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GLOBAL PERSPECTIVE ON ISLAMIC BANKING & INSURANCE

ISSUE NO. 182JANUARY–MARCH 2012

SAFAR-RABI AL THANI 1433

PUBLISHED SINCE 1991NEWHORIZON

POINT OF VIEW:AGAINST MEGA BANKINGAND IN FAVOUR OFMUTUALITY

MARKET FOCUS:THE MALDIVES EDGETOWARDS A FULLY-FLEDGED ISLAMICCAPITAL MARKET

ACADEMIC ARTICLE:DOUBTFUL AND MIXEDCAPITAL IN ISLAMICFINANCIAL INSTITUTIONS

COUNTRY FOCUS:QATAR PUNCHES ABOVEITS WEIGHT

IN THE SPOTLIGHT:AN INTERVIEW WITHANOUAR ADHAM, QIB(UK)

NewHorizon 182_NewHorizon 24/01/2012 09:37 Page 1


NEWHORIZON Safar-Rabi al Thani 1433

CONTENTS

05 NEWSA round-up of the important storiesfrom the last quarter around theglobe.

29 Where Are TheyNow?A new, regular feature looking athow students have fared sincegaining their IIBI Diploma.

31 AWARDSListing of IIBI post graduatediplomas and diplomas in Islamicbanking.

32 IIBI LECTURESReports of the September 2011lecture on financial reform and itsimplications for Islamic finance; theOctober lecture on the socio-ethicalfailure of Islamic banking andfinance and the November lectureon the emergent Islamic financelegal system.

38 DIARY OF EVENTSENDORSED BY THE IIBI

39 APPOINTMENTS

40 TECHNOLOGYNEWSNews from Oracle, Misys and PathSolutions.

11 Against Mega Bankingand in Favour of Mutality

Arshad Ahmed and Jonathan Berthet lookat popular anti-megabank protestmovements and how they argue for mutualorganisations, particularly in Islamicfinance, to address the concerns of ordinarypeople around the world.

13 The Maldives EdgeTowards a Fully-FledgedCapital Market

With the first Islamic bank established inearly 2011, Maldives takes the next steps intheir quest to become a centre for Islamicfinance.

15 Doubtful and MixedCapital in Islamic FinancialInstitutions

Dr. Zaharuddin Abd Rahman argues for apragmatic approach on the question of theorigins of capital in Islamic financialinstitutions citing the opinions of Shari’ahscholars to justify his views.

17 Qatar Punches AboveIts Weight

A profile of Qatar and its ambitions in thefinancial sector and particularly in Islamicfinance.

20 An Interview withAnouar Adham, QIB (UK)

Anouar Adham talks about assetmanagement at QIB (UK) and how he

views the future of this sector of theindustry.

21 Form and Substancein Islamic Finance –Challenges, Problems andthe Way Forward

A report from the one-day workshop thattook place in London in December 2011.Following a keynote address from LordSheikh, panellists looked at how legaldisputes have highlighted the problem andthe need for greater professionalism amongShari’ah scholars.

Fares Mourad

Samer Hijazi


NEWHORIZON January–March 2012

2011 drew to a close with few signs of any real resolution to theEurozone crisis, a sense of disappointment among those calling forreform of the UK banking sector at the very moderaterecommendations of the Vickers report on the future of banking inthe UK and the Occupy movement around the world still in full crydespite attempts to remove them from the hearts of the financialdistricts in cities such as London and New York. One UK bankerand philanthropist, Jonathan Ruffer, referred to thecurrent banking crisis as a ‘moral disaster’. Against this backgroundthere is resurgence in the form over substance debate in Islamicfinance, which is very much reflected in this issue of NewHorizon.

There is a strong groundswell of opinion that now is the time forIslamic finance industry to revisit its roots and offer the world,Muslims and non-Muslims, a real alternative to the debt drivenconventional banking industry. The IIBI’s 3rd Annual ThematicWorkshop, which took place in London on 12 December 2011,addressed this issue and despite a very earnest desire to see Islamicfinance deliver on the principles of the Islamic moral economy,there was also a strong sense of realism about the difficulties thatwill have to be overcome to achieve this.

At this point we should perhaps remember the words of the 1stcentury Roman philosopher, Seneca. He said, ‘It is not becausethings are difficult that we do not dare, it is because we do not darethat things are difficult.’ Any transformation of the Islamic financeindustry to reflect its original and laudable aims more truly will nothappen overnight and there will be stumbling blocks along the way,but the industry must dare to be different. That way lies success forthe industry and real hope for millions of people around the worldin both developed and developing nations.

On that note may I, on behalf of the Institute, the NewHorizoneditorial team and all the staff at the IIBI wish all our readers,members, friends and supporters the very best for 2012.

EDITORIAL

Mohammad Ali Qayyum,Director General, IIBI

Andrea WhartonSue Dobson

Mohammad Shafique

Humphrey Tizard

Mohammed AminM Iqbal AsariaRichard T de BelderAjmal BhattyStella CoxIqbal KhanDr Imran Ashraf Usmani

Institute Of Islamic Banking andInsurance7 Hampstead Gate1A FrognalLondon NW3 6ALTel: +44 (0) 207 2450 404Fax: +44 (0) 207 2459 769Email: [email protected]

Institute Of Islamic Banking andInsurance7 Hampstead Gate1A FrognalLondon NW3 6ALTel: +44 (0) 207 2450 404Fax: +44 (0) 207 2459 769Email: [email protected]

Mohammad ShafiqueInstitute of Islamic Banking andInsurance7 Hampstead Gate1A Frognal London NW3 6ALUnited Kingdom Tel: + 44 (0) 207 2450 404Fax: + 44 (0) 207 2459 769Email: [email protected]

©Institute of Islamic Banking andInsuranceISSN 0955-095X

Surat Al Baqara, Holy Quran


NEWHORIZON Safar-Rabi al Thani 1433 NEWS

The Islamic Financial Services Board (IFSB) hasissued Exposure Drafts (EDs)on liquidity risk managementand stress testing for a three-month public consultationperiod lasting until the end of 2011. The proposeddocument on liquidity riskmanagement endeavours todelineate a set of guidingprinciples for the robustmanagement of liquidity risk by institutions offeringIslamic financial services(IIFS). In keeping with theobjectives of the IFSB, the 22 guiding principles aim tohelp develop a prudent,efficient and resilient Islamic financial servicesindustry, thus enhancing thestability of the overallfinancial systems in whichIslamic financial institutionsoperate.

In addition to providingnecessary conditions foreffective liquidity riskmanagement in the Islamicfinancial services industry,these guiding principlesoutline among others:

i the salient characteristics of the liquidity riskmanagement process to beundertaken by IIFSincluding identification,measurement, monitoring,

control, reporting andmitigation;

ii the role of variouscomponents in thegovernance structure as wellas that of different functionaland business units inensuring robust and effectiveliquidity risk management byIIFS;

iii the liquidity risk implicationsof various Islamic financingcontracts during differentstages of operations;

iv the important ingredients ofsupervisory frameworks tomonitor the liquiditypositions including initiativesfor the development of arobust national liquidityinfrastructure, supervisors’contingency planning for IIFSand supervisors’ roles asproviders of Shari’ah-compliant liquidity supportto IIFS.

The proposed document onstress testing aims to provide aset of guiding principlesintended to complement theexisting international stresstesting framework taking intoconsideration the specificities ofIIFS as well as the lessonslearned from the financial crisisso as to contribute to thesoundness and stability of the

IIFS particularly as well as theIslamic financial servicesindustry as a whole.

