will pay US$44.99 million (RM170 million) cash for the stake before the end of the year, thus making the merchant bank a wholly-owned subsidiary. Affin Holdings will buy 69.08 million shares in Affin Merchant Bank based on a valuation of 1.25 times its book value – as at the end of December 2004 – of US$97.67 million (RM369 million). The deal is still subject to Foreign Investment Committee approval. Affin Holdings recently reported a 7% drop in net profit for the third quarter of 2005. It made a net profit of US$11.3 million (RM42.7 mil-lion) for the quarter ending on the 30th September, down 6.7% from the same quarter in 2004. Revenue increased by 3.7% to US$119.16 million (RM450.2 million). On a nine-month basis, Affin Holdings registered a net profit of US$46.2 million (RM174.5 million), a 29% rise from the first nine months of 2004.

BAHRAIN VCBank to launch fund The first dedicated Islamic venture capital investment bank, Venture Capital Bank (VCBank), will launch a US$250 million venture capital fund early in 2006. VCBank has signed a mutual agreement with Global Emerging Mar-kets (GEM) Group, a leading US-based private investment firm, to co-manage and jointly establish the fund. The fund will target undervalued finance-seeking companies with strong management teams, proven track records and potential for revenue growth and market leadership, thus providing investors with significant and untapped opportunities in the region. VCBank and GEM Group will look to raise capital from high net worth individuals and institutions from across the GCC region and the globe.

SINGAPORE Islamic banking for Singapore The largest Islamic operator in Malaysia – Maybank – has introduced Islamic deposit products, based on the Islamic principle of Al Wadiah Yad Dhamanah (guaranteed safe custody) in Singapore. The new products that will be available at Maybank’s 22 branches in the Republic will be a Shariah compliant online savings account – the iSAVvy Savings Account-I – with ATM access and a special dividend-on-dividend feature, and a Shariah compliant two-in-one checking and savings account – the PremierOne Account-i.

DUBAI Morgan Stanley in DIFC Morgan Stanley will open its first office in the Middle East in the Du-bai International Financial Centre (DIFC). Georges Makhoul has been appointed to run the Middle East and North Africa business from the new Dubai office.

MALAYSIA Islamic bond sale delayed The sale of the government’s five-year Islamic bonds has been de-layed until December. The bonds were supposed to have been issued in November, but Bank Negara Governor Tan Sri Dr Zeti Akhtar Aziz said that the delay was to accommodate the government’s financing requirements.

BAHRAIN BMA sign MoU with TOCOM The Bahrain Monetary Agency (BMA) has signed a Memorandum of Understanding (MoU) with the largest commodity futures exchange in Japan, The Tokyo Commodity Exchange (TOCOM). The MoU is intended to develop co-operation between Bahrain’s Cen-tral Bank and financial services regulator and the world’s leading bul-lion and energy exchange. From this MoU, the institutions intend to develop an institutional framework to enable financial institutions and brokers in Bahrain to conduct Shariah compliant transactions on the TOCOM. The BMA is currently looking at Shariah compliant products to enable Islamic fi-nancial institutions to trade in commodities listed on the TOCOM.

PAKISTAN State Bank awards l icence to DIB Dubai Islamic Bank (DIB) has been granted a licence to operate in the country by the State Bank of Pakistan, and more licences will be is-sued in the future. Dr Ishrat Hussain, State Bank Governor, commented: “While the bank-ing industry in Pakistan has immensely flourished in the past five years, it has also been one of the core objectives of my governance to promote Islamic banking in Pakistan. Through the advent of Dubai Islamic Bank, which happens to be one of the most profitable and successful ventures in Islamic banking, I am sure the foundations of this industry would further be bolstered.”

KUWAIT IBS symposium on Islamic banking A symposium on legislative and legal rules and systems of Islamic banking services was held by the Institute of Banking Studies (IBS) in Kuwait.

Salah Al-Khuli from the Central Bank of Kuwait spoke generally about the banking and financial system in Kuwait and the split between Is-lamic and conventional finance. He also highlighted the supervisory, stabilizing role of Central Bank.



NEWS BRIEFS MALAYSIA Hubline appoints Affin adviser Affin Merchant Bank has been appointed by Hubline to act as princi-pal adviser and lead arranger for Hubline’s proposed issuance of Murabahah commercial papers (CP)/medium-term notes (MTN) of up to US$39.73 million (RM150 million), with a seven-year tenure. Affin will also be the primary subscriber for the proposed US$18.55 million (RM70 million) Bai Bithaman Ajil Islamic debt securities. Affin Merchant Bank commented that this issue will allow Hubline to access lower funding costs relative to its current bank financing. The proceeds from the exercise will be used to repay existing borrowings, part finance working capital needs and vessels expansion pro-gramme. Rating Agency Malaysia (RAM) gave the issue a long-term of A2 and a short-term rating of P1 (see Ratings Update). Hubline has posted net profits of US$12.7 million (RM47.96 million) – a 75% jump – for the year ending on the 30th September. Revenue stood at US$108.1 million (RM408.30 million).

MALAYSIA MONASH training in 2006 Islamic finance training sessions will be run at Monash University from the 22nd February next year, designed to be an informal, lively and fun training experience. Experts in the industry will discuss significant topics within Islamic banking, including principles of Islamic finance, a description of the principal financial products and contracts, Islamic capital markets and legal, tax and risk management issues. The exponential growth of Islamic finance in Malaysia in recent years, and the huge potential for the industry worldwide, necessitates a greater awareness of the ever-changing challenges and opportunities in the industry.

BAHRAIN Shamil FX Mudarabah launched Shamil Bank has launched a new Shariah compliant, capital-protected product investing in currency-linked instruments: the US$20 million Shamil FX Mudarabah. The Shamil FX Mudarabah has been launched in collaboration with the leading global investment bank Deutsche Bank AG and gives investors the opportunity to achieve risk-adjusted returns based on a one-year investment in currency-linked Murabahahs, with 100% capi-tal protection. Shamil Bank will raise a minimum US$20 million from investors to place in transactions involving commodity trades in association with Deutsche Bank. The underlying returns will be based on Euro–US dollar rate fluctuations.

UAE (Abu Dhabi) Manazel poised to enter market Abu Dhabi-based new real estate firm Manazel is now, after closing its private stock subscription last month, one of the largest privately funded firms in the country. Manazel initially raised funds through a Shariah compliant private stock subscription. The subscription was offered through Abu Dhabi Islamic Bank and audited by Deloitte & Touche. Investors will be is-sued stock certificates next month. The real estate firm is currently finalizing plans for its four projects in Abu Dhabi, Dubai and Sharjah, which will implement a low-cost, high-quality housing concept.

DUBAI Islamic investment takes to the skies The Bahrain Executive Air Services Company (BEXAIR) has set up its own aircraft leasing company – Arabian Aircraft & Equipment Leasing Co (AAELCO) – which will provide aircraft leasing for its own fleet and to customers throughout the region. Speaking at the ninth international aerospace exhibition in Dubai, Chairman and CEO of both BEXAIR and AAELCO Mansour Al-Tassan said: “We anticipate providing a vehicle for large amounts of Islamic investments via AAELCO, as these kinds of asset-based financing transactions are particularly well suited to Shariah compli-ant investing.”

GERMANY Islamic finance workshop

An “Introductory Workshop on Islamic Finance” will be held on the 8th December in the Chamber of Commerce Conference Centre in Frank-furt. The workshop will examine key Islamic issues, principles and objectives. This most recent event in a rash of conferences on Islamic finance in Europe is further evidence that Islamic banking is set to take off in Europe. Frankfurt hosted the first commercial conference on the 16th November and, previous to that, on the 8th and 9th November, Luxem-burg hosted “Islamic Finance – A European Challenge,” organized by the Islamic Financial Services Board.

MALAYSIA Islamic Sustainabil ity Index ready

The second Islamic Index from Dow Jones Indexes – the Islamic Sus-tainability Index – is set to be launched by January 2006 to supple-ment the existing Dow Jones Islamic Index. The new index is a collaboration between Dow Jones Indexes, STOXX Ltd and Switzerland’s Sustainability group to ascertain whether there is any overlap between Islamic and other ethical values.

SUDAN Sudan gets AMF loan The Arab Monetary Fund (AMF) has agreed to lend Sudan an addi-tional US$45 million to reform its financial and banking sectors. Sudan is facing problems because of the differences between the Islamic banking system in the north and the conventional system in the south. This loan from the AMF will help to reform, rebuild and develop the country’s banking, financial affairs and savings. This will be achieved by restructuring the abilities of northern Sudan’s Islamic banking system in terms of technology, policies and functions.



NEWS BRIEFS

BAHRAIN GFHCB profits up 80% Gulf Finance House Commercial Bank (GFHCB) has posted a net profit of US$7.43 million (BD2.8 million) for the first nine months of 2005, up from US$4.14 million (BD1.56 million) for the first six months of the year.

The total assets of the wholly-owned on-shore commercial banking subsidiary of Gulf Finance House, a leading regional Islamic invest-ment bank, increased to US$135.3 million (BD51 million). The bank’s operating income is now US$11.41 million (BD4.3 million), compared to US$4.78 million (BD1.8 million) when it began opera-tions in December 2004.

Total shareholders’ equity of the bank at the end of the nine-month period stood at nearly US$87.54 million (BD33 million).

BAHRAIN Aseambankers wins mandate Aseambankers Malaysia will assist Bahrain’s The Housing Bank to raise funds from a sale of mortgage-backed securities (bonds backed by housing loans).

The investment banking unit of Malaysia’s biggest bank, Maybank, won the mandate to carry out work structuring and issuing the securi-ties. This deal has increased Maybank’s interests in overseas mar-kets, swiftly following on from a mandate to help arrange a US$300 million loan for Al Rajhi Banking and Investment Corporation (see the last issue of Islamic Finance News). The bonds will be offered for sale in regional and international mar-kets and the proceeds will be invested in expanding The Housing Bank’s real estate and investment operations.

UAE ADIH in Energy City placement Newly established Abu Dhabi Investment House (ADIH) will be the strategic partner and sole sponsor of the Energy City Qatar private placement in the UAE. The lead advisers to Energy City Qatar – Gulf Finance House – have signed a Memorandum of Understanding with ADIH, allowing the investment house to offer US$100 million of the US$276.5 million private placement for the project exclusively in the UAE market.

MALAYSIA RHB first Islamic index fund The RHB group will target GCC investors with its first US$100 million co-branded Islamic Index fund – the Dow Jones–RHB Islamic Malay-sia Index Fund. The open-ended fund will track the Index and will be passively managed with a low tracking error. The index fund, which RHB hopes will attract more foreign invest-ments in sophisticated instruments, will make Malaysia the first Is-lamic banking hub in the world to launch an Islamic Index fund using the Dow Jones legal framework and matrices. Chief Executive Officer of RHB Securities Zaha Rina Zahari com-mented: “Bahrain enjoys a very distinctive position among the finan-cial centres in the world and Malaysia and Bahrain, being the finan-cial centres for Islamic banks and financial institutions, are keen to enhance the level of co-operation, sharing of expertise and comple-menting each other’s rapidly growing Islamic banking sectors.”

DUBAI DIFC office for INVESCO INVESCO Asset Management Ltd, which forms part of the independ-ent global investment management business AMVESCAP, has launched a new office in the Dubai International Financial Centre (DIFC). INVESCO’s office will be headed by Cormac Sheedy, Associate Direc-tor of INVESCO’s International Development Division. It will offer Du-bai authorized persons, regulated financial institutions and invest-ment professionals access to its global investment resources and expertise. INVESCO’s first investment meeting in Dubai was held on the 21st November on the subject “Long-term Investment Strategies.”

DUBAI HSBC in DIFC HSBC has sought approval to establish a presence in the Dubai Inter-national Financial Centre (DIFC) early in 2006. Stephen Green, HSBC Group Chief Executive and Chairman of HSBC Bank Middle East Ltd, explained that, with the approval of the Dubai Financial Services Authority, HSBC will set up significant divisions of its Islamic Finance division HSBC Amanah, as well as its Corporate, Investment Banking and Markets division and HSBC Private Bank.

SAUDI ARABIA First banking l icence to HSBC HSBC Holdings Ltd is the first foreign bank to be granted a full invest-ment banking licence by the Capital Market Authority of Saudi Arabia.

Previously, Saudi Arabia’s 11 domestic banks held a monopoly on brokerage activity on the Arab world’s biggest bourse, which doubled in value this year. Central Bank has now approved 10 Gulf and west-ern banks to operate in the Kingdom. French bank BNP Paribas be-came the first European bank to open a branch in Saudi Arabia last month.

Saudi Arabia is due to join the World Trade Organization next month, and the new licences are seen as a major step towards opening up competition in the Kingdom.

BAHRAIN Extra summits at WIBC Participants at the World Islamic Banking Conference (WIBC) this month will, for the first time, have the choice of participating in either a Retail Banking Summit or a Corporate & Investment Banking Sum-mit.

At the Retail Banking Summit – hosted by Al Rajhi Banking & Invest-ment Corporation – Nasr-Eddine Benaissa, Partner at McKinsey & Company, will explain why Islamic banks will need to make their retail offering competitive to both Islamic and conventional banks and how service quality will be a key factor in guaranteeing the capture of new retail business.

The Corporate & Investment Banking Summit will be hosted by CIMB Islamic – the top lead manager for Islamic bonds in Malaysia – and will explore trends in corporate and investment markets, assess de-velopments in Islamic capital markets and examine the emerging opportunities in sovereign and corporate Sukuk.



NEWS BRIEFS

MALAYSIA RHB Capital’s Islamic profit up 26% RHB Capital has posted a net profit of US$64.66 million (RM244.26 million) for the nine-month period ending on the 30th September, an increase of 8%, with Islamic finance contributing to that growth. Islamic banking income, led by RHB Islamic Bank, amounted to US$27.8 million (RM105 million). Total Islamic banking assets grew 26% to US$2.03 billion (RM7.7 billion), while financing and other ad-vances grew 7% to US$952.99 million (RM3.6 billion). Islamic banking income for the nine months was US$27.8 million (RM105 million). Total group income during this nine-month period amounted to US$317.66 million (RM1.2 billion), an increase of 12% year on year. RHB Bank, which is the group’s largest profit contributor, achieved a pre-tax profit of US$94.66 million (RM357.6 million) for the nine-month period ending on the 30th September 2005. During this time, Standard & Poor’s Rating Services raised its credit rating on RHB Bank to BBB.

KUWAIT Subs open for Indian Islamic fund Kuwaiti company Al Madina – for Finance & Investment Co – has opened subscriptions in a Shariah compliant mutual fund in India. The Indian equities fund will have a minimum ceiling of US$17.12 mil-lion (KD5 million) and a maximum of US$171 million (KD50 million). The minimum subscription will be 1,000 units, at US$3.42 (KD1) per unit. The Islamic fund will be open to Kuwaitis and non-Kuwaitis, and subscriptions will remain open until the 21st December. Chairman and Managing Director of Al Madina, Ali al-Shamali, com-mented: “This is the first fund for Indians handled by a Kuwaiti com-pany and regulated by the Central Bank of Kuwait.”

INDONESIA BCHB ups stake in Bank Niaga Bumiputra-Commerce Holdings (BCHB) now holds a 65.04% stake in Bank Niaga. BCHB has purchased an additional 32.03 million Class B shares for US$1.05 million (RM3.97 million), increasing the total number of shares held by BCHB to 7.71 billion. Of the current 65.04% equity interest in Bank Niaga, subsidiaries of BCHB, namely CIMB Niaga Securities and GK Goh Indonesia, hold 0.69% and 0.35% each respectively.

BAHRAIN Tie-up for women’s Uni The construction of Bahrain’s first ever private university for women will be funded through a Musharakah financing. Emirates Islamic Bank (EIB), Gulf Finance House Commercial Bank (GFHCB), Amlak Finance and the Islamic Corporation for the Development of the Private Sector have formed a strategic tie-up for the Musharakah. UAE-based Islamic banking service provider EIB will arrange the Musharakah finance, and GFHCB, which is owned by Gulf Finance House, one of RUW’s founding members, will source it. The Royal University for Women (RUW) aims to empower women through higher education. It is hoped that by honing women’s skills and confidence, the University will enhance their contribution to society and the economy in general.

Dubai Law firm first in DIFC Walkers became the first offshore law firm to open its doors at the Du-bai International Finance Centre (DIFC) when it commenced business on Monday, the 21st November. Grant Stein, Senior Partner at Walkers, commented that: “As the forma-tion of investment funds, private equity funds, and Sukuk … continues to soar, the need to provide global counsel has grown too.” The growth in Dubai’s equity markets, and the expectation that this growth will accelerate in the future, has led to an increased need for international legal expertise. “Also driving the need for greater offshore legal expertise in Dubai are the international entities who invest in the GCC region through British Virgin Islands companies and regional investment in United Kingdom commercial real estate,” Mr Palmer, Managing Partner of the Dubai office, said. “With Walkers’ strong presence and experience in those jurisdictions, we can now provide a complete suite of offshore legal service to our clients in Dubai.”

BAHRAIN Islamic bank auto finance A new Murabahah car financing scheme has been launched by Bahrain Islamic Bank. The flexible, Shariah compliant scheme offers affordable install-ments and a repayment period of up to seven years. The service offers competitive profits, a highly flexible ceiling and does not re-quire a salary transfer.

MALAYSIA I -REIT guidelines issued The last issue of Islamic Finance News revealed that the Securities Commission planned to issue guidelines for Islamic Real Estate Investment Trusts (I-REITs). These guidelines, intended to facilitate further development of new Islamic capital market products, have now been released by the Securities Commission. The guidelines set a global benchmark for the development of I-REITs, providing opportunities for Shariah compliant real estate investment via capital market instruments. The Securities Commission stated: “This latest achievement further enhances Malaysia’s lead role in the development of the Islamic capital market among the international financial community, and will further promote and accelerate the growth of a competitive Islamic capital market in Malaysia.” The I-REIT guidelines – available on the Securities Commission web-site – allow international investors seeking Shariah compliant in-struments to invest in Malaysian property without needing to own the assets directly.

EGYPT Faisal Islamic Bank profits double Faisal Islamic Bank of Egypt has achieved a net profit increase of 110.2%. Profits for the first nine months of 2005 stand at US$54.38 million (E£54,375,000), as against US$4.5 million (E£25,867,000) for the same period in 2004.



NEWS BRIEFS

MALAYSIA Ratings Update

Putrajaya Holdings notes rated Putrajaya Holdings (PJH)’s proposed US$581.93 million (RM2.2 bil-lion) Islamic Medium-Term Notes Programme has been assigned an Islamic debt long-term rating of AAAID by Malaysia Rating Corporation (MARC). This is a reflection of PJH’s solid capitalization; exceptionally strong financial flexibility; and its strategic importance in Putrajaya’s devel-opment as Malaysia’s administrative capital. PJH’s revenue increased significantly in 2005 to US$348.91 million (RM1,319 million). The company’s financial flexibility comes from the strength of its shareholders (Petronas and Khazanah) and an unuti-lized revolving credit line of US$181.47 million (RM686 million) (see earlier piece).

MARC reaffirms KFC rating The rating of A+ID has been affirmed by MARC for KFC Holdings (Malaysia) (KFCH)’s US$79.36 million (RM300 million) Islamic Notes Issuance Facility, with developing outlook. KFCH is an investment holding company with subsidiaries in restau-rant operations, convenience food store chain and integrated poultry operations. The company has a total revenue of US$372.99 million (RM1.41 billion) and a sturdy credit profile. The developing rating outlook re-flects uncertainty about future ownership of the company and its implications for continuance of the franchise agreement.

Power producer rated Rating Agency Malaysia (RAM) has reaffirmed the long-term rating of AA1 for Pahlawan Power’s US$119 million (RM450.00 million) Al Bai Bithaman Ajil Islamic Debt Securities. Simultaneously, the Agency gave the independent power producer’s US$26.45 million (RM100.00 million) Al Murabahah Commercial Paper/Medium-Term Notes Programme a long-term rating of AA1 and reaffirmed its short-term rating of P1.

RAM gives AA3 rating Independent power producer Teknologi Tenaga Perlis Consortium (TTPC) has had the long-term rating of its US$400.76 million (RM1,515 million) Al Istisnah Fixed-Rate Serial Bonds reaffirmed by RAM at AA3, with a stable outlook. This rating is supported by TTCP’s robust financial profile, fixed ca-pacity payments for maintaining the dependability of the power plant, and as energy payments for selling electricity to Tenaga Nasional. Cashflow is expected to stay robust throughout the tenure of the bonds.

A factor moderating the rating is the existence of several outstanding legal disputes among the company’s shareholders.

Expressway’s bonds maintain ratings The long-term ratings of New Pantai Expressway (NPE)’s US$129.62 million (RM490 million) Senior Bai Bithaman Ajil Notes and US$66.13 million (RM250 million) Junior Bai Bithaman Ajil Notes have been reaffirmed by RAM at AA3 and A1(s) respectively, both ratings carrying a stable outlook. NPE is a special purpose company (owned by Road Builder (M) Hold-ings) incorporated to undertake the design, construction, operation and maintenance of the 19.6 km, intra-urban highway: the New Pan-tai Highway.

Full redemption of Hubline bonds Hubline made an early redemption of its US$31.75 million (RM120 million) Al Murabahah Commercial Papers/Medium-Term Notes Pro-gramme on the 24th November 2005, cancelling those outstanding. RAM’s rating obligation on the CP/MTN is therefore at an end. Previously, RAM had allocated a long-term rating of A2 and a short-term rating of P1 to the group’s US$39.68 million (RM150 million) MCP/MMTN and a long-term rating of A2 to its US$18.52 million (RM70 million) Bai Bithaman Ajil Islamic Bonds in October 2005. The long-term ratings carry a stable outlook (see earlier piece).

Encorp Systembilt on rating watch RAM has placed the AA2(s) ratings of the following notes issued by Encorp Systembilt on rating watch with a negative outlook: US$349.45 million (RM1,321 million) Al Bai Bithaman Ajil Notes Issuance Facility (Tranche 1); US$134.91 million (RM510 million) ABBA Notes (Tranche 2); US$66.14 million (RM250 million) ABBA Notes (Tranche 3); and US$176.46 million (RM667 million) ABBA Notes (Tranche 4). This rating watch is the result of persistent irregularities in the monthly concession payments from the Government of Malaysia, in addition to the fact that an independent audit to verify the final ac-counts has taken longer than anticipated. Encorp Systembilt is the concessionaire to develop 10,000 units of teachers’ quarters throughout Malaysia, based on the “build, transfer and finance” concept.

SBC bonds rating reaffirmed SBC Corporation (SBC)’s US$13.11 million (RM49.57 million) Al Bai Bithaman Ajil Bonds have had their long-term rating of BBB2 reaf-firmed by RAM. The rating outlook for the bonds, however, has been revised downward from stable to negative.

This downward revision reflects the ongoing deferments of the group’s property launches and the numerous delays experienced by its flagship project and main income contributor, Taman Mastiara in Kuala Lumpur. Tempering this, however, is the success of the group’s smaller com-mercial developments in the city and SBC’s healthy balance sheet.



This paper will discuss the diversity of interest-free bank-ing practice across Islamic countries, particularly in Iran. Islamic banks have increased rapidly over the past 30 years and have a growing presence in the world’s financial markets. There are now 240 financial institutions worldwide which follow Islamic principles, operating in 48 countries throughout the world. Accumulated Islamic banking assets are estimated at over US$200 billion, with an average growth rate of more than 15% annually.

The fundamental basis for Islamic banking and finance is the prohibition of interest. Islam permits profit sharing, but prohibits interest (riba). The central requirement of the Islamic banking system is the replacement of the rate of interest with the rate of return on real activities as a mecha-nism for allocating resources. Islamic banks operate under the terms of Profit Sharing Contracts (PSC) rather than interest rate conventions. PSC is a critical dilemma facing Islamic banking in Muslim countries, as there is no clear definition of the term riba, which is used interchangeably with usury. In addition, the banking systems of each country use various modes of financing and contracts. In some countries the development of Islamic banking has led to the whole financial system being restructured, such as in Iran, Pakistan and Sudan. In other Islamic countries, Islamic banks and traditional banks co-exist.

Other Islamic countries Islamic banks get their funds from two sources: investment deposits and current account deposits. Investment deposits (savings, fixed-term and unlimited term deposits) are invested on the basis of the PSC sys-tem, with depositors participating in the profits and potentially losing, in some cases, the entire deposit. Current account deposits are not used for investment and depositors do not receive any income, only services.

Iran The Law for Usury-Free Banking (LUFB) was published in 1986 by Cen-tral Bank and provides a brief description of interest-free banking in Iran. Under the LUFB, Islamic banks offer two types of deposit accounts.

Al-Qardhul Hasan deposits Al-Qardhul Hasan is a current or savings account which yields no income, but is praised by the authorities as highly desirable on religious grounds. To encourage the placing of Al-Qardhul Hasan deposits the banks may offer depositors bonuses in the form of cash or prizes, such as air tickets to holy shrines, carpets, gold coins, even cars or houses, an exemption or reduction from payment of commission for banking services, and priority in the use of banking facilities. The purpose of these accounts for customers is to serve as a means of transactions, payments and liquidity. Banks consider such deposits as their own resources to use, although no profits are to be the full nominal value of the deposits.