The 22 guiding principlesprovide a framework for IIFSwith the aim of guiding them inassessing and capturingvulnerabilities under variousstress-testing scenarios includingextreme but plausible shocks.The guiding principles include:

i identifying how differentportfolios respond to changesin key economic variables(for example benchmarkrates, foreign exchange ratesand credit quality);

ii assessing the quality of assetsto identify existing andpotential loss exposures;

iii evaluating potential threatsto the IIFS’s ability to meetits financial obligations atany time arising from eitherfunding or market liquidityexposures;

iv estimating the impact ofstress events on baselineprofit (as profits normally actas the first line of defencebefore dipping into capital);

v analysing the IIFS’s ability tomeet its capital requirementsat all times throughout areasonably severe economicrecession.

There are six guidingprinciples for supervisoryauthorities, which can be usedas surveillance tools forperiodic assessment of the‘safety and soundness’ of thefinancial system, and from afinancial stability perspective,an identification of‘weaknesses’ in the financialsystem and structural(systemic) vulnerabilitiesarising from the specific riskprofiles of IIFS individuallyand collectively.

This is yet another step by the IFSB to address theliquidity problems faced byIslamic financial institutions,which have been handicappedin the past by the lack ofsuitable short-term,high-quality liquidityinstruments. The first step was the establishment of theIslamic Liquidity Management Corporation in early 2011, which wasconfidently expected to havelaunched its first short-termsukuk by the end of 2011.This latest step should havethe effect of beginning to close the gap withconventional financialinstitutions and puttingIslamic financial institutionson a more even footing withtheir conventionalcounterparts.

The Islamic Financial Services Board Issues ConsultationDocuments on Liquidity Risk Management and Stress

Testing


Thomson Reuters launched theworld’s first Islamic financebenchmark rate at the WorldIslamic Banking Conference inBahrain in late November. It isdesigned to provide an objectiveand dedicated indicator for theaverage expected return onShari’ah-compliant short-terminterbank funding using thecontributed rates of 16 Islamicbanks and the Islamic sectionsof conventional banks.

The benchmark’s ongoingimplementation and integritywill be overseen by an IslamicBenchmark Committee of morethan 20 Islamic financeinstitutions, chaired by Dr.Nasser Saidi, chief economist ofthe Dubai InternationalFinancial Center (DIFC), and aShari’ah committee consisting offour eminent Shari’ah scholars.

Dr. Nasser Saidi, chair of theIslamic Benchmark Committeeand chief economist, DubaiInternational Financial Centre,

said: ‘The establishment of theIIBR (Islamic InterbankBenchmark Rate) marks animportant milestone in thematuring of Islamic moneymarkets by providing aninternational reference rate forinterbank transactions.Conventional money marketshave relied on LIBOR, which bydefinition does not comply withShari’ah conventions. Islamicmarkets will be able to rely onthe IIBR and it will become aninternational reference rate forboth conventional and Shari’ah-compliant transactions. Our aimis to provide an IIBR that isreliable, timely, representative ofmarket conditions, transparentin its construction and acceptedas the market reference. Islamicmoney and financial markets arecoming of age and becomingpart of the mainstream.’

Established in co-operation withthe Islamic Development Bank(IDB), the Accounting andAuditing Organisation for

Islamic Financial Institutions(AAOIFI), the BahrainAssociation of Banks (BAB), theHawkamah Institute forCorporate Governance and anumber of major Islamic banks,the IIBR harnesses ThomsonReuters global benchmarkfixings infrastructure, which isused to compile over 100 fixingsaround the world.

Rates for Shari’ah-compliant USdollar (USD) funding will becontributed by the 16-memberpanel in the morning of eachbusiness day to ThomsonReuters systems and will be

published daily on ThomsonReuters terminals and feeds at11.00am Makkah time(GMT+3). The new benchmarkcan be used to price a number ofIslamic instruments includingcommon overnight to short-term treasury investment andfinancing instruments such asmurabaha, wakala andmudaraba, retail financinginstruments such as propertyand car finance and sukuk andother Shari’ah-compliant fixedincome instruments. It can alsobe used for the pricing andbenchmarking of corporatefinance and investment assets.

NEWHORIZON January–March 2012NEWS

Thomson Reuters Announce Islamic Benchmark Rate

Launch Ceremony for Thompson Reuter’sIslamic Finance Benchmark Rate

Thomson Reuters and the BondPricing Agency Malaysia havelaunched a suite of indices acrossa range of Islamic instruments toprovide transparent guidelinesfor investors interested inMalaysia. The new suite ofindices include 108 MalaysianRinggit sukuk and bond indicescomprising 36 Thomson Reuters-BPAM Malaysian sukuk indices,36 Thomson Reuters-BPAMMalaysian bond indices and 36Thomson Reuters-BPAM all

bond and sukuk indices covering778 issues. The indices cover sixbond classes archived back to2007 and have total marketcapitalisation ofMYR583.6 billion(US$182 billion).

Meor Amri Meor Ayob, chiefexecutive officer, BPA Malaysia,said: ‘The coming together ofThomson Reuters and BPAMalaysia to co-brand our indicesis a proud moment for us as it

confirms our belief that BPAMalaysia products are of globalstandards. Thomson Reuters willprovide the global reach for ourindices and will also provide anew global window to Malaysia’ssukuk and bond markets.’

Thomson Reuters-BPA MalaysiaRinggit Sukuk and Bond Indicesmeet the relevant economicsector, financial and generalconsiderations. Theinfrastructure in place accesses all

public information, conversationwith traders, and news about agiven sukuk or bond issue todetermine best available pricing.

Thomson Reuters-BPA MalaysiaRinggit Sukuk and Bond Indicesare available on ThomsonReuters Eikon, the company’snext-generation desktop. Theindices are also available inThomson Reuters data feeds andother products such as ThomsonReuters Datastream.

New Suite of Indices for Malaysian Sukuk and Bond Markets



The World Islamic BankingCompetitiveness Reportlaunched at the World IslamicBanking Conference in Bahrainhighlighted that following the2008–2009 slowdown, 2010 haswitnessed clear signs of a globaleconomic revival with the GCCand key markets for Islamicfinance outperforming the rest ofthe world. In fact the reportpredicted that the Islamic financeindustry will grow to$1.1 trillion by the end of 2012,a 33% increase on 2010. Thereport also noted, however, thatdespite strong growth,profitability has declined and theroad ahead is challenging. Inorder to meet marketexpectations, Islamic banks willhave to improve operationalperformance by learning fromconventional banks and capturenew pockets of growth.

According to the report, thesmall and medium-sizedenterprise (SME) and mid-

market segments offer significantopportunity for banks,particularly in emerging markets,given that the SME and mid-market segments account forapproximately 25–35% of loanvolumes and are growing fasterthan the rest of the market. Thereport pointed out that inaddition to filling selected gapsin product portfolios throughinvestment in productdevelopment, Islamic banks mustalso aggressively bolster salesmodels and design tailored creditstrategies for SME and mid-market segments in order to seizethe opportunity they provide.

The report noted that goingforward, retail banking will beone of the key drivers of bankingrevenue growth in the MiddleEast and capturing the affluentbanking customer segment will becritical. It also noted that Islamicbanks have the opportunity togrow beyond their core principlesbut that they are increasingly

facing stiff competition fromconventional banks who offerIslamic products. As a result, it iscritical for Islamic banks todevelop a compelling valueproposition in order to attractaffluent customers, which willrequire defining core elementsincluding the relationship model,branding, the service model andproduct offerings.