Term investment deposits Banks are authorized to accept both short-term and long-term invest-ment deposits, which are used to fund the whole range of the bank’s activities. Depositors are given a surety of return of their money depos-ited and so run no risk of losing their money.

COUNTRY REPORT Comparison of Islamic Banking in Iran with Other Islamic Countries

By Mohammad Reza Taheri The banks use the investment deposits in compliance with financing and credit policies, and profits are divided between the bank and the depositors according to a pre-determined agreement. Although the banks can use their own resources (capital and Al-Qardhul Hasan deposits), priority must be given to the use of investment deposits, or depositors’ resources. The banks can also use a combination of depositors’ resources and their own funds, so the bank and depositors share the resulting profits. Alternatively, the bank can act as a trustee and place the depositors’ funds in an investment project, in which case all resulting profits plus any capital gains are returned to the depositors. In this case, the bank charges only a commission to cover the cost of administering the accounts. In all cases the banks undertake or insure at their own expense the repayment of the principles of the investment deposits. When the combined resources of the depositors and the bank are invested, the return to depositors is calculated to the total amount of investment deposits (net of statutory requirements). The banks must declare their profits at the end of each six months of operation. Depositors who withdraw their money before the minimum time required or reduce it below the set minimum amount earn no profits.

Other Islamic countries In most Islamic countries four financial instruments are used as profit sharing contracts: Mudarabah, Murabahah, Musharakah and Ijarah.

Mudarabah Mudarabah is regarded as the preferred mode of finance in Islamic banking. It is an agreement between two or more persons whereby one or more of them provides finance (called Rab-al-Mal) while others provide management (Mudarib) to use the funds in pursuit of the partnership’s goal. The resulting profits from investing the funds of these accounts are shared by the parties to the Mudarabah contract according to a pre-determined ratio, agreed upon before the implementation of the contract. The bank would receive what is called the Mudarib share of profit. This cannot be an absolute amount or a fixed remuneration. Murabahah Murabahah involves an Islamic bank, as a partner, financing the purchase of commodities in return for a share in the profits realized when the goods are sold. However, if losses are incurred, the contracting bank may (or may not) share the loss, depending on the terms and conditions of the agreement. Repayment of such financing can be deferred or made in installments. Musharakah Musharakah is partnership financing where the bank participates in the capital and management of a separate business or a part of the business of the lender and shares in the profit and losses of the business in a pre-agreed proportion.

Ijarah Ijarah has provided the bulk of the operating income of Islamic banks, covering both long-term leasing/lease financing and short-term hire purchase. In financing the Islamic bank or its leasing company pur-chases a piece of equipment selected by the entrepreneur and then leases it back to him. In a hire purchase arrangement the entrepre-neur may partially purchase, and partially rent the equipment.

Introduction

Continued...

Sources of funds of Islamic banks

Financing and credit operations



Iran Following the revolution in Iran in 1979, steps were taken to bring the banking system into line with the requirements of Islamic law. The Iranian authorities chose to convert their banking system to an inter-est-free system by passing the comprehensive LUFB. The number of banks in the country, excluding Bank Markazi (Central Bank), was reduced from 36 at the end of 1979 to nine banks, comprising six commercial banks and three specialized banks. The law provides various modes of operation upon which the financing transactions of the banks must be based, which are detailed below. Aqsat Mu’amalat Banks are authorized to buy machines, tools, equipment, raw materi-als, and spare parts for firms and resell these items to them in install-ments. The duration of installment sale agreements for raw material, spare parts to meet the working capital needs of production units is medium term, and for production tools and machinery it is long term. Installment sale facilities are not be used for commercial transac-tions. In other words, they are used for the supply of financial re-sources needed for production and services activities, and not for trading. The installment price is determined by taking into consideration the cost price of goods, as well as the profit of the bank. In installment sale transactions, the declaration of cash price and credit price to the buyer is compulsory. For this reason, it is essential that finalization of the installment sale agreement be deferred to a time when the rele-vant prices have been fixed. The cash sale price of the bank is equiva-lent to all of the money paid by the bank for the procurement of the relevant goods. Credit sale price is calculated by adding the profit for changing the transaction into the installment to the cash price, after deduction of the advance payment made by the customer. Musharakah The law recognizes two different forms of partnerships: civil partner-ship and legal partnership. Civil partnership is a legal establishment, which has been introduced for the first time in the Islamic banking system in Iran. Civil partnership is a project-specific partnership based on the contribution of cash or non-cash capital by several legal per-sons on a joint ownership basis, for the performance of a specific project in the fields of production, trade and services, for a limited duration, and with the intention of making a profit on the basis of an agreement. The second form of partnership is concerned with firms in which the bank provides a part of the capital of a new joint-stock com-pany or buys part of the shares of an existing joint-stock company. Mudarabah This transaction considers a short-term commercial, contractual part-nership between a bank (owner) and an agent/entrepreneur (Amel), where financial capital is provided by the bank and managerial skills by the entrepreneur in order to undertake a specific commercial pro-ject. Banks are required to give priority in their Mudarabah activities to co-operatives. Moreover, banks are not allowed to engage in Muda-rabah financing of imports with the private sector. Mudarabah is an optional contract, and so either party has the right to revoke it unless a reverse condition has been included in the agree-ment. In banking transactions it is conventional that the wording of the Mudarabah agreements is arranged in such a manner that by signing the agreement, the Amel foregoes his right to rescind the agreement until final settlement. Mudarabah is a short-term facility with a maximum period of one year, on the basis of which the bank (as the owner) may supply the neces-

COUNTRY REPORT Comparison of Islamic Banking in Iran with Other Islamic Countries (continued)

sary cash investment for the expansion of the commercial activities to the applicant (as the Amel), whether the Amel is a real person or a legal entity, so that they may divide the profits earned between them-selves, in the ratios initially agreed upon. In Mudarabah, the roles of the owner and the Amel are completely separate: the owner should only supply the capital, and should not accept the responsibilities of the Amel. Therefore banks cannot act as Amel in Mudarabah agreements. The Amel is also expected to per-form his duties as Amel only, and even if he accepts responsibility for some of the costs while signing the Mudarabah contract, this shall not constitute an obligation to play the role of the owner. The capital must be a cash lump sum. Al-Qardhul Hasan grant The Holy Qur’an refers to Al-Qardhul Hasan in several verses, the most famous verse being: “Who is he that will loan to Allah a beautiful loan? For (Allah) increase it manifold to his credit, and he will have (besides) a liberal reward” (Hadid, 57:11). Banks are required to set aside a portion of their own resources in order to extend interest-free loans to small producers, entrepreneurs and farmers who would otherwise be unable to find alternative sources of financing investment and working capital. As regards Al-Qardhul Hasan, the relationship between the lender and the borrower is either a creditor or a debtor, and the debt remains the responsibility of the borrower. Banks are permitted to charge a minimum service fee to cover the cost of administering these loans. Salaf Mu’amalat Forward deals are a way of providing firms with working capital. Banks can purchase the firm’s products in advance at a fixed price not ex-ceeding the market price of the product at the time of the transaction. However, the banks are not allowed to sell the products in advance of their date of delivery unless the purchased products have been deliv-ered before the date of delivery. The date cannot exceed one produc-tion cycle from the time of contract, and in no circumstances can it be more than one year. The main function of a forward deal is to supply the working capital needs of production units (industrial, mining and agricultural), whether individuals or legal entities. Banks cannot buy goods which have already been produced, even if they remain with the producer, unsold.

Debt purchase Debt purchase, or debt trading, is used for the provision of financial resources required by production, commercial and services units. Through the discount of trade documents and papers of such units, in accordance with the relevant regulations, only documents and secu-rity papers evidencing real debts and arising from commercial trans-actions can become the subject of a debt purchase transaction.

Ijarah The purpose of hire purchase transactions is to provide the necessary facilities for the expansion of services, agricultural, industrial, and mining activities. Consequently, the banks can purchase the needed machinery, equipment, and other movable or immovable property and lease them to firms. At the end of hire purchase periods and after the last rental payment, the ownership of property will be transferred to the leaseholder, providing that the leaseholder has fulfilled the condi-tions specified in the contract. The period of hire purchase must not exceed the duration of the effective life of the properties. Continued...



Jo’alah Jo’alah is a contract based on commission, where the Jaa’el bank or employer undertakes to pay a specified amount of money (Jo’al) to the Amel or contractor for rendering a specific service, in accordance with the terms and conditions of the contract. Banks may provide or acquire services whenever they are needed and charge or pay com-mission or fees for such services. The service to be performed and the fee to be charged must be determined at the time of the transaction. Jo’alah is a short-term facility. Mozara’ah and Mosaqat Mozara’ah is an agreement between the owner of land and the farmer, according to which the farmer cultivates the land, and the produce is divided between the parties in a fixed ratio which has been agreed upon by them. Banks may provide agricultural lands that they own or that are otherwise in their possession to farmers for the pur-pose of cultivation for a specific period and a pre-determined share of the harvest. Mosaqat works in the same way, but is specific to or-chards and trees. Direct investment Banks can directly invest in any profit-making project. The operation of direct investment projects is possible only through the creation of legal joint-stock companies, which are units independent from the banks. Undertakings of direct investment by banks are allowed if the returns from these projects are sufficient to meet the minimum re-quired rate designated by Central Bank. Their own articles of associa-tion, rules and regulations govern joint-stock companies.

There are 11 modes of Islamic finance allowed in Iran and banks have made predominant use of three of them, namely Aqsat Mu’amalat, Musharakah and Mudarabah. In other Islamic countries these types of contracts are also limited to three, namely Murabahah, Musharakah and Mudarabah. Although the terms are equivalent, there are differences in meaning. Generally, modes of financing offered by the Islamic banks of Iran to customers are classified into two categories: first, operations, such as installment sales and forward deals whose profits are pre-determined. Secondly, other operations whose profits are pre-determined by the banking system. In Iran, the difference between the expected profit and the pre-determined profit is not clear. When banks provide facilities to cus-tomers, the expected share of the bank profit is pre-determined based on economic income. Generally, modes of finance by Islamic banks in other countries are classified into two categories. The first one is Mudarabah, an ancient means of merchant practice which has been developed for modern banking practices. The second form relates to operations whose prof-its are pre-determined by the banking system, such as Murabahah and Musharakah. There are currently no accounting standards set for Islamic banking in Iran. Bodies such as the Accounting and Auditing Organization for Financial Institutions (AAOIFI) have been established to set such stan-dards for Islamic banks, but Iranian banks have not made use of their achievements.

COUNTRY REPORT Comparison of Islamic Banking in Iran with Other Islamic Countries (continued)

The author is Associate Professor of Accounting, Accounting Department, Economics College, Shahid, Chamran University, Ahwaz, Iran, email: [email protected], [email protected].

Comparison of PSC in Iran with other Islamic countries



Financial transactions are not immune to disputes and disagreements. When disputes arise in a contractual agreement, the parties to the dispute seek legal redress to resolve the matter in favour of one party. This redress is commonly undertaken through the litigation process. Litigation is a process by which an entity sues or makes a claim concerning a dispute or a disagreement. The litigation process must necessarily adhere to principles of natural justice, as well as procedural justice. Under the Islamic litigation process, it must also follow the principles outlined in the Holy Qu’ran, Sunnah, Ijmak, Qiyas and other sources of Shariah law.

In Malaysia, when a dispute or disagreement arises concerning prod-ucts offered by the Islamic banking system, the court of law that re-solves the disagreement is the civil court and not the Shariah court. This matter was established by the case of Bank Islam Malaysia Ber-had v Adnan Bin Omar [1994] 3 CLJ 735. In this case, five issues were raised, one of which was whether civil courts had jurisdiction over Islamic banking. The defendant argued that since the plaintiff is an Islamic bank, the civil court had no jurisdiction to hear the case, in view of article 121(1A) of the Federal Constitution. The judge, NH Chan J (as he then was), overruled that objection and held that the matter was rightly brought before the civil court. His Lordship stated the following grounds in his judgment: (a) The Shariah courts can only decide cases that fall under List 2 of

the 9th Schedule, which excludes any cases relating to commer-cial laws, such as Islamic banking.

(b) The Shariah courts can only decide a case when all the parties

are Muslims. The plaintiff is a corporate institution created by statute and does not have a religion.

(c) Section 5 of the Civil Law Act provides that, in matters of mer-

cantile law or commerce, English law is to be applied. As such, the jurisdiction is certainly vested in the civil courts. In addition, section 3 of the same Act states for the application of the Eng-lish law and rules of equity when there is a lacuna in the provi-sion of any written law. There is the Islamic Banking Act in Malay-sia, but it is not exhaustive. Thus any issues of ambiguity, clarifi-cation and interpretation will be referred to the civil courts.