Exploring the growth opportuni-ties that takaful offers in theGCC market, the reportsuggested that, although theGCC insurance market hasgrown rapidly, it is still under-penetrated. Takaful insurancerepresents approximately 36%of the total premiums in keymarkets and continues to gain alarger share of the totalinsurance premium. Despite thefaster growth, however, takafuloperators’ Return on Equity(RoE) is lower compared toconventional players. The reportsaid that strong growth in

population in the GCC and ahigh and fast growing GDP percapita and private consumptionis likely to propel the growth oftakaful. With a mix of gooddemographics and positive stepsin regulation takaful operatorsare likely to boost their futureprofits.

Providing an in-depth analysison how Islamic banks need tochange the way they measureperformance in a liquidity andcapital constrained world, thereport said that since the crisis in2008, capital and liquiditypressures have not eased and inorder to manage capital andliquidity, Islamic banks need toensure that they increasetransparency and put in placegreater management disciplineand oversight. According to thereport, banks need to re-assesstheir internal asset and liabilitypricing for both liquidity andtheir cost of capital and includeit in their business unit profitcalculations

The Islamic Finance Industry Still Faces Challenges

At the IREF Summit galadinner on 30 November 2011,Volaw’s Director of IslamicFinance and Funds Group,Trevor Norman, collected theIslamic Real EstateAdministrator/Trustee of theYear award.

Volaw has been leading theway in the administration ofShari’a-compliant real estatefunds and SPVs for more than15 years, having been involvedin the creation and

management of many innovativestructures for Muslim clients.During 2011, Volaw has beeninvolved in several successfulShari’ah-compliant real estatestructures, including: LondonCentral Apartments Limited(regulated by the JerseyFinancial Services Commissionas a Listed Fund), which willinvest in prime residentialproperties in central Londonand several acquisitions of UKcommercial real estate usingJersey companies established as

private ‘Club’ structuresfinanced in a Shari’ah-compliantmanner.

Trevor Norman commented,‘This award is a testament to thestrength of Volaw’s IslamicFinance team and it iswonderful to see the work of myteam and colleagues recognisedin this way. I may be the face ofIslamic Finance at Volaw, butour reputation for excellenceand expertise in Islamic financeis founded on their hard work

and diligence in looking afterour clients.’

Another Islamic Finance Accolade for Volaw

Trevor Norman Receives theIslamic Real EstateAdministrator/Trustee of theYear Award


Malaysia’s 2012 nationalbudget announcementincluded significant moves to further boost the growth of Islamic finance in theregion. The new provisionsinclude:

• a tax deduction on expensesincurred for sukuk wakalafor a three-year period,which is designed toencourage sukuk issuanceboth within and outsideMalaysia.

• an extension of the incometax exemption given fornon-ringgit sukuk issuanceand transactions for a further three years.

• I-VCAP, a subsidiary ofValue Cap Sdn. Bhd., willprovide RM200 million asseed monies for Shariah-compliant ETFs to promote the development of Shari’ah-compliantexchange traded fund (ETF)products.

• the concessionary tax rate of10% on dividends ofnon-corporate institutionaland individual investors, dueto expire at the end of 2011will be extended for a periodof five years.

• a Shariah-compliant SMEFinancing Fund totallingRM2 billion to be managedby selected Islamic banks will

be established by thegovernment. In addition thegovernment will establish aShari’ah-compliantCommercialisationInnovation Fund to helpSMEs bring new productsto market. Again thesefunds will be availablethrough selected Islamicbanks.

• a Shari’ah-compliant fundto finance speculative housebuilding. (Currently mosthomes in Malaysia are soldbefore construction starts,thus exposing buyers torisks associated withprojects being delayed orabandoned.)

These moves are seen as partand parcel of Malaysia’sambitions to become a majorhub for Islamic finance andparticularly cross-bordersukuk issuance.


Malaysian Government 2012 Budget to Boost IslamicFinance

The Skyline of Kuala Lumpur at Dawn

Qatari invest bank, QInvest, has launched the ‘Qatar EquityProtected Note’ that aims toreplicate the movements of the most liquid Shari’ah-compliant equities with fullcapital protection. The Noteoffers exposure to a basket of the most liquid and investable Shari’ah-compliant

securities listed on the QatarExchange.

QInvest CEO, ShahzadShahbaz, commenting on thenote, said: ‘We have seen anoverwhelming response from the market as investors look to maximise returns whilstmaintaining capital protection.’

He added: ‘The note is one of aseries of investment productsQInvest is bringing into themarket in the coming months,and demonstrates our strongShari’ah-compliant structuringcapabilities and commitment tomeeting client needs.’

Further commenting on the

success of the note, NaderShenouda, Head of Placement& Wealth Management, said‘Clients’ positive reactionindicate that they were attractedby the risk return ratio the noteoffered. With interest rates athistoric lows, the note is a muchmore rewarding alternative tocash deposits.’

QInvest Launches Equity Protected Note



The most charitable descriptionof the world’s conventionalbond markets at present wouldbe ‘challenging’; the pessimistsmight prefer the term ‘anightmare’. The Eurozone crisishas thrown financial marketsinto turmoil. With thepossibility of Greek and Italiandefaults putting pressure onother Eurozone countries andrumours that France may face achoice between supporting itsown banks, which are heavilyexposed to Italian debt, orhelping in the Eurozone bailout,there is increasing interest inmarkets and instruments thatwould have come well down thelist of preferred options in thepast. It is possible that thesukuk market could be one ofthe beneficiaries of this turmoil.

It is rumoured that Dubai’srapidly expanding Emiratesairline is considering sukuk tofinance the future purchase ofaircraft. In the past they haverelied on conventionalinstruments through European,notably French banks.

At the same time countries thathave not been major players inthe Islamic finance market todate are beginning to takelegislative action to level theplaying field for sukuk. In early2011 Turkey changed its lawsrelating to sukuk. In Februarythe withholding tax for ijarahsukuk was reduced to 10% andexempted from value-added andcorporate taxes and stamp duty.In a second move in April sukukcertificates with a minimumtenure of five years wereexempted from taxes onrevenue.

The first sukuk issued under thenew legislation came fromTurkey’s Kuveyt Turk inOctober, the first time a Turkishfinancial institution has issuedan asset-backed sukuk. Theresponse from investors to the$350 million, five-year sukukwas very positive both withinthe region and internationally,with the result that the issue wassignificantly oversubscribed.Curiously, Bank Asya in Turkeyannounced their intention toissue a $300 million, five-yearsukuk in late October and at theend of November cancelled itciting negative marketconditions as the reason.

Oman was the last of the GulfStates to approve Islamicbanking as recently as May2011. Now the Capital MarketAuthority is said to be preparinga revised set of regulations forthe country that will pave theway for the issuance ofcorporate sukuk in the country.

Libya, Egypt, Kuwait andAustralia are also said to beworking on legislation that willfacilitate sukuk issuance in thosecountries and South Africa hasgone out to tender to find anadvisor to assist in thestructuring and issuance of asovereign sukuk.

One announcement that appearsto be generating somecontroversy was theannouncement by GoldmanSachs of a $2 billion Islamicbond programme. They haveregistered a company in theCayman Islands, the GlobalSukuk Company Limited withthe aim of issuing a murabahasukuk on the Irish StockExchange.