In several other cases pertaining to Islamic banking products – for instance Tinta Press Sdn Bhd v Bank Islam Malaysia Berhad [1987] 2 MLJ 192, Dato’ Nik Mahmud bin Daud v Bank Islam Malaysia Berhad [1996] 4 MLJ 295, Tahan Steel Corp Sdn Bhd v Bank Islam Malaysia Berhad [2004] 6 MLJ 1 and Bank Islam Malaysia Bhd v Pasaraya Peladang Sdn Bhd [2004] 7 MLJ 335 – the decisions of the civil courts reinforce the position that the civil courts remain the proper forum in which matters pertaining to Islamic litigation are resolved. In the case of Bank Kerjasama Rakyat Malaysia Bhd v Emcee Corp Sdn Bhd (Court of Appeal, appeal no. N-02-421-1999, unreported), the judge, the Honourable Dato’ Abdul Hamid Mohamad JCA, stated in his judgment:

INDUSTRY REPORT Is Civil Banking Litigation in Harmony with Shariah?

By Associate Professor Dr Hassan Ali, Associate Professor Nurretina Ahmad Shariff, Zainal Amin Ayub and Mohammad Azam Hussain

“As was mentioned at the beginning of this judgment the facil-ity is an Islamic banking facility. But that does not mean that the law applicable in this application is different from the law that is applicable if the facility were given under conventional banking. The charge is a charge under the National Land Code. The remedy available and sought is a remedy provided by the National Land Code. The procedure is provided by the Rules of the High Court 1980. The court adjudicating it is the High Court. So, it is the same law that is applicable, the same order that would be made, if made, and the same principles that will be applied in deciding the application.”

Given that Islamic banking litigation is not carried out in the Shariah court system, where litigation will be based on Shariah principles, but rather through the civil court system, an important question arises: how much of the civil banking litigation process conforms to Shariah? Research has been conducted to investigate whether civil banking litigation processes are in harmony with Islamic banking litigation. The research examined whether certain aspects of civil banking litigation – such as summons, pleading, discovery, affidavit, appearance and subpoena, as provided under the Rules of High Court 1980 and other major sources of civil procedure, such as the Rules of the Court of Appeal 1994, the Rules of the Federal Court 1980, the Rules of the Supreme Court 1980 and the Subordinate Courts Rules 1980 – are in harmony with Shariah. Two other aspects of the litigation process – judges and witnesses – were also examined.

The sample for the study consisted of Muslim Shariah lawyers. The list of Muslim lawyers was obtained from the Shariah Lawyer Category of the Legal Directory published by the Bar Council. The Shariah Law-yer category consists of 307 lawyers practising throughout Malaysia. The lawyers were asked to state their opinion as to whether certain aspects of the civil banking litigation are in harmony with Islamic banking litigation.

Data was collected using a survey questionnaire. There were 36 items that measured specific aspects of the civil banking litigation process, such as summons, pleading, discovery, affidavit, appearance and subpoena, as well as matters concerning judges and witnesses. The response scale used was a 4-point Likert, with 1 = strongly disagree, 2 = disagree, 3 = agree, and 4 = strongly agree. Lawyers who re-sponded strongly disagree or disagree to an item in the questionnaire were indicating that the item concerned is not in harmony with Shariah litigation. Conversely, if a lawyer responded agree or strongly agree to an item, they were indicating that the item is in harmony with Shariah litigation. Personal information was also gathered in the ques-tionnaire, including the gender, age, qualifications, experience in legal practice and whether the respondents had handled both civil and Islamic banking litigation cases. Prior to the full-scale study, the ques-tionnaire was pre-tested among several Muslim lawyers. Minor modifi-cations were then made to several of the statements to increase clar-ity and understanding. The questionnaires were then distributed to the lawyers through the mail. Several personal visits to lawyers were also carried out during the process of data collection. A total of 307 questionnaires were sent out to the Muslim lawyers. The number of responses received was 136 questionnaires, giving a

Continued...

Islamic banking litigation

Methodology



INDUSTRY REPORT Is Civil Banking Litigation in Harmony with Shariah? (continued...)

response rate of 44.3%. Eighty-five (62.5%) of the respondents were male lawyers and 51 (37.5%) were female lawyers. One hundred and sixteen (85.3%) of the respondents were advocate and solicitor and syarie lawyers and 20 (14.7%) were advocate and solicitors with a Shariah background. The average age of the respondents was 35.82 years (SD = 6.47 years). The average experience of the respondents in the legal profession was 8.84 years (SD = 4.36 years).

Tables 1 to 7 show the responses of the lawyers in a percentage form as to whether an aspect of the civil banking litigation is or is not in harmony with Shariah. Table 1 shows that the Muslim lawyers gener-ally agree that all the procedures involving summons in civil litigation are in harmony with Shariah litigation. Only in the matter of summons that were failed to be served within a period of 6 months being con-sidered void is the opinion of the lawyers clearly divided.

Table 1: Summons

Based on the results of Table 2, the Muslim lawyers do not believe that two aspects of pleading are in harmony with Shariah litigation. First, 75% of the lawyers indicated that a court possibly ordering that the action be tried without pleadings is not in harmony with Shariah litigation. Secondly, 59% of the lawyers indicated that pleading being deemed to be closed at the expiration of 14 days is also not in har-mony with Shariah litigation.

Table 2: Pleading

The results displayed in Table 3 indicate that two aspects of the dis-covery process are not in harmony with Shariah litigation. First, 55% of the lawyers indicated that parties refusing to make discovery of documents for inspections is found to be not in harmony with Shariah litigation. Secondly, 54% of the lawyers indicated that failure to observe notice of discovery may result in pleadings being void is also not in harmony with Shariah litigation. Table 3: Discovery

The results of Table 4 indicate that all aspects of affidavit and appearance are seen to be in harmony with Shariah litigation. Table 4: Affidavit and appearance

Continued...

Results

Not in harmony

In harmony

% % All litigation must begin with summons. 28.1 71.9

Summons must be served personally on the defendant.

27.9 72.1

Summons can be sent through registered post to the last known address.

14.8 85.2

Service is effected by leaving the summons with or near the defendant.

18.4 81.6

Summons left with the defendant must be brought to his attention.

14.7 85.3

Affidavit of service must be made after summons served.

3.9 96.1

Summons failed to be served within 6 months is void.

48.6 51.4

Not in harmony

In harmony

% % Pleading must be used for all actions. 10.3 89.7 Court may order that the action be tried without pleadings.

75.3 24.7

Any facts in the pleading are deemed to be admitted unless denied.

11.1 88.9

Court may strike out or amend any matter in the pleading if it discloses no reasonable cause of action.

18.4 81.6

Court may strike out or amend any matter in the pleading if it discloses no reasonable cause of defence.

20.6 79.4

Pleading is deemed to be closed at the expiration of 14 days.

59.3 40.7

Not in harmony

In harmony

% % Court may order any parties to make discov-ery of documents or facts.

3.0 97.0

Discovery may be ordered as against parties to the proceedings only.

44.9 55.1

Parties may refuse to make discovery of documents for inspections.

55.2 44.8

Discovery is subjected to other laws related to protected documents.

6.7 93.3

Discovery may be ordered against a third party.

11.3 88.7

Failure to observe notice of discovery may result in pleadings being void.

54.0 46.0

Not in harmony

In harmony

% % Affidavits may be used as evidence of the matters deposed.

10.3 89.7

The court may allow evidence in affidavits to be used in a full hearing.

15.6 84.4

Appearance can be in person or through representation by a solicitor.

6.7 93.3

In default of appearance of one party, a judge may commence the hearing.

18.3 81.7

A party who defaulted in appearance when the judgment was made or order given may apply to the court to set aside the judgment or order.

10.3 89.7

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INDUSTRY REPORT

The results of Table 5 shows that all aspects of subpoena are believed to be in harmony with Shariah litigation. Table 5 Subpoena

Table 6 presents the views of the Muslim lawyers regarding judges. Of the Muslim lawyers, 61% indicated that a judge who is not a Muslim is not in harmony with Shariah. Further, 78% of the lawyers indicated that a judge who is a fasiq (wicked person) sitting and hearing a bank-ing litigation case is not in harmony with Shariah litigation.

Table 6: Judges

Finally, Table 7 provides the results of the opinions of the Muslim lawyers regarding witnesses. Only one aspect is found to be not in harmony with Shariah litigation, ie that a witness can be a fasiq.

Is Civil Banking Litigation in Harmony with Shariah? (continued...)

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Not in harmony

In harmony

% %

Witness must be present for hearing when subpoena by court.

2.2 97.8

Subpoena must be served personally on witness.

2.2 97.8

Failure to be present is deemed as con-tempt of court.

7.4 92.6

A warrant of arrest can be issued for failure to attend hearing.

11.8 88.2

Not in harmony

In harmony

% %

A judge may be a non-Muslim. 61.2 38.8

A judge may be female. 28.8 71.2

A judge who is a fasiq may sit for hearing in banking litigation.

78.0 22.0

A judge hearing litigation must satisfy the requirements of the relevant Act.

8.1 91.9

Continued...

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INDUSTRY REPORT Is Civil Banking Litigation in Harmony with Shariah? (continued...)

Table 7: Witnesses

The findings of this study indicate that the civil litigation process is gen-erally perceived to be in harmony with Shariah litigation. Only on several matters relating to pleading, discovery, judges and witnesses did the Muslim lawyers indicate that there are certain aspects that are not in harmony with Shariah litigation. The lawyers opined that parties to a proceeding could not refuse to make discovery of documents for inspec-tion. Although civil litigation allows parties to refuse making discovery of documents for inspection, Shariah requires that both parties to the liti-gation be allowed to examine each other’s documents. This is in line with Qu’ranic injunction, which imposes the obligation to give evidence regardless of whether it may incriminate oneself, one’s parents or rela-tives. The lawyers also believed that failure to observe notice of discov-ery could not result in pleading being void. According to Shariah, it is the right of every person to be heard. In Shariah litigation, regardless of whether a notice of discovery is being duly observed, a pleading cannot be struck off. According to Ibn Farhun (cited in A.K. Zaidan, Nizam al-Qada’ (Baghdad, Matba’ah al-‘Ani, 1984)), it is the duty of the presiding judge to hear all matters presented before him. Almost two-thirds of the Muslim lawyers were of the opinion that a non-Muslim judge cannot preside over Shariah litigation. It is probable that these views are consis-tent with the opinion of most Muslim scholars, who believe that a non-Muslim is not qualified to preside as a judge over any Islamic matters (W. Al-Zuhayly, Al-Fiqh al-Islami wa Adillatuh (Damascus, Dar al-Fikr, 1989)). Finally, the lawyers were of the view that a fasiq cannot be a judge or a witness in Shariah litigation. Most Islamic scholars and jurists believe that a fasiq is an unreliable person and therefore cannot be a judge or a witness in Shariah litigation.

The present study examined the views of Muslim Shariah lawyers. It is necessary to confirm the present findings by examining the views of a broader group of experts in Shariah law, including Shariah judges and also experts in Islamic banking who have a strong legal background.

Not in harmony

In harmony

% %

A witness may be a person who is a fasiq. 66.5 33.5

The number of witnesses is not an important element in proving any matters.

41.5 58.5

The evidence of male and female witnesses has equal weight.

46.7 53.3

The religion of a witness is not important in determining admissibility of evidence.

36.1 63.9

Conclusion

The authors are from the Faculty of Business Management and Faculty of Public Management and Law, Universiti Utara Malaysia. Email: [email protected]; [email protected]; [email protected]; [email protected].

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the rich and puts pressure on the poor, needy and those in difficulty. Moreover, it creates ill-feeling among people and leads to tension in a community. Riba also encourages laziness in the rich and inefficiency in the bank, whose employees will not have to work hard to gain profit through trade and risk-taking. Consequently, they will start to find easier ways of gaining profit, such as by giving loans and charging interest on them. In a riba-based economy, the possessors of capital will not only remain permanently rich, since they eradicate the possibility of suffer-ing losses, but they will also grow ever richer from the wealth belong-ing to others. Islam, on the other hand, prohibits profit gaining activities that are independent of any labour or the assumption of any risk. Islam relies on “Al-Kharaj Bid Dhaman”, meaning “profit is by taking risks.” Allah, the Most High, has unambiguously declared that nothing can be had without effort or labour (6:85, 11:85, 26:183). The only loan contract approved by the Shariah is a loan provided without imposing any additional amount on the repayment. The Hadith states: “Every loan given which leads to a benefit on the lender’s part is riba.” Therefore, no profit can be generated through a loan contract for the benefit of the lender, as in Islam a loan is a proc-ess of helping one other voluntarily and is regarded as Qardh Hassan (a benevolent loan). The second form of riba occurs when a customer deposits his money in a conventional bank account.

Conventional fixed deposit account According to the signed agreement, the account operator/bank will pool the depositors’ money and invest in strong, well-established companies to gain profit. As a reward to the depositor, the bank will fix an up-front interest rate (fixed interest). For example, 3% interest will be given to the depositor (in addition to his capital money) at a maturity period of, say, between 1 and 12 months. According to Shariah, the 3% rate from the fixed deposit account is riba al-qard, meaning riba out of lending and bor-rowing. This kind of riba is the extra amount of money over and above the loan, either imposed by the lender on the borrower in the con-tract, or promised by the borrower in the contract. Conventional savings account For a savings account, the bank usually gives a fixed interest rate ranging from 0.1% to 1.5% or higher per annum. The bank is re-garded as borrowing the money from the depositor for the purpose of engaging in investments or providing loans. The depositor is regarded as imposing the fixed interest on the bank and so the bank is re-quired to pay an additional sum based on the interest rate, regard-less of whether a profit or loss has been made. If the bank gains a high profit, it only has to pay the small fixed interest to the depositors. If the bank suffers a loss, it will still have to pay the fixed interest, regardless of the loss. In this way injustice occurs, as the bank has to pay the interest despite it being in a loss position, or the depositor receives a small income as against the bank’s high profit. In Islamic banking, customers may deposit their money in either one of the following two types of accounts.

Riba: Today’s Practical Form and the Reasons Behind its Prohibition By Ust Hj Zaharuddin Hj Abd Rahman

This article will briefly discuss riba (usury), which is well known to be the main difference between an Islamic bank and a conventional bank. Among the commonly asked questions regarding riba are:

• What exactly is riba and why is it prohibited in Islam? • What is meant by the coercion and duress resulting from riba?

(Practically, nobody in this matter would feel coerced; indeed, the customer would benefit from the interest charged.)

• How does a bank gain profit without riba? And, following on from that, how does a bank attract customers without profit?

This article will try to answer all these questions. It must always be remembered that Allah, the Most Merciful, stated clearly in the Qu’ran:

“Those who swallow usury cannot rise up save as he ariseth whom the devil hath prostrated by [his] touch. That is because they say: Trade is just like usury; whereas Allah permittteth trading and forbiddeth usury” (Al-Baqarah: 275)

According to the Shariah, riba can occur in the situations outlined below.

Riba occurs where a loan contract exists between two parties (bank and borrower). An example in today’s banking practice could be that Bank A approves a loan of US$13,243 (RM50,000) to Customer B, but the bank fixes the interest rate, for example at 10% a year, to enable the customer to have the stated amount of money. However, the amount accrued from the interest may be compounded into an un-known amount in the event of the customer being in default. The practice occurs regularly with products such as car loans, home loans, personal loans and term loans. This kind of riba is categorized as both riba al-fadl (interest in excess) and riba an-nasiah (increase due to time), both of which, according to Shariah, are prohibited. So why is it prohibited? What is wrong with charging interest on a cus-tomer’s loan? The answer is that the revenue resulting from the inter-est is received as a result of exploiting the customer’s difficulty (only a person in dire need would go to a bank for a loan in order to settle his financial problems). Unfortunately, the bank is charging an additional amount of payment for the loan (in the form of interest). This is why riba leads to injustice and duress on the customer’s part. In addition to this, in the case of failure to settle the monthly payments, the cus-tomer is penalized, which is compounded.

In Islamic banking, in contrast, the bank sells the goods to the cus-tomer at a fixed selling price which cannot be increased. If there is a default on the payment, the customer is only charged a compensation, which merely covers the cost of administration. If any excess occurs, it will be distributed to charity.

The difference between the compensation imposed by Islamic banks and the penalty imposed by conventional banks is thus obvious. Charging interest diminishes a person’s good conduct and discourages him from helping others in society. It also encourages selfishness in

Continued...

INDUSTRY REPORT

The first riba

The second riba



INDUSTRY REPORT Riba: Today’s Practical Form and the Reasons Behind its Prohibition (continued...)

Wadi’ah Yad Dhamanah (savings account-i) Wadi’ah Yad Dhamanah is when the bank pools and utilizes the funds. The bank’s responsibility is in the form of a guarantee and therefore it is compulsory for the bank to return the fund as and when requested by the customer. The bank may give hibah (a gift or reward) to depositors. The hibah is at the bank’s discretion and cannot be promised by the bank. If the bank achieves a high investment, or financing projects profit, the de-positor will usually receive a good hibah appropriate to the profit. In the event of loss, the bank need not give any hibah to its customers. Fur-thermore, the depositors’ money is still in custody and will not be re-duced, even though there has been a loss. In this way justice prevails for both the bank and customer because:

• customers enjoy hibah, which is given by the bank for their money in safe custody, whilst not having to bear any investment risk;

• the rate or amount of hibah is solely dependant on the bank’s dis-cretion – the bank often gives a competitive hibah for profitable investment in order to attract customers;

• the bank is not obliged to pay anything to its customers if there is no profit from investment, and so the bank will not be in a disad-vantaged position;

• there is no riba involved in this account and the investment is Shariah compliant.

Wadi’ah with the concept of Mudharabah (investment account) With this account, the customer’s money is in safe custody, but he can also invest at the same time. Under this concept, customers accept the risk arising from the investments in order to gain a higher profit. The percentage rate of the profit is initially determined in the contract, for example 70% for the customer and 30% for the bank. Hence, what is imperative in an Islamic account is that the accumulated deposit is only invested in Shariah compliant companies (those whose business activities are in compliance with Shariah princi-ples and all income generated is free from doubtful sources). For instance, RHB Islamic Bank ensures that all the deposits received are invested in businesses or companies which are clearly free from unlawful activities.

Screening is carried out diligently and in a client-friendly environment. A transparent discussion takes place between the bank and compa-nies that have been targeted for investment, to ensure that the com-panies are Shariah compliant. The discussion will take into considera-tion the assets and liabilities of the companies in which the depos-its/funds will be invested, regardless whether they are publicly listed or not. Generally, the following Shariah filters are used:

• Industry filtering (excludes companies whose primary business is related to prohibited products and goods).

• Primary financial filters (excludes companies which have unac-ceptable levels of debt, or impure interest income according to Shariah Committee guidelines).

In conclusion, Islamic accounts differ from conventional accounts, which are not confined by the laws of Shariah and which only focus on profit generating investment. There are various permissible ways for Islamic banks to gain profit without riba. These are very reliable methods, capable of generating high income and gaining good prof-its. The following are examples of Shariah approved selling and buy-ing modes.

• Bai Bithaman Ajil (deferred installment sale). • Normal Ijarah (leasing), Ijarah Muntahiyah Bit Tamleek (ending

with ownership) and AITAB (Islamic hire purchase). • Musharakah (joint venture profit sharing) and Musyarakah Mu-

tanaqisah (diminishing Musharakah). • Mudharabah (trustee profit sharing). • Murabahah (cost plus sale) and three-party Murabahah. • Ujr (syndication services).

In these ways Islamic banks are capable of generating profit as well as benefiting society for their financial needs.

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Conclusion

The author holds a BA (Hons) from the University of Malaya and a MA Shariah (Hons) from Yarmouk, Jordan. He is presently a Shariah Com-pliance Manager in the Product Development Division at RHB Islamic Bank.



We continue to witness extraordinarily large profits from many of the world’s Islamic banks, many of which are relatively small and recently established financial institutions. Do such levels of profitability

indicate a high and opaque fee structure within these organizations?

CHRIS COOK

Principal Partnerships Consulting LLP, London

Banks, whether Islamic or not, are not banks as far as the UK’s Financial Services Authority is concerned, but “Credit Institutions.” In other words, they create credit on the basis of a regulatory “Capital base” as set out by the 1988 Basel Ac-cord. Any return from the differential (the “bid/offer spread”) between what they pay to depositors/“investors,” and what they charge to borrowers/“customers” in excess of the cost of providing the system and of defaults by borrowers/customers is pure profit. Banking is therefore a remarkably profitable business. The arbitrary rates of return (ie interest) set by Central Banks have nothing whatever to do with these underly-ing costs, and in fact, therefore, may often be one of the root causes of inflation, rather than a cure, as conven-tional economic wisdom has it. The source of Islamic banks’ credit is the same as any other banks – ie pure credit creation with a click of a mouse – it is merely the risk profile between the bank and its counterparties that is different from conventional banking. I must confess that I find it difficult to understand how any Islamic scholar who understands the process may approve of any credit creation in excess of banks’ capital: “Islamic Banking” involving such credit creation is arguably, therefore, a contradiction in terms. Putting that subject to one side, in essence the answer to the question is that Islamic banks are particularly profitable for two principal reasons: the default experience is better and the bid/offer spread is greater – probably because of complexity and opacity in charging.

Sadia Ghani

Research Analyst

There has indeed been a significant increase in the profits of Islamic banks in recent times, making the sector to be highly lucrative with a large number of new entrants in the market. The question could be relevant in large investment banks that are involved in real estate development, but perhaps not with other commercial Islamic banks. Increase in profitability of banking and financial institutions in the Middle East is not just limited to Islamic banks but can be witnessed in conventional banks also. This is mainly due to the prevailing eco-nomic conditions. Profitability of an institution is not dependent on just one factor; rather it depends on a large number of internal and external factors. Internal factors would include detailed data on the assets, balance sheet, income state-ments, sources and uses of funds, as well as rates of returns on various specific items on its portfolio. It has been observed that Islamic banks tend to favour short-term projects and trade finance, which are less risky. Part of the explanation is that long-term financing requires expertise which is not always available. An-other reason is that there are no back-up institutional structures such as secondary capital markets for Islamic financial instruments. It is very likely that the bulk of financing in many institutions may have been concen-trated to mark up Murabahah, which is highly profitable and less risky. This type of financing, although lucrative for the banks and their investors, is unhealthy for the long-term progress of the Islamic banking. However, this trend is changing with a lot of increased activity being observed in this direction. There are also a number of external factors that have contributed to profitability and consequently growth in Islamic banking. With an encouraging regulatory environment, emerging competitive landscape, of a wide range of new products and increased market awareness, these banks are certain to achieve a significant mar-ket share in the business in a short span of time. High profitability, thus, cannot be linked only to the fee structure within the institution. It has to be viewed as a whole, taking into account the overall contributory factors and accounting techniques of the institutions.

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(continued...)

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How important a role does Takaful play in the development of a liquid and efficient Islamic capital market?

PROFESSOR RODNEY WILSON

Director University of Durham

The high profits that Islamic banks in the Gulf currently enjoy reflect the buoyant state of these economies because of high oil prices, as the profits of conventional banks have also risen sharply. Fees are relatively high in some Gulf markets, but this reflects limited competition, although as competitive pressures are now increasing with the entry of new players in both the conventional banking and Islamic banking segments, fees can be expected to fall.

Elsewhere, Islamic banks have been less profitable, with, for example, Bank Islam Malaysia making a loss during its last financial year. Small size clearly inhibits profits; especially as with information technology sys-tems there are substantial economies of scale that favour the larger institutions.

Islamic banks have to generate sufficient income to cover the additional costs of Shariah compliance. These costs can justify higher fees, as the client has to pay for the service obtained. Therefore, in my view Islamic banks are not overcharging their clients to benefit their shareholders.

Profits do not simply reflect higher fees and charges, but rather the wider economic and financial environment in which the banks operate. In short, most Islamic bank clients pay a fair price for their financial services and are not being ripped off, as some mischievous commentators who are highly critical of Islamic banking, suggest.

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NEWS BRIEFS

Islamic insurance services provider Syarikat Takaful Malaysia believes it can maintain a 20% growth in premiums next year, according to Chief Executive Officer Md Azmi Abu Bakar. Profits given by Takaful Malaysia to participants in the past has never been under 25%, which Md Azmi said is due to the company’s profit-sharing principle and track record. “Normally, the actual profit that we pay to participants is based on the current monthly rates of profit which range from 25% to 26% per an-num of the amount of Takaful contributions collected. This means you can get back your profits on top of the no claim bonus,” he explained. Md Azmi claimed that the potential for competition, with four new Takaful licences being issued by Central Bank in January, does not concern the company: “We are not worried about the competition because the prospects for the Takaful industry in Malaysia are still good.” At 5.2%, he said the market penetration for the Takaful indus-try is still low.