It seems, however, that thisprogramme may not be withoutits problems. Critics havesuggested that this is, in fact,not a murabaha sukuk, butreverse tawarruq, which theInternational Council of Fiqh

Academy have declared notpermissible as it is a disguisedform of usury. Currently there isalso no indication of how theIrish Stock Exchange will ensurethe sukuk trades at par valueand thus avoid the accusation oftrading in debt, which isforbidden under Shari’ah law.Finally, it has been suggestedthat Goldman Sachs could welldivert the proceeds of the sukukinto the financing ofconventional banking activities,which again is an impermissibleactivity.

If Goldman Sachs intention is toattract investment fromnon-Islamic investors by puttinga cloak of respectability aroundan otherwise fairly conventionalbond issue and hitching a rideon the Islamic sector’sreputation for striving to delivera more ethical andsocially-responsible form offinance, then the criticisms thathave been levelled at theannouncement may not have amaterial impact on the successof the venture. If that is the case,however, that raises the issue ofwhether the Islamic financesector is prepared to accept thehijacking of its reputation forsuch a purpose. If, on the otherhand, Goldman Sachs areentirely genuine and attemptingto become a real player inIslamic finance, then they needto be more open about many ofthe details of this announcementand answer the very realconcerns that have been raised.If there is nothing to hide, thereshould be no problem forGoldman Sachs in producing theclarifications the Islamic sectoris seeking.

Sukuk Update

Sultan Qaboos Mosque in Oman


The Al Baraka Banking GroupBSC (ABG) has acquired 60%of the issued shares of theAl Tawfeek Financial Groupthrough its subsidiary inBahrain, Al Baraka IslamicBank. Al Tawfeek is a closedjoint stock company registeredin the Kingdom of Saudi Arabiaand licensed by the CapitalMarket Authority. The companyengages in asset and portfoliomanagement, custody, debt andequity arranging, as well asresearch and advisory services.All products and services offeredby the company are incompliance with the provisionsof Islamic Sharia. The

company’s authorised capital isSAR 360 million.

Mr. Adnan Ahmed Yousif,President and Chief Executive ofAl Baraka Banking Group said,‘We view this step as astrategically vital acquisition forthe group. Our foundingshareholders have a strong basein the Saudi market so theacquisition of the Al TawfeekFinancial Group will strengthenthat presence. The Saudi marketrepresents a key entry point forus to access the extensive baseof investors and provide themwith a wide range ofShari’ah-compliant products.’

The International IslamicLiquidity ManagementCorporation (IILM) isexpected to issue its firstpapers by the middle of 2012.The initial issuance isexpected to be less than$2 billion and is being treatedas a pilot. Once the IILM hastested the water, they intendto have a programme ofregular, short-term andhigh-quality issuances ofaround $2 billion.

Rasheed Mohammed AlMaraj, Governor of theCentral Bank of Bahrain(CBB) has been appointed asChairman of the IslamicFinancial Services Board(IFSB) and Sheikh AbdullahSaoud Al-Thani, the Governorof the Qatar Central Bank, asDeputy Chairman for 2012.The Council also admittedseven organisations as newmembers of the IFSB,including the InternationalIslamic Liquidity ManagementCorporation (IILM) and theNational Bank of Kazakhstanas Associate Members. AhmedZakari & Co (CharteredAccountants), Nigeria; theCentral Bank ofOman;Towers Watson,Singapore; the Islamic Bank ofThailand; and Bank ofLondon and Middle East,United Kingdom have beengranted observer status. Thisbrings the membership of theIFSB to 189 members.

UM International Inc., a smallbut well-established CanadianIslamic mortgage lender, wentinto receivership in October2011. At the time of going topress there was a great deal ofuncertainty about how theCanadian legal system will

deal with this insolvency, dueto the nature of Islamicmortgages (diminishingmusharaka), where title to theproperty remains with thelender until the full value ofthe property if paid off. If theproperties are deemed to be anasset of UM International,then borrowers stand to losetheir homes. If this doeshappen, then it may provesomething of a setback forIslamic finance in NorthAmerica.

A recent report from Deutsche Bank predicts thatglobal Islamic banking assetscould reach $1.8 trillion bythe end of 2016, almostdoubling assets at the end of2010. The analysts responsiblefor the report believe that theregulatory burden on banks inthe US and Europe will curtailbank lending and that Islamicbanks could benefit from thefallout. They believe that theincreasing transparency andthe introduction ofinternational standards to theIslamic finance sector is alsoincreasing the globalawareness and acceptance ofIslamic finance.

In mid December 2011BankMuscat, the leadingfinancial services provider inthe Sultanate, announced itsdecision to set up anindependent Islamic bankingwindow subject to approvalfrom the Central Bank ofOman. The Islamic bankingwindow will operate under thebrand name ‘Meethaq’ and itsoperations will be totallysegregated from itsconventional counterpart. Athree-member Shari’ah boardhas already been appointed.


The United Arab Emiratesconceived the idea of anEmirates Development Bankback in 2008 when thefinancial crisis triggered thecollapse of Dubai’s real estatesector. After a number of falsestarts it has finally beenannounced that the EmiratesDevelopment Bank (EDB) willbe launched with $2.7 billionin capital to fund real estateand industrial projects anddiversify the economy. Thefunds will be used to helpcitizens build property,establish businesses and fundagricultural and craft-relatedprojects.

Bahrain’s Al Baraka Expandin Saudi Arabia

Boubyan Bank plans to open afurther 30 bank branches inKuwait over the next 3-4 years.This is apparently in response toincreased demand for bankingservices in the region.

Qatar National Bank (QNB)has opened a branch in Juba,the largest city and the capital ofthe Republic of South Sudan,which came into existence inJuly 2011. This is a part ofQNB’s long term expansionplans in the region, whichinvolves providing corporatebanking and project financingfacilities to leadingorganisations and governments.

In Brief


NEWHORIZON Safar-Rabi al Thani 1433 POINT OF VIEW

People Power

When the Occupy Wall Street (OWS)movement in lower Manhattan’s ZuccottiPark raised thousands of dollars in surplusdonations, its decision-makers agreed upon adeliberate strategy of placing those sums withthe customer owned Peoples Federal CreditUnion (Peoples). In doing so, OWS aligneditself (whether wittingly or not, yet in eithercase one can suppose, happily) with theprinciples of Bank Transfer Day. This is aseparate movement the objective of which isto cause a shift in banking attitudes amongthe American people in favour of takingdeposits out of banks ‘too big to fail’ andtransferring them to credit unions and banklike cooperatives that are much smaller andcommunity oriented. Unlike Chase orCitigroup, for example, Peoples primarilyserves the needs of lower income NewYorkers (typically earning less than USD$38,000 a year).

A problem reportedly arose when megabankGoldman Sachs, having realised thatinstitutionally it had made a USD $5,000charitable donation to this communityoriented institution and desired to withdrawits donation. Why did Goldman Sachs rescindits financial support of Peoples given that thisdecision came with certain costs? In the firstinstance Goldman Sachs would have neededto spend additional time and effort to identifyan alternative community based financialinstitution to receive the donation as certainamounts of charitable grants are a require-ment of the federal Community ReinvestmentAct and TARP (Troubled Asset ReliefProgramme), to which Goldman Sachs issubject. Secondly and perhaps more criticallythere would be a negative effect on GoldmanSachs reputation. Nevertheless GoldmanSachs went through with its decision torescind the donation, because it did not wantto be seen to be supporting an institutionproviding banking services to OWS; Peopleshad become guilty by association.