MALAYSIA Takaful Malaysia seeks to maintain 20% growth

MALAYSIA

Syarikat Takaful Malaysia has reported its highest growth in 20 years of operations at its 20th AGM. Profits before zakat and taxation stood at US$9.89 million (RM37.4 million) for the financial year ending on the 30th June, a 77.2% in-crease from US$5.58 million (RM21.1 million) for the same period last year. The net profit was US$8.07 million (RM30.5 million), com-pared to US$6.08 million (RM23 million) in 2004. At group level, net profits were up to US$7.3 million (RM27.6 million), from US$6.37 million (RM24.1 million) last year. This increase is at-tributed to the improved performance of the subsidiary company Asean re-Takaful International (L) Ltd. Total net assets rose to US$631.98 million (RM2.39 billion), a 13.8% increase from last year. The total Takaful contribution collected by Takaful Malaysia for the year ending on the 30th June 2005 was US$167.12 million (RM632 million), up from US$163.77 million (RM618 million) in 2004.

Takaful Malaysia profits up

GCC

The Gulf Cooperation Council (GCC) states will see a dramatic in-crease in insurance in general and especially in Takaful over the com-ing years. Saudi Arabia in particular will see this rise: the Jeddah Chamber of Commerce believes the insurance market will triple from US$2.13 million (SR8 billion) to US$6.4 billion (SR24 billion) within the next decade. Insurance currently contributes 0.7% of the GDP; this is ex-pected to reach 3.7% in 5 years. Currently in Saudi Arabia there are 20 firms undergoing the licensing procedure, and 10 more have lodged applications to the Saudi Ara-bian Monetary Agency.

Takaful surge in GCC

Syarikat Takaful Malaysia has expressed interest in joining its exper-tise with the financial might of the Islamic Development Bank (IDB) to develop Takaful in member countries of the Organization of Islamic Conference (OIC). The Chief Executive Officer of Takaful Malaysia, Md Azmi Abu Bakar, said the company is ready to enter more overseas markets and has commissioned a study into viable areas. It has previously invested in and helped to set up Takaful operators in several OIC member states, including Brunei, Bahrain, Bangladesh, Qatar, Kuwait, Indonesia, Sri Lanka and Saudi Arabia. Currently, the company is in discussion with potential partners from Kuwait, Pakistan and Thailand: “We prefer to look for local partners who know the market, can make feasibility studies and decide whether to provide assistance or put up the capital,” Md Azmi said.

MALAYSIA Takaful Malaysia wants IDB l ink

Maphilindo International may become Malaysia’s first loss adjuster to provide Shariah based loss adjusting services by 2006. Managing Director and CEO James Ong said Bank Negara has ap-proved its loss adjusting Takaful licence, subject to the company amending its Memorandum and Articles of Association. Maphilindo offers services to insurers, reinsurers, financial institu-tions, brokers, multinational and corporate clients and is currently providing Takaful adjusting services on behalf of Takaful operators Takaful Ikhlas and Takaful Nasional. Ong believes that Maphilindo’s Takaful business will grow with the increase of the Takaful insurance share, as new Takaful operators enter play next year. “It’s not unreasonable to say that within the next two years our Takaful business will grow by 10% to 20%,” Ong said.

MALAYSIA Maphil indo may be Takaful adjuster

QATAR

Quatar Islamic Bank (QIB) supported Solidarity for its first Islamic planning seminar outside of Bahrain last week. Solidarity, one of the world’s largest Takaful companies, has already completed a series of educational seminars in Bahrain. The seminar in Bahrain discussed the importance of Islamic financial planning, highlighting the differences between Takaful and conven-tional insurance. It also examined various Shariah compliant saving, investment, and protection aspects of Family Takaful plans.

Solidarity seminars go international



NEWS BRIEFS

MALAYSIA

Deputy Prime Minister Datuk Seri Najib Razak said that Malaysia is well positioned to play a more significant role in Takaful and re-Takaful, as well as in Islamic fund management, fund raising and talent development, thanks to its comprehensive Islamic financial infrastructure. The Deputy Prime Minister made a keynote address at the Interna-tional Convention on Takaful and re-Takaful, celebrating the 20th anni-versary of the Takaful industry in Malaysia: “Takaful in Malaysia – Sharing 20 Years’ Experience and the Way Forward” in Kuala Lumpur. Najib also spoke on the desirability of establishing a “road map” to establish a clear strategic direction for the development of Islamic finance throughout the countries of the Organization of Islamic Con-ference (OIC). He praised the Islamic Development Bank and the Is-lamic Financial Services Board for initiating moves for a 10-year mas-ter plan for the Islamic financial industry to assist member countries develop well-structured Islamic financial systems.

Takaful and re-Takaful conference

UAE (Dubai)

New Takaful company Takaful Re was officially inaugurated in Dubai on the 20th November. Chairman Khalid Ali Al Bustani, said: “Takaful Re will soon commence operations by accepting business from the 1st January 2006. It will bring to the marketplace a well-capitalized company that is able to lead business.” Takaful Re will serve markets in the MENA region, South-East Asia and Africa from a base in the Dubai International Financial Centre.

Takaful Re inaugerated

MALAYSIA

Idaman Unggul and Kuwait Finance House (KFH) have teamed up to apply for one of the five Takaful licences to be issued by Bank Negara by January. Executive Chairman of Idaman Unggul, Datuk Annuar Senawi, indi-cated that the group would use Malaysia as its base, if given a Takaful licence, and from Malaysia would expand to markets such as the Mid-dle East, Turkey, India, Pakistan and Sri Lanka. Idaman Unggul – which has recently agreed to sell its life insurance business – has serious intentions in the Takaful business: “If the op-portunity is given, we don’t mind converting Tahan Insurance into a Takaful company if this is allowed by the Central Bank,” said Annuar.

KFH and Idaman tie-up

MALAYSIA

Six companies have received Mudharabah payments totalling US$46,084.89 (RM174,272.95) from Syarikat Takaful Malaysia. The profit sharing agreement, founded on the principles of Mudhara-bah, has formed the basis of Takaful Malaysia’s operations since it was set up 20 years ago. Profits currently paid to participants who subscribed to Takaful Malay-sia’s various property coverage Takaful products is around 25%–35% of the premiums. The companies who received the payouts were Langkawi Develop-ment Authority, Wavemaster Langkawi Yatch Centre, Langkawi Port, Zaima Realty, Langkawi Municipality Council and Perniagaan Haji Ismail.

Takaful Malaysia profit payout

MALAYSIA

Interest in Bank Negara’s four new Takaful licences, to be issued by January 2006, has been received from as far afield as Australia, Japan, Europe and the Middle East, including from conventional finan-cial institutions. Speaking at the opening ceremony of the International Convention on Takaful and re-Takaful: “Takaful in Malaysia – Sharing 20 Years’ Ex-perience and the Way Forward” in Kuala Lumpur last month, the Gov-ernor of Bank Negara Tan Sri Dr Zeti Akhtar Aziz said: “It is envisaged that the bringing in of new players of strong capacity in product devel-opment and risk management into our financial system would hasten further expansion of the Takaful industry.” By 2010, Takaful is expected to constitute 20% of the total insurance market (currently 6.5%). In the same year, Takaful’s share of the Ma-laysian insurance industry is estimated to be worth US$1.85 billion (RM7 billion).

Foreign interest in Takaful l icences

MALAYSIA

The country’s biggest Takaful operator, Syarikat Takaful Malaysia, credits Bank Negara for the growth of the industry over the past 20 years. Md Azmi Abu Bakar, Chief Executive Officer of Takaful Malaysia, com-mented that Bank Negara: “has established a strong regulatory framework to sustain the growth by introducing a legal structure and getting more players to come on board.” Md Azmi believes the Central Bank has aggressively promoted Islamic financing as a major component of Malaysia’s financial system. Cur-rently, Bank Negara is reviewing the legal framework of the Takaful industry. Since the inception of the industry 20 years ago, Takaful industry as-sets have grown 60%. Md Azmi believes that Islamic banking and Takaful industries are on track to achieve Bank Negara’s target of Islamic finance constituting 20% of the banking and insurance market share in the future. “For the past five years, the conventional insurance industry experi-enced 10% growth per annum while Takaful recorded more than 20% per annum due to the relatively untapped [Muslim] market.”

Central Bank spurs growth



NEWS BRIEFS

UNITED KINGDOM

A Shariah compliant home insurance product has been made available to UK bank customers for the first time, thanks to the new HSBC Home Takaful insurance policy. Several features of the conventional home insurance product have been altered to make the policy conform with Shariah law. This is the latest Islamic product from HSBC, which already provides Shariah compliant home finance, current accounts and pension funds.

Home Takaful for UK

BAHRAIN

The 12th World Islamic Banking Conference will be preceded by a Takaful Summit and an Islamic Ratings Seminar at pre-conference briefings on the 10th December. At the Takaful Summit, a panel of industry experts, regulators and scholars will debate the key issues and opportunities facing the Taka-ful market. Also discussed will be new business models, Shariah perspectives, regulatory insights and market developments. The Islamic Ratings Seminar will be opened by the Chairman of the Islamic International Rating Agency, Khaled Al Aboodi. Sovereign, Shariah, Takaful and credit ratings of Islamic financial institutions will all be covered in the seminar. IIRA commented: “The papers will high-light the important aspects of the methodologies and also the bene-fits of rating for the development of the Islamic financial market. The forum will provide an opportunity for better understanding of rating as a tool for bringing about greater transparency in the market.” Finally, an executive briefing on the 2005 McKinsey Competitiveness Report will also be held before the conference. The Competitiveness Report Executive Briefing will discuss the findings of this major annual industry research project. The report, themed “Tracking an Industry in Transition,” will be made available to all delegates.

Takaful Summit pre-World Conference

MALAYSIA

HSBC’s expansion plans in Southeast Asia may include seeking one of Malaysia’s Islamic insurance licenses. Chairman of HSBC Holdings Sir John Bond said: “Islamic finance is one of the fastest growing businesses within HSBC and we attach huge importance to it.” HSBC already has a presence in several Islamic countries; has a range of Islamic services and products (HSBC Amanah Islamic); and has a Takaful business in Singapore. In addition, HSBC now distrib-utes Syarikat Takaful Malaysia’s Takaful products. Bank Negara’s announcement to issue up to four new Takaful licences was aimed to widen access to the industry, and thus improve Malaysia’s chances of becoming a global centre for Islamic financial services.

Malaysia’s place in HSBC expansion

UAE (Sharjah) Aman opens in Sharjah

Dubai Islamic Insurance and Reinsurance Company, Aman, has opened a new office in Sharjah to provide a wide range of Shariah compliant insurance and re-insurance products and services. Managing Director Hussain Al Meeza said: “As a leading provider of Islamic-based insurance products in the UAE, Aman has succeeded in stabilizing its existence in the insurance market. Since its estab-lishment, Aman’s core principle has been to develop incrementally the Islamic insurance services. The launch of the new Sharjah branch is therefore integral to our commitment towards the community.”

DUBAI Salama posts US$14.43m profit

One of the largest Takaful and re-Takaful companies, Salama Islamic Arab Insurance Company, has announced net profits for the first nine months of this year of US$14.43 million (Dh53 million). Total assets stood at US$461.78 million (Dh1.696 billion) and shareholder equity US$204.8 million (Dh1.046 billion). Sheikh Khaled bin Zayed bin Saqr Al Nehayan commented on the results: “In the first nine months we have got very close to our year end profit forecast of US$16.74 million (Dh61.5 million). By any standards this is an outstanding performance, achieved across all our core business activities.”

EVENING IMPACT SERIES Islamic Finance & Banking

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22nd February – 12th April 2006, KUALA LUMPUR

FOR MORE INFORMATION, contact: Andrew Tebbutt Tel: 603 2143 8100;

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Premium payment A Takaful installment, or the premium paid by the participants, is di-vided and credited into the two separate accounts of PA and PSA. The portion of the installment credited into the PA is for savings and invest-ment, while the balance of installment credited into the PSA account is considered as Tabarru. The proportions are not fixed.

En Ikram, Marketing Executive of Health Takaful, explains that the divi-sion of the installment between the PA and the PSA is made according to the following criteria.

Age Age is regarded as an important criterion, as the older a person is, the higher is the risk of being diagnosed with an illness. This higher risk results in a larger portion of the installment being placed in the PSA compared to a younger person with lesser risk.

Gender According to studies, the life expectancy of females is longer than males, resulting in a lower risk for women. Thus female participants will be eligible for a greater proportion of the installment being placed in PA compared to men.

Duration When a young person signs up for Health Takaful, the coverage period is longer compared to an older person. This longer coverage period (or duration) results in a higher proportion being placed in PA.

Health The state of health of the participants is also considered in dividing the installments. If the participant is diagnosed with an illness, the risk is higher, thus meaning a higher proportion being placed in PSA.

TAKAFUL REPORT Islamic Health Insurance (Takaful Sihat)

By Professor Dr Mohd Ma’sum Billah

Package A Of the two packages Health Takaful provides for its customers, Pack-age A provides savings for the participant, in addition to the coverage for the 36 illnesses. The participant can also share the profits accord-ing to the principles of Mudharabah.

Death

Diagram 2 shows an example of a person who died of illness during the period of coverage. The customer took the Takaful Plan for 20 years and died during year 10 due to an illness covered in the pack-age. His family are eligible to receive US$5,304 (RM20,000) plus the balance remaining in his PA.

Diagnosis of critical illness

This is the concluding section of a two-part article analyzing Takaful Sihat in Malaysia. In the last issue the concept of Islamic health insurance and how it works was explained.

This part will focus on the practicalities of health plans.

Participant’s Special

Accounts (PSA)

20% 80%

Participant’s Account

RM400 RM100

Diagram 1

RM 500

Premium Paid

Practical application

RM20,000 + AP

Diagram 2

Yr 0 Yr 10 Yr 20

Died of illness

End of policy period

Yr 0 Yr 10 Yr 20

Diagnosed with illness

End of policy period

RM10,000

Died of illness

RM10,000 + AP

Diagram 3

Continued...



Diagram 3 shows the case of a person who bought a Takaful policy of 20 years. He was diagnosed with an illness during year 10, which enti-tled him to receive US$2,625 (RM10,000) for medication purposes. He died of the illness in the remaining period, which entitled the family members to receive the balance of US$2,625 (RM10,000), plus the balance of his PA.

Permanent disablement Diagram 4 relates to a case of a permanent disablement. When a per-son is permanently disabled as a result of illness they are entitled to receive US$26.52 (RM100) monthly plus the PA balance until the per-son reaches 65 years old. Permanent disablement coverage also de-pends on the percentage of the part of body which is disabled.

Accident If the participant is involved in an accident then he is eligible to receive US$10,609 (RM40,000) if the accident was not caused by any illness.

Hospital allowance If a participant is diagnosed with an illness that requires a hospital stay (such as Dengue fever), then he will be entitled to US$26.52 (RM100) daily as long as he stays in hospital.

Cash withdrawal In case of emergency, participants can withdraw their money according to the proportion previously determined. Participants can withdraw 50% of the total PA balance after 2 years and 70% after 5 years. Package B Package B is planned more toward charity. The installment is divided according to age groups, with the premium increasing as the age in-creases. All other plans are the same as Package A, with the exception of the critical illness plan.

Diagnosis of critical illness

Diagram 5 shows that when a participant in Package B is diagnosed with an illness, the total amount – which is US$5,304 (RM20,000) plus AP – is given. This is in contrast to Package A.

TAKAFUL REPORT Islamic Health Insurance (Takaful Sihat) (continued...)

Health Takaful provides many benefits to its participants. According to one Takaful operator in Malaysia, Health Takaful is favoured by cus-tomers because of the monetary benefits they receive, as well as the coverage. Some of the advantages are explained below. The two different plans that Health Takaful provides (with or without savings) give customers freedom of choice to evaluate and choose whichever package is more suited to them. The fact that the premium is charged according to financial ability and age criteria enables cus-tomers from all levels of society to have a Takaful policy. Funeral ex-penses for participants are also provided by Takaful Malaysia. Takaful Malaysia, unlike other operators, does not appoint agents to promote its product. Intermediaries are eliminated by recruiting mar-keting executives who are directly connected to the company. This means costs are saved and the revenue for the customers and Taka-ful itself is increased. This reduction in cost results in a higher propor-tion of the premium being deposited in the participants’ account. In addition, eliminating agents decreases the risk of false play, as agents are usually connected to more than one firm, which may lead to dishonesty. Direct employees who are involved in the well-being of the firm are more likely to be loyal.

Takaful Malaysia forms part of the BIMB Holdings Bhd group of com-panies. Takaful Malaysia offices are placed together with Bank Islam offices all over Malaysia, thus giving ease of access for customers to pay premiums or to obtain more details regarding the product. Takaful Malaysia, as a provider of Islamic insurance, only invests in Shariah-based companies. There are no elements of riba, maysir and gharar in any of its activities. Majlis Pengawasan Shariah (MPS) has the responsibility of ensuring that Takaful Malaysia follows the rules of Shariah in conducting its business. A group of committees is ap-pointed to foresee problems raised by the executives and provide a solution from an Islamic viewpoint.

Participants are able to withdraw their investment in Takaful Malaysia before the maturity date if they wish. Participants can withdraw 50% of the total amount paid in two years and 70% of the total amount paid in five years. This attracts customers, because they know they can withdraw the money in an emergency.

Takaful Malaysia does not charge for the late payment of a premium, as other insurance operators do. The premium is deducted from the participant’s salary in 30 days. For the personal payment method, only 15 days is given for the late payments. This gives the customers a chance to make the payment later than the date scheduled in case of monetary difficulties. Having a Takaful Malaysia Plan also has tax advantages. This is because Takaful expenses are deducted from total income before the tax payable is calculated, thus reducing the taxable income, which will lead to lesser tax.

Takaful Malaysia faces quite a number of problems, mainly derived from its customers. Some customers do not understand the terms and conditions of the policy. They claim for non-covered fatalities, even though it is made clear in the agreement that they cannot claim for an illness that is not shortlisted in the types of illness covered. Another example is a participant claiming for more than one illness even though it is made clear from the beginning that the coverage is for only one illness, even if a participant is diagnosed with more than one.

Yr 0 Yr 5 Yr x


RM100 monthly + AP

(until 65 years old)

Diagram 4

Yr 0 Yr 10 Yr 20


RM20,000 + AP Get nothing

Diagram 5

Died of illness

Advantages of Takaful Sihat

Problems encountered

Continued...



Late payment of premiums is also a big problem for the operator. This is because it is time-consuming and difficult for executives to detect and handle late payers. Customers also tend to give false information regarding their health condition, failing to reveal that they are diagnosed with certain illnesses at the time of registration. This contradicts the condition that a person should not be diagnosed with any of the 36 illness listed in the agreement before getting the policy.

After analyzing all the information gathered, we would suggest a few improvements that Takaful Sihat could look into. First, we suggest Health Takaful increases its market share. There are four Takaful opera-tors in Malaysia and in order to strengthen its competitive position, it should conduct aggressive promotional activities. Health Takaful is al-ready favoured by customers because of its benefits, but extra promo-tion is needed for the information to reach people from all walks of life.

Secondly, Takaful Malaysia should take action to eliminate the miscon-ception regarding the image of the firm. This can be done by reducing the misunderstanding of the coverage provided. This has become a big issue, especially when a customer complains through the media. The executives should carefully monitor the registration process so that the customers thoroughly understand the terms and conditions.

Thirdly, we suggest that the term of the policy is increased. The partici-pation period is now limited to 10, 15 and 20 years. This should be in-

TAKAFUL REPORT Islamic Health Insurance (Takaful Sihat) (continued...)

Recommendations

creased to 25 or 30 years. Currently, if a participant obtains a Health Takaful plan when he is 20 years old, then the coverage only lasts until he reaches the age of 40. Usually the risk of becoming ill is lower for those below 40 years old.

Human beings exist in this world in a state of uncertainly, as we lack knowledge of future. There would be no risk if we knew what will happen in the future and without risk there would be no need for protection. In reality, we can only anticipate the future based on our past experience. From an economic point of view, uncertainty re-lates to the fear of having to face the possibility of huge losses. In-surance offers a protection against this kind of mischief. Takaful Sihat, as we have discussed above, is a protection against critical illness. This article has illustrated that Takaful Sihat is one of the best plans that Takaful operators have come up with, as all humans risk being diagnosed with illness. The activities of Takaful Malaysia are controlled by MPS, a further attraction for potential customers, as its business is purely Islamic.

Conclusion

The author is an Adviser and Consultant to several companies and institutions on Takaful, re-Takaful, insurance, banking, financial and IT regulations, wealth & asset management, Islamic bond market, Islamic capital market, Islamic money market and gold dinar. He is also the author of http//.www.islamic-insurance.com. He can be contacted at [email protected].



WALKERS – Dubai

MOVES

The newly opened office of Walkers in the Dubai International Finance Centre will be led by Managing Partner Rod Palmer, who brings to Dubai a wealth of experience in Islamic finance.

Partner Robert Varley will oversee business development in the Middle East. Mr Varley specializes in investment funds, including Islamically acceptable financial products, and has advised on many pioneering UK and European real estate Shariah funds.

LINKLATERS – Dubai Ewan Cameron has been appointed to head up Linklaters’ new Dubai office. Ewan comes to Linklaters from Clifford Chance, where he was Head of Corpo-rate and Securities in the Dubai office.

Jonathan Inman and his team will concentrate on general finance work, cur-rently from the London office, but with a focus on the Middle East.

Scott Campbell, previously with Clifford Chance, will work in corporate/M&A, TMT and equity capital markets.

MORGAN STANLEY – Dubai Dr Georges Makhoul has been appointed Managing Director for Morgan Stanley’s new Middle East and North Africa business.

Dr Makhoul has considerable international experience, and will relocate to Dubai for his new role.

DEUTSCHE – Indonesia

Deutsche has appointed Elwin Karyadi as Head of the Product and Cash Man-agement Team for domestic custody services in Indonesia.

HSBC – UK Chairman of HSBC Holdings plc, Sir John Bond, will retire in May 2006 after 45 years with the company and three years as CEO.

Current Chief Executive Officer Stephen Green will succeed him as Chairman.

Michael Geoghegan will become the new CEO. Mr Geoghegan has led HSBC’s UK retail banking division for two years.

Dyfrig John will replace Mr Geoghegan as head of the UK business.

ISLAMIC FINANCE News Team

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Editor Frances O’Sullivan Tel: +603 2143 8100 [email protected] Deputy Editor Sreerema Banoo Tel: +603 2143 8100 [email protected] Senior Writer Seelan Sakran Tel: +603 2143 8100 [email protected] Correspondents Kamal Bairamov Tel: +603 2143 8100 Shirene Shan Research Director Shih Yan-Ting Tel: +603 2143 8100 [email protected] Newsletter Manager Christina Morgan Tel: +603 2141 6025 [email protected] New Business Charles Philip Tel: +603 2143 8100 x 13 Manager [email protected] Subscriptions Manager Geraldine Chan Tel: +603 2141 6024 [email protected] Production Manager Jeya Jeevan Tel: +603 2143 8100 [email protected] Marketing Manager Zalina Zakaria Tel: +603 2141 6021 [email protected] Marketing Assistants Dhana Dorasamy Tel: +603 2143 8100 Sharifah Shazana Administration Kim Yong Tel: +603 2143 8100 x 23 Manager [email protected] Managing Director Andrew Tebbutt Tel: +603 2141 6022 Training [email protected] Sales Manager Derrick Lee Tel: +603 2143 8100 x 14 Training [email protected] Managing Director Andrew Morgan Tel: +603 2141 6020 & Publisher [email protected]

OASIS INTERNATIONAL LEASING – Abu Dhabi Oasis International Leasing has appointed Saeed Al Hajeri – Executive Direc-tor of the Abu Dhabi Investment Authority and Chairman of the Abu Dhabi Commercial Bank – to its Board of Directors.

Al Hajeri is also Vice-Chairman of the Abu Dhabi Investment Company and a Director of Etisalat, Abu Dhabi’s Higher Corporation for Specialised Economic Zones, Dubai Cable Company, Sourouh Real Estate, Al Qudra, and the Emir-ates Institute for Banking and Financial Services. He attended Harvard Busi-ness School.

Anand Banerjee has been appointed as Chief Financial Officer. Mr Banerjee has previously held the same role at Dubai International Capital, Siemens, Marks & Spencers and The Oberoi Group. He has an MSc and a BSc in Ac-counting & Finance, an MSc in Economics and is also a lecturer in Accounting.

Rachel Frye has been appointed as Marketing Director. She has previously held the role of Senior Vice-President of AMS Aircraft Ltd, where she gained extensive experience in Technical Management and Remarketing.

QFC – Qatar The Qatar Financial Centre has appointed Steve Martin to be Head of Corpo-rate Communications and Marketing.

Mr Martin will be charged with building the QFC brand and promoting the op-portunities that the QFC offers. Mr Martin joins from HSBC, where he held the position of Regional Manager of Corporate Affairs in the Middle East for the past seven years.