Peoples’ receipt of deposits from OWS posedno business threat to Goldman Sachs.Furthermore it should have come as nosurprise that Peoples, an institution whosestated mission has been to provide basicbanking services to lower income individuals,had in fact received deposits from personsaffiliated with OWS. Goldman Sachs’ actionis something of a kneejerk reaction andperhaps reflects their fear that more and moreAmericans will, when given the option,choose alternative banks not merely out ofconvenience, but based on an ideologicalrejection of banking as usual. OWS and theBank Transfer movement encourage a systemintended to reduce megabank capital and thenow entrenched bailout practices thatunderpin their ability to dominate economiesaround the world.

As a result, at least in part, of Bank TransferDay, assets worth some USD $4.5 billionwere shifted by depositors from megabanksto nearly 650,000 new US credit uniondeposit accounts during the course of a mere40 days. Such a shift in consumer attitudesand behaviour cannot be taken lightly. TheCredit Union National Association (CUNA)reported that nearly 700,000 people becamenew credit union members in the weeksleading up to Bank Transfer Day. Ordinarypeople were empowered to take an active rolein their economic destinies. The idea of astructural shift among the American peopleaway from megabanks to smaller institutionsmay be a pill too hard for Goldman Sachsand their kinsmen to swallow withoutpushback.

A Flawed System

The criticisms of the ruling economic modelinherent in Bank Transfer Day and OWS arenot lost upon technocrats, academicians, andother specialists covering the industry. RickBookstaber, a Senior Policy Adviser in the USSecurities and Exchange Commission’sdivision of Risk, Strategy and Financial

Innovation, suggested on his blog that incomedistributions and social systems areinextricably intertwined. This is somethingthat OWS innately understands andconsequently the movements are, deep down,addressing instability and egalitarian issues.Nassim Taleb, a Lebanese American experton randomness and probability and a critic ofthe financial system, noted that bank bailoutsrepresent ‘as cunning a tax on everyone elseas one can imagine. It feels quite iniquitousthat bankers, having helped cause today’sfinancial and economic troubles, are the onlyclass that is not suffering from them – and inmany cases are actually benefiting.’ Hisadvice to OWS is narrow your message andfocus on challenging the compensationasymmetry found in mega banking.

According to Taleb’s analysis, megabankscontinue to operate as sophisticated incomeredistribution schemes, masking theprobabilities of low risk, high magnitude‘Black Swan’ (difficult to predict) events,while benefiting from the safety net of publicguarantees. Profits at these megabanks aredependent on excessive leverage, not skills orentrepreneurial activity. If assets are markedto market and losses are privatised ratherthan socialised, banks have never made anymeaningful return in their history, nor shouldthey be expected to produce any return in thelong run under those circumstances.

Those circumstances, however, are not withinthe control of individuals in society, owing tothe efforts of lobbyists, economicpolicymakers or other decision makers whohave the interests of the moneyed classes inthe forefront of their minds and have theadvantage of being able to skew results intheir own favour. The subsidising by society(via government support) of bank managersand executives is relatively involuntary fromthe standpoint of all those who are not actingin the interests of bank managers andexecutives. If bank managers and executivesare out of control and government is

Against Mega Banking and In Favour of Mutuality

By: Arshad A Ahmed and Jonathan Berthet


NEWHORIZON January–March 2012POINT OF VIEW

unwilling to tame them, what recourseremains?

Mutuality as an Elixir

Tilting banks and banking toward thepublic interest, and away from bankers’ selfinterest, means treating banking like autility rather than a casino. It is preciselybecause certain strands of the Americanpeople felt unsatisfied with the government’spost bailout regulation of megabanks thatthey fell back to credit unions as a vehicle forachieving a more sensible banking model.

OWS and the proponents of Bank TransferDay clearly understood a couple of pointswith which financial academicians havebeen grappling. For decades, academicdiscussions regarding American and Anglocorporate governance, whether relating tothe banking industry or not, have suggestedthe objective should be to align managementinterests with those of shareholders. Withinbanking, the interests of depositors, i.e.consumers are not included within any legalframework of corporate governance. Rather,the interests of depositors in mega bankingtend to be looked after by regulators. Withregulators having at best shot and missedand at worst abdicated their responsibilitiesin recent times, consumers are left trying toascertain their remaining options. OWStook to the streets generally to express theirdiscontent with banking (remember it beganin Wall Street), whereas Bank Transfer Daywas more pointed in its call for movingconsumer banking out of the megabanksand into credit unions.

Credit unions tend to be notably smallerthan their conventional bankingcounterparts and operate on the basis ofmutual banking. The depositors are in factthe shareholders of a mutual and thereforethe whole shareholder versus depositorargument is by definition solved. Managersand executives at credit unions answer tothe depositors directly, not to a set of legally enfranchised shareholdersdisconnected from the end users andbecause managers are responsible directly todepositors, the dependence of the latter onregulators to serve as a sentinel is somewhatmuted.

Without shareholders, and thus tradableshares, credit unions (like all mutual financialinstitutions) lack the ability to offer equitybased compensation to their managers andthus managers’ no longer have any interest inmaximising share values in the short run thusaddressing one aspect of the compensationproblem identified by Taleb. The possibilityof abuse, as Taleb sees it, arising frommanagers’ compensation being tied tointernal accounting entries is ameliorated bythe very nature of mutuality. Credit unions(like all mutuals) do not tolerate risk the waymegabanks do.

For centuries, farmers and similar risk aversegroups depended on mutual organisations toprovide affordable credit. Mahmoud El-Gamal, head of the Department of Economicsat Rice University, Houston, Texas noted thatthe first credit unions and mutual savingsbanks in North America and Europe oftencollaborated with churches to help theirmembers to avoid usurious economic activity.Mutuality arose in North America out ofconsumers’ needs for fair credit preservation,not out of any desire for steady creditaccumulation or even financialintermediation. The mutual financialinstitution’s goal lies in maintaining a steadyand safe return on investment, which by legaldesign happens without any countervailingtension to maximise short term equity gains.In short, mutuality attracts consumersseeking safe investments.

It has been shown by Abbas Mirakhor of theInternational Monetary Fund and ZamirIqbal of the World Bank among others thatan Islamic financial institution managing itsrisks well would appear to fit the form of abanking utility, with its essential service toend users being that of amanat (deposit andtrust services). The higher risk activitiescarried out by megabanks, which are noneother than those criticised by commentatorssuch as Nassim Taleb, have no place in anIslamic bank and one wonders how any‘Islamic bank’ operating like a megabank isnot a contradiction in terms.

Investment activities in Islam hadtraditionally been undertaken viapartnerships, e.g. mudarabah, qirad andmusharakah or endowment (waqf), not

banks. In the contemporary post bailoutcontext, Taleb has repeatedly argued that oneway of tilting banks back toward soundercompensation schemes is by applying thehedge fund compensation model to high riskinvestment activities, which is none otherthan a partnership framework. Economicallyspeaking it is neither a corporate nor bankingmodel.

The American and Anglo corporate model,with shareholders detached from depositors,has no precedent in Islamic fiqh. Apartnership, whichever form it takes, is apartnership and no amount ofcharacterisation, overlays or other legalfictions offered by Shari‘ah scholars toIslamise a legal construct as foreign to Islamicthinking as is the Anglo American corporationwill render halal the economic reality of whatis ultimately a flawed economic institution.Western legal scholars easily comprehend thesubstantive differences between corporationsand partnerships and it is high time that so-called Shari‘ah scholars did the same.