MALAYSIA ISLAMIC BOND UPDATE

MYR ISLAMIC DEBT YIELD CURVES

SPREAD VS GII (in b.p)

RINGGIT ISLAMIC DEBT MARKET: FORTNIGHTLY SNAPSHOT

For enquiries regarding the above information, please contact:

Tel: +603 2711 5125/5126 Fax: +603 2284 1807 Email: [email protected]

AS AT 2nd Dec 2005

5-YEAR YTM Historical Charts (weekly closing, over last 6 months) YTM Curves

Key Benchmarks Trend (by volume) Rating This week close (RM) 23/11/2005 (RM) 16/11/2005 (RM) 09/11/2005 (RM)

Private Debt Securities SPLASH 0.000% 18.07.2008 AA3 (RAM) 98.01 98.01 98.01 98.01

P NIAGA 0.000% 27.10.2010 AA ID (MARC) 113.16 115.38 115.38 115.38

PLUS 0.00000% 17.06.2016 - SERIES 1 AAA (RAM) 56.78 54.73 54.73 54.73

ELITE 0.00000% 28.02.2012 AA3 (RAM) 111.06 111.03 111.20 111.20

SPLASH 0.000% 18.07.2014 AA3 (RAM) 120.68 120.68 120.68 120.68

Government Investment Instruments

GII 1/2003 0.00000% 31.03.2008 n/a 92.81 92.81 92.86 92.73

GII 3/2004 0.00000% 29.10.2009 n/a 87.38 87.38 87.38 87.38

GII 1/2002 0.00000% 02.12.2005 n/a 99.90 99.90 99.90 99.84

GII 1/2004 0.00000% 15.06.2007 n/a 95.27 95.27 95.27 95.25

Quasi Government

KHA2/03 1B 0-CP 5Y 18/9/08 n/a 90.65 91.11 91.20 91.08

IBRD 0.00000% 12.05.2010 n/a 98.72 98.72 98.69 98.69

KHA1/05 1B 0-CP 5Y 18/01/2010 n/a 85.80 86.89 86.45 86.45

KHA1/04 1.15B 0-CP 5Y 18/9/2009 n/a 87.91 87.91 87.89 87.89

KHA4/99 1B 0-CP 7YR 18/12/2006 n/a 96.75 96.75 96.73 96.75

PROFIT-BASED GII 1/2005 16.03.2015 n/a 101.67 101.67 101.80 101.80

TENURE

1-Year 2-Year 3-Year 5-Year 7-Year 10-Year

GII 3.25 3.36 3.5 3.74 3.94 4.23

Cagamas 0.1 0.22 0.26 0.2 0.25 0.23

Khazanah -0.05 0.03 0.02 0.07 0.11 0.1

AAA 0.25 0.3 0.46 0.54 0.67 1.05

AA1 0.31 0.51 0.78 0.77 0.9 1.21

A1 1 1.21 1.46 2.17 2.68 2.81



ISLAMIC LEAGUE TABLES

For all enquires regarding the above information, please contact: Catherine Chu Email: [email protected] Phone: +852 2804 1223; Fax: +852 2529 4377

Issuer or Group Nationality Instrument Amt US$ m Iss. % Share Manager

1 Wings FZCO UAE Islamic Sukuk Al Musharakah Issue

550 1 13.4 Dubai Islamic Bank, Standard Chartered Bank, HSBC

2 Cagamas MBS Malaysia Asset-backed Sukuk Musharakah Islamic Bond

542 6 13.2 CIMB, HSBC, ABN AMRO, AmMerchant Bank

3 Islamic Development Bank Saudi Arabia Islamic Bond 500 1 12.2 Deutsche Bank, HSBC

4 PLUS Expressways Malaysia Serial Bai Bithaman Ajil Islamic Securities

349 4 8.5 CIMB

5 Syarikat Bekalan Air Selangor Malaysia Bai Bithaman Ajil Commercial Papers/MTN

273 4 6.6 CIMB, Bank Islam Malaysia, HSBC Bank (Malaysia)

6 Maybank Malaysia Islamic Subordinated Bond 265 1 6.4 Aseambankers Malaysia

7 DRB-HICOM Malaysia Bai Bithaman Ajil Islamic Debt Securities/Murabahah CP/MTN Facility

209 11 5.1 AmMerchant Bank, Malaysian International Merchant Bankers

8 Konsortium Lebuhraya Utara-Timur (KL)

Malaysia Redeemable Secured Serial Sukuk Istisnah

207 9 5.0 CIMB

9 Ranhill Power Malaysia Islamic MTN Programme 142 12 3.5 Aseambankers Malaysia

10 Antara Steel Mill Malaysia Al Bai Bithaman Ajil Islamic Debt Securities

133 6 3.2 AmMerchant Bank

11 Cagamas Malaysia Bithaman Ajil Islamic Securities 132 1 3.2 AmMerchant Bank

12 Golden Crop Returns Malaysia Sukuk Al Ijarah 117 15 2.8 Affin Bank

13 Konsortium Lapangan Terjaya Malaysia Al Bai Bithaman Ajil MTN 101 9.0 2.5 Alliance Merchant Bank, United Overseas Bank (Malaysia)

14 Bayu Padu Malaysia Istisnah Serial Bonds 66 8.0 1.6 United Overseas Bank (Malaysia)

15 Konsortium Lebuhraya Butterworth-Kulim

Malaysia Bai Bithaman Ajil Islamic Debt Securities

66 25 1.6 Bank Muamalat Malaysia

16 Sarawak Gateway Malaysia Redeemable Secured Serial Sukuk Ijarah

64 6 1.5 CIMB, RHB Sakura Merchant Bankers

17 Harum Intisari Malaysia Murabahah Commercial Paper/MTN Programme

53 1 1.3 HSBC Bank Malaysia

18 Sweetwater SPV Malaysia Serial Bai Bithaman Ajil Islamic Securities

52 3.0 1.3 Avenue Securities

19 Focal Quality Malaysia Sukuk Al Ijarah 50 8.0 1.2 OCBC Bank (Malaysia)

20 Sacofa Malaysia Redeemable Secured Serial Sukuk Istisnah

42 6 1.0 CIMB, RHB Sakura Merchant Bankers

Total of issues used in the table 4,112 168 100.0

TOP 20 ISSUERS OF ISLAMIC DEBT May 2005 – Nov 2005



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ISLAMIC LEAGUE TABLES TOP 20 ISSUERS OF ISLAMIC DEBT YEAR-TO-DATE

Issuer or Group Nationality Instrument Amt US$ m Iss. % Share Manager

1 Pakistan International Sukuk Co Pakistan Sukuk Al Ijarah Sovereign Islamic Bond

600 1 10.0 Citigroup, HSBC

2 Wings FZCO UAE Islamic Sukuk Al Musharakah Issue

550 1 9.2 Dubai Islamic Bank, Standard Chartered Bank, HSBC

3 Cagamas MBS Malaysia Sukuk Musyarakah Islamic Bond 542 6 9.0 CIMB, HSBC, ABN AMRO, AmMerchant Bank

4 Islamic Development Bank Saudi Arabia Islamic Bond 500 1 8.3 Deutsche Bank, HSBC

5 PLUS Expressways Malaysia Serial Bai Bithaman Ajil Islamic Securities

349 4 5.8 CIMB

6 Syarikat Bekalan Air Selangor Malaysia Bai Bithaman Ajil Commercial Papers/MTN

273 4 4.6 CIMB, Bank Islam Malaysia, HSBC Bank (Malaysia)

7 Maybank Malaysia Islamic Subordinated Bond 265 1 4.4 Aseambankers Malaysia

8 Jimah Energy Ventures Malaysia Istisnah Islamic MTN Facility 245 10 4.1 AmMerchant Bank, RHB Sakura Merchant Bankers, Malaysian International Merchant Bankers, Bank Muamalat Malaysia

9 Cagamas Malaysia Bithaman Ajil Islamic Securities 238 5 4.0 Cagamas /AmMerchant Bank

10 DRB-HICOM Malaysia Bai Bithaman Ajil Islamic Debt Securities

209 11 3.5 AmMerchant Bank, Malaysian International Merchant Bankers

11 Konsortium Lebuhraya Utara-Timur (KL) Malaysia Redeemable Secured Serial Sukuk Istisnah

207 9 3.4 CIMB

12 Gold Sukuk dmcc UAE Islamic Sukuk Al Musharakah Issue

200 1 3.3 Standard Bank, Dubai Islamic Bank

13 International Bank for Reconstruction & Development – World Bank

Supranational Bai Bithaman Ajil Islamic Debt Securities

200 1 3.3 ABN Amro Bank , CIMB

14 Musyarakah One Capital Malaysia Asset-Backed Sukuk Musharakah Issuance Programme

176 7 2.9 CIMB

15 Special Power Vehicle Malaysia Bai Inah Islamic MTN Facility 163 13 2.7 Malaysian International Merchant Bankers, AmMerchant Bank, RHB Sakura Merchant Bankers, Bank Muamalat Malaysia

16 Ranhill Power Malaysia Islamic MTN Programme 142 12 2.4 Aseambankers Malaysia

17 Antara Steel Mill Malaysia Al Bai Bithaman Ajil Islamic Debt Securities

133 6 2.2 AmMerchant Bank

18 Golden Crop Returns Malaysia Sukuk Al Ijarah 117 15 2.0 Affin Bank

19 Konsortium Lapangan Terjaya Malaysia Al Bai Bithaman Ajil Islamic Debt Securities

101 9 1.7 Alliance Merchants Bank, United Overseas Bank (Malaysia)

20 Kingdom of Bahrain Bahrain Sukuk Al Ijarah 80 1 1.3 Bahrain Monetary Agency




Manager or Group Amt US$ m Iss. %Share

1 CIMB 998 37 24.3

2 HSBC 849 13 20.6

3 Aseambankers Malaysia 407 13 9.9

4 AmMerchant Bank 383 21 9.3

5 Deutsche Bank 275 3 6.7

6 Dubai Islamic Bank 183 1 4.5

7 Standard Chartered Bank 183 1 4.5

8 United Overseas Bank 117 17 2.8

9 Affin Merchant Bank 117 15 2.8

10 EON Bank 104 11 2.5

11 RHB Bank 99 22 2.4

12 Bank Islam Malaysia 91 4 2.2

13 Oversea-Chinese Banking Corp 88 19 2.1

14 Bank Muamalat Malaysia 66 25 1.6

14 Avenue Securities 52 3 1.3

16 Alliance Merchant Bank 51 9 1.2

17 Andalan Artha Advisindo 30 1 0.7

18 OSK Asia Securities 13 4 0.3

19 Bank BNI 6 1 0.1


ISLAMIC LEAGUE TABLES ISLAMIC DEBT YEAR-TO-DATE

ISLAMIC DEBT BY COUNTRY MAY 2005 – NOV 2005 ISLAMIC DEBT BY COUNTRY YEAR-TO-DATE

Manager or Group Amt US$ m Iss. %Share

1 CIMB 1,247 43 20.8

2 HSBC 1,149 14 19.2

3 AmMerchant Bank 506 50 8.4

4 Aseambankers Malaysia 407 13 6.8

5 Citigroup 300 1 5.0

6 Dubai Islamic Bank 283 2 4.7

7 Deutsche Bank 275 3 4.6

8 EON Bank 246 47 4.1

9 RHB Bank 201 45 3.4

10 Standard Chartered Bank 192 2 3.2

11 Bank Muamalat Malaysia 168 48 2.8

12 United Overseas Bank 117 17 2.0

13 Affin Merchant Bank 117 15 2.0

14 Cagamas 105 4 1.8

14 ABN AMRO 100 1 1.7

16 Standard Bank Group 100 1 1.7

17 Bank Islam Malaysia 91 4 1.5

18 Oversea-Chinese Banking Corp 88 19 1.5

19 Bahrain Monetary Agency 80 1 1.3

20 Avenue Securities 52 3 0.9


Amt US$ m Iss. %Share

Malaysia 3,026 164 73.6

UAE 550 1 13.4

Saudi Arabia 500 1 12.2

Indonesia 36 2 0.9

Total 4,112 168 100.0


Malaysia 3,805 225 63.5

UAE 750 2 12.5

Pakistan 600 1 10.0

Saudi Arabia 500 1 8.3

United States 200 1 3.3

Bahrain 80 1 1.3

Indonesia 61 3 1.0

Total 5,996 234 100.0


Malaysian ringgit 3,026 164 73.6

US dollar 1,050 2 25.5

Indonesian rupiah 36 2 0.9

Total 4,112 168 100.0 Amt US$ m Iss. %Share

Malaysian ringgit 4,005 226 66.8

US dollar 1,850 4 30.9

Bahraini dinar 80 1 1.3

Indonesian rupiah 61 3 1.0

Total 5,996 234 100.0

ISLAMIC DEBT BY CURRENCY YEAR-TO-DATE

ISLAMIC DEBT BY CURRENCY MAY 2005 – NOV 2005

ISLAMIC DEBT MAY 2005 – NOV 2005

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