Were they to do so, they would recognisemutual financial institutions, not banks, asthe salient framework for financialintermediation adaptable to Islamic ways.Traditionally the Islamic way has been,theoretically speaking, the ethical way. It isno coincidence that American movementscritical of economic disparity and unfairfinancial practices, such as OWS and BankTransfer Day, are also finding mutuality (notto mention profit and fair risk sharing) to bean antidote to conventional banking. Anythinking person should surely be worried thatthe Islamic label banking and financeindustry continues to embrace as ‘Shari‘ah-compliant’ and ‘Islamic’ those very legal andeconomic models that Western users are nowfinding unacceptable from not only an ethicalbut also from a prudential point of view.

Arshad A. Ahmed serves as a managingdirector of Elixir Capital and adjunctprofessor at both Berkeley Law and theUniversity of California Hastings Collegeof the Law in San Francisco. His co-author,Jonathan Berthet, is a recent graduate ofthe University of California, Santa Barbaraand serves as an analyst at Elixir Capital.


NEWHORIZON Safar-Rabi al Thani 1433 MARKET FOCUS

Background

Maldives is an essentially Muslim country,which mainly follows the Shafi’i School ofThought of Sunni Islam. With a populationof just 300,000 it is the smallest country inAsia; it is also the smallest Asian country interms of land area, consisting of more thana thousand islands, just two meters abovesea level. Despite several attempts tointroduce Islamic finance in the past, until2011 Maldives had no Islamic financialinstitutions.

Spurred by the growth of Islamic financeworldwide, even in Muslim-minoritycountries, the first Islamic bank in Maldivesopened its doors in early 2011 and thecountry is now taking steps to establish anIslamic capital market.

The Financial System of Maldives

Before looking at the Islamic financialdevelopments in Maldives, it is important tounderstand the conventional system thatwas the only system in operation until 2011,which is at best an irony given that Islam isthe only recognised and openly practicedreligion in Maldives and at worst it could beconsidered a failure to fully observe andpractise the precepts of Islam.

The banking sector and the non-bankingfinancial institutions are regulated by theMaldives Monetary Authority, the CentralBank of Maldives. Currently there are sixconventional banks and one Islamic bankoperating in the country. The non-bankingfinancial sector includes the generalinsurance market, a finance leasingcompany, a specialised housing financeinstitution and money transfer businesses.

The first bank established in Maldives wasthe Bank of Maldives Plc (BML), which

began its operation in 1982. This bank ispartly owned by the government and isgenerally considered as the national bank ofthe country. The other banks operating inMaldives are a branch of the State Bank ofIndia (SBI) established in 1974, Habib BankLimited (HBL) established in 1976 andBank of Ceylon (BOC) established in 1981,a branch of the Hong Kong ShanghaiBanking Corporation (HSBC) established in2002 and a branch of MauritiusCommercial Bank Ltd (MCB) established in2008. The only Islamic bank operating inthe country is the Maldives Islamic Bank PvtLtd established in March 2011.

The capital market and the pension funds ofMaldives are regulated by the CapitalMarket Development Authority (CMDA) ofMaldives established in 2006. It is anindependent institution responsible for theregulation of dealing companies, therepresentatives of the dealing companies,custodians, the Maldives Stock Exchange,the Maldives Securities Depository andcredit rating agencies. Currently there arethree licensed dealing companies; six

licensed dealers’ representatives, onelicensed custodian and one licensed ratingagency operating in the country.

Emergence of Islamic Banking and Financein Maldives: Where are we now?

Islamic banking and finance has not yetachieved full momentum in Maldives. Thefirst form of Islamic financial institutionthat was introduced to the country was atakaful company, which operates under aconventional insurance license. This wasfollowed by the opening of the first fully-fledged Islamic bank in the country andthen the issuance of Islamic equity that gavea green light for the introduction of anIslamic capital market to the country.

It would be accurate to say that Islamicbanking and finance is still very new inMaldives and that it is yet to be developedproperly. The main focus now is, therefore,to build on these beginnings and tointroduce a fully-fledged Islamic bankingand finance industry in the country. Thefollowing diagram shows the development

The Maldives Edge Towards a Fully-Fledged Islamic Capital Market

Aishath Muneeza, Head of Islamic Finance, Capital Market Development Authority(CMDA), Maldives

Introduction of Takaful–2003

Under a conventional insurance license, the first takaful company ,Amanah Takaful PLC is incorporated

Introduction of Islamic Banking–2011

A new regulation, Islamic Banking Regulation 2011 of Maldives created the environmentfor the establishment of the first Islamic Bank of the country, Maldives Islamic Bank Pvt Ltd

Approval of first Islamic Securities–2011

June 2011- Amanatakaful was given the green signal to isse the first Shari'ah-compliant securities

What next?

Sukuk?


NEWHORIZON January–March 2012MARKET FOCUS

of Islamic banking and finance in Maldivesso far.

The first Islamic banking and financeproduct to be introduced to the country wastakaful via a branch of Amanah Takaful, acompany incorporated in Sri Lanka. Thiscompany was registered in Maldives under aconventional insurance license as to datethere is no takaful law or regulatoryenvironment to cover takaful operations.

In March 2011 the first Islamic bank in thecountry was established parallel to theconventional banks operating in thecountry. To accommodate Islamic banking,the Central Bank of Maldives, MaldivesMonetary Authority (MMA) enactedIslamic Banking Regulation 2011. This is aregulatory law rather than a substantive lawthat deals with the substance of Islamicbanking in Maldives. A Shari’ah AdvisoryCouncil was also created at the MMA andthe respective banks that are licensed asIslamic banks are required to create an in-house Shari’ah advisory council.

Prior to the incorporation of the firstIslamic bank of the country, MaldivesIslamic Bank Pvt Ltd, the country had sevenconventional banks. Regrettably theconventional banking system established inthe country failed to serve the wholepopulation of the country in an even-handed way. The only bank that was able toprovide even a basic banking facility, thedeposit and withdrawal of money, outsidethe capital, Male’ was the National Bank ofMaldives, Bank of Maldives Pvt Ltd. It ishoped that the expansion of the services ofthe Islamic capital market in Maldives willbenefit the rural population of the countryliving in islands other than Male’ as well.

Recently Maldives have taken steps to enacta legal and regulatory framework for theissuance of sukuk in the country to facilitatethe development of a fully fledged Islamiccapital market.

The Progress of the Islamic Capital Marketin Maldives

‘In addition to focusing on thedevelopment of a conventional debt

market, CMDA considers the developmentof a market for Islamic securities ofutmost importance to cater to theinvestment needs of the country. We arenow working on the legal framework andmechanisms to facilitate both governmentand private sector issues of Shari’ah-compliant instruments. A Capital MarketShari’ah Advisory Committee is advisingthe CMDA on approving Shari’ah-compliant products and services. Ourmodel for developing Shari’ah-compliantproducts and services is based on theMalaysian Islamic Capital Market model.’Fathimath Shafeega, CEO of the Capital

Market Development Authority

The vision of CMDA is to develop anIslamic capital market parallel to theexisting conventional capital marketcreating a competitive environment in thefinancial market of Maldives andcontributing to the stabilisation of theoverall economy. The journey began in 2010with the first Islamic capital market productbeing launched in mid 2011.

An Islamic Capital Market Function wasestablished on 15 June 2011 as a part of theMarket Regulation and Supervision Sectionto organise and facilitate theimplementation of Islamic capital market-related activities within the organisationalstructure of CMDA. It is anticipated that inthe near future it will be upgraded to afully-fledged section with its own mandatesand vision to develop Islamic capital marketto the next level.

The aims of the Islamic Capital MarketFunction include encouraging and assistingall parties involved in the Maldivian IslamicCapital Market; to propagate best practiceand latest technology among marketparticipants; to build and sustain publicconfidence and trust towards the MaldivianIslamic Capital Market and its operations;to work towards regulating, monitoring andmaintaining professionalism amongst theparticipants of the Maldivian IslamicCapital Market and to prevent thestakeholders in the Maldivian IslamicCapital Market from participating in anytransactions that may be constitutionallyillegal or non-Shari’ah compliant.

CMDA Strategic Plan (2011–2014)

The Capital Market Strategic Plan2011–2014 is intended to provide clarityand certainty on the direction of CMDA’sstrategies for market development. Its remitincludes:

• Establishment of a Shari’ah Advisorycommittee to advise on matters related tothe Islamic capital market

• Innovating Islamic capital marketproducts and promoting them in themarket

• Capacity building of CMDA staff andother stakeholders in the Islamic capitalmarket

• Creating public awareness of Islamicfinance

Conclusion

With the successful launch of an Islamicequity market in Maldives, CMDA is takinginitiatives to introduce a sukuk market inMaldives. As part of this project, a study onthe market has been carried out and thenecessary legislation has been drafted. It ishoped that in the near future a fully-fledgedIslamic capital market industry will emergein Maldives parallel to the existingconventional capital market.

CDMA Offices, Maldives


NEWHORIZON Safar-Rabi al Thani 1433 ACADEMIC ARTICLE

One of the most debated issues in Islamicfinance is around the initial capital ofIslamic banks and takaful companies,especially when initiated by a conventionalparent company. Some people doubt thepurity of the capital in Islamic banks andtakaful companies and as a result questionwhether these organisations are truly Islamicwhen their capital is not completely halal.

The Facts

There are two points to be made in relationto this issue:

1. Money itself is not unlawful, butbecomes prohibited through the way it isprocured, i.e. not in line with the Shari’ahlaw. Sin does not move with the moneyfrom one party to another. This is unlikean item that is physically prohibited suchas pork or liquor. Regardless of where thepork is or whether it is already mixedwith another item, it will still beprohibited and will contaminate otherpermissible items through any form ofcontact or convergence.

2. Capital earned by the parent companiesof Islamic banks may not be entirely fromprohibited businesses. Part of the capitalis sourced from individuals andpermissible government and privateorganisations, therefore, it is possible thatthe funds originated only from permittedsources even if combined with prohibitedincome. Readers should be aware that theinitial capital of Islamic banks andtakaful companies is confirmed as beingfrom permitted and halal sources.

Scholars’ Opinions

There are differences of opinion amongscholars regarding this issue. The majority

of Hanafi scholars, Ibn Qasim from theMaliki sect, Hanbali and Ibn Taimiyah areof the opinion that it is permissible to dotransactions with the owners of mixedcapital when the majority of the capitalcomes from permitted sources. Ibn Nujaimwas reported as saying, ‘When the majorityof the total capital or its income ispermitted, there is no problem in acceptingtheir gifts and food as long as there is noclear sign showing that it is prohibited.Conversely, when the majority of the capitalor its income is prohibited, then any gift orfood from them is not permissible exceptafter it is confirmed as clean (permissible).’

Ibn Qudamah alternatively said, ‘When youknow (or are told by people whose incomeis mixed) that the commodity, supply orfood comes from permissible sources, thusthey are permissible.’

A few prominent scholars such as As-Syawkani and al- Muhasibi are also of theopinion that it is permissible to performtransactions with the owners of mixed fundsif only a minor portion of it is permitted.Their supporting arguments, among others,include:

1. The Prophet and his companionsperformed transactions with the Meccanpeople before Hijrah, when most of themwere non-believers. There was never anymention of The Prophet prohibiting anyform of transactions with them, eventhough most of their wealth came fromprohibited sources.

2. The Prophet also had financial dealingswith the Bedouin Arab community, whoassociate Allah with others, during ajourney to Madinah. Their wealth wasknown to originate from prohibitedsources as well.

Doubtful and Mixed Capital in Islamic Financial Institutions

By: Dr. Zaharuddin Abd Rahman, Shari’ah scholar and lecturer at the faculty ofeconomics and management sciences at the International Islamic University,Malaysia

Money itself is not unlawful,but becomes prohibitedthrough the way it is procured,i.e. not in line with the Shari’ahlaw. Sin does not move withthe money from one party toanother.


NEWHORIZON January–March 2012ACADEMIC ARTICLE

3. During the migration of the The Prophet,he transacted with the Jews fromamongst the people of Madinah and theBedouin Arabs who permitted what wasprohibited in Islam. If those transactionswere prohibited, surely The Prophetwould have disallowed them from thevery beginning.

4. The Prophet’s taqrir (endorsement) byletting his companions trade and enterinto financial transactions with nonbelievers previously involved in robberyand non-permissible transactions is alsoevidence.

5. When Islam allows financial transactionswith non-believers, it also means Islamallows financial transactions withMuslims whose wealth is a mixture ofpermissible and non permissible.

6. The companions of The Prophet alsodealt with robbers in Madinah at thetime of Yazid bin Muawiyah; none ofthem forbade it.

7. When such transactions are impeded,problems will arise especially in a periodwhere it is difficult to locate a companywith 100% permissible income. We canalso consider the stand of Ibn Mas’ud(may Allah be pleased with him) ondealings with a company or an individualwhose wealth is mixed.

‘It was said that a man came to AbdullahIbn Mas’ud and said, ‘I have a neighbourand I know nothing of his wealth except itis soiled and prohibited and he invited me tohis house. I feel reluctant to accept andreluctant not to.’ Ibn Mas’ud said, ‘Acceptand attend to his invitation, verily sins(from the prohibited wealth) is (solely) onhim.’ (Narrated by Al-Baihaqi, 5/335; Al-Baihaqi is of the opinion that thisnarration is frail)

Imam Al-Ghazzali used to say, ‘Verily, ifprohibited wealth is widely spread within anarea and it is difficult to move out of it (thearea), thus it is permissible to have deals(with it) even beyond the emergencyboundaries, because if the people werelimited to only emergency boundaries, thus

human life will end, systems will bedamaged and at that point religious affairswill also be damaged and Islam will collapse(because nothing can be done without therole of wealth).’

What Does This Mean?

The capital in a conventional bank,therefore, cannot be regarded as prohibitedin its totality and must not be rejected as theinitial capital for Islamic banks and takafulcompanies. Of course it is better for banksto ensure that only the permitted portion isused and separated specifically for Islamicbanks, takaful companies or their Islamicbanking departments. Even so, it is notcompulsory (wajib) to do so.

If a small portion of prohibited capitalexists within the total capital used as theinitial capital for an Islamic bank, I believeit is Qard Hasan (non-interest bearing loan)from the conventional parent company toits subsidiary. The majority of contemporaryscholars are of the opinion that it is not aproblem for a parent company to give aloan to its subsidiary with the condition ofrepaying the loan later.

In fact, some scholars such as Dr ZakiBadawi issued a fatwa that it is permissibleeven if it is an interest bearing loan. This isbecause they are considered one companyand the fund is simply moving from onepocket to another.

The Practical Approach

Even if the opinion of prohibition is used,Islamic banks can still cleanse the doubtfulcapital by repaying the loan and giving aportion of its profit to charity. Thetransition and strengthening process of theIslamic financial system must be supported.It is impossible for a conventional bank orcompany to shift to an Islamic systemwithout the aid of sufficient capital orfinance, therefore, in line with the objectiveof Shari’ah (Maqasid Shari’ah), this processmust be allowed to enable the transitionprocess, notwithstanding the use of aportion of capital that is obviouslyprohibited.

There is then the matter of using profitsfrom permitted business, which have raisedinitial capital either through theft or fromprohibited sources. In this matter, ImamMalik, Imam As-Shafie, Imam Abu Yusofand Sheikh Zufar Huzayl agree that thethief has a right to the profit earned by hispermitted investment even if the initialcapital was prohibited, nevertheless he mustreturn the stolen money (money used as hisbusiness or investment capital) to therightful owner. Based on this scholasticijtihad, we assume that Islamic banksshould take profits from their businesses orinvestments even if the capital used wasinitiated from prohibited sources. This,however, is a ‘worst case scenario’.

This issue needs to be clearly understood,because confusion on this matter mightmake Islamic banks look un-Islamic or evenworse, similar to conventional banks.

Dr Zaharuddin Abd Rahman is a Shari’ahscholar and lecturer at the IslamicUniversity of Malaysia, as well as beingan associate lecturer at the MarkfieldInstitute of Higher Education in the UK.He is also a Shari’ah advisor to severalfinancial organisations in both Malaysiaand the GCC and a regular contributor toseveral publications focussing on Islamicfinancial issues.


NEWHORIZON Safar-Rabi al Thani 1433 COUNTRY FOCUS

Qatar is a tiny country, a peninsula of justunder 11,500 square kilometres with apopulation of 1.7 million, more than 80%of whom are migrant workers from othercountries in the Gulf region and the Indiansubcontinent. Its reserves of oil andparticularly gas (15% of known reserves inthe world) have propelled it from being apoor, pearl fishing community in the earlyyears of the 20th century to being one of therichest countries in the world measured byincome per capita.

The Qataris appear to have realised,however, that total reliance onhydrocarbons is a dangerous strategy andthey are very actively working to diversifythe economy. The progressive attitudes ofQatar owe much to the enlightenedleadership of the current Emir, Hamad binKhalifa Al Thani, who became the country’sleader in 1995, following a bloodless coup,which deposed his father. Qatar plans tospend $150bn on infrastructuredevelopment over the next five years andspending in the non-oil sectors will varybetween $120bn and $140bn over the nextfive years, while the oil and gas sector willattract spending of $30bn to $40bn.

The Economy and the Finance Sector

The importance of a diversification strategywas underlined recently when Qatar’sGeneral Secretariat for DevelopmentPlanning (GSDP) published its inauguralQatar Economic Outlook, 2011–2012.High oil prices particularly in early 2011boosted GDP growth for 2011 to 15%, butin 2012 that growth is expected to slow toaround 5.1% as the vigorous expansion inthe hydrocarbon sector slows. This meansthat solid performance in other sectors ofthe economy will become more important.

The finance sector is one of the ‘othersectors’, which it is hoped will contribute tothat necessary solid performance. In 2006the finance sector in Qatar employed just2,600 people; by the end of 2010 this hadgrown to around 20,000 people.

In rankings of financial centres published inthe late summer of 2011, Z/Yen, a London-based risk consultancy, placed Qatar 30th inthe world and the highest in the MiddleEast. This puts them ahead of Dubai (36thplace), Bahrain (55th place) and SaudiArabia (66th place). One Dubai-basedrespondent to the survey of 1,800 financeprofessionals worldwide commented,‘Dubai has suffered a big attack on itsreputation. It has allowed Qatar to establishitself as a credible challenger in the MiddleEast.’ It appears that Qatar is no longerplaying catch up in the region; it is settingthe pace.

The Commercial Bank of Qatar wasestablished in 1975 as the country’s firstfully private sector bank and today isQatar’s largest private sector bank. It is aconventional bank, with assets of almostQR (Qatari Riyals) 63 billion ($17 billion)and net profits of just over QR1.6 billion($440 million) at the end of 2010. In 2005it began offering Islamic finance via awindow operation, but it will have to closethis operation by the end of 2011 (seebelow).

Qatar Financial Centre

Qatar Financial Centre (QFC) has beeninstrumental in Qatar’s growth as aninternational finance hub. Established in2005 with the aim of attracting financialinstitutions to the country, it set out to offera business friendly tax environment, a legalsystem based on English common law and a robust regulatory regime. In early 2010 ithad issued licenses to just 59 organisations,but by the end of 2011, that number had increased to 147, a growth of almost150%.

In early 2010 the Qatar Financial Centrebegan focusing its attention on assetmanagement, re-insurance and captiveinsurance as part of its mandate to build aworld-class financial services marketplace,which resulted in an increase in the numberof companies locating to the QFC.

The QFC Regulatory Authority sits alongsidethe QFC and it is responsible for regulatingthe organisations to which the QFC grantslicences. Its regulations are based oninternationally accepted standards andclosely follow the UK Financial ServicesAuthority. Financial organisations must beauthorised by the QFC Regulatory Authority.

Islamic Banking in Qatar

Islamic banking was established by decree inQatar in 1982 with the Qatar Islamic Bankopening its doors to business in 1983. In2005 the Qatar Central Bank (QCB)authorised conventional banks to offerShari’ah-compliant products via Islamicwindows. Among the banks taking up thedual role opportunity were HSBC, QatarNational Bank, Doha Bank, theInternational Bank of Qatar and theCommercial Bank of Qatar. In something ofa volte-face in February 2011, QCB issued adirective to these dual role organisationsinstructing them to stop opening newIslamic branches, accepting Islamic depositsand initiating new Islamic financeoperations. (For a fuller description of thedirective and its implications seeNewHorizon, Issue 179, April–June 2011.)

Since the directive, HSBC Amanah hassimply announced that it will close theIslamic window operation rather than sell itand the International Bank of Qatar (IBQ)sold their Islamic retail operations to BarwaBank. At the time of writing there was nonews about what other affected bankswould be doing to comply with thedirective, although it has been suggestedthat some of the affected banks may seeOman as a bolthole. (Oman issued a royaldecree in May 2011 paving the way for theestablishment of Islamic banking in theSultanate. Islamic window operations willbe permitted.) On the plus side for Qatar,the directive, combined with strongeconomic growth forecasts, is attracting theinterest of Islamic banks located in otherparts of the UAE.

Qatar Punches Above Its Weight


NEWHORIZON January–March 2012COUNTRY FOCUS

Qatar currently has four Islamic banks –Qatar Islamic Bank (QIB), QatarInternational Islamic Bank (QIIB), MasrafAl Rayan and the newest addition, BarwaBank. The Qatari royal family arerepresented on the boards of these Islamicbanks. They hold key board positions atQIIB – chairman and managing director –and the chairmanship of QIB.

Qatar Islamic Bank

Qatar Islamic Bank (QIB) is by far thelargest and longest established Islamic bankin Qatar with around 35 branches, capitalat the end of 2010 of QR 2.1 billion ($577million), a 35% share of the country’sIslamic assets and an 11% share of theoverall banking sector. In 2010 its debutinternational sukuk was eight timesoversubscribed and it also participated inQatar’s sovereign sukuk to the tune of QR1.25 billion ($343 million). Interestingly, bythe end of 2010 QIB’s capital adequacyratio had reached 17.4%, well above theQatari requirement of 10% and already incompliance with Basel III.

QIB’s ambitions, however, are not purelydomestic. They are building theirinternational presence with operations, inparticular in the European and Asian

markets. In 2010 they pulled their variousinternational initiatives together under thename ‘QIB International’. The objective isto ‘diversify the QIB client base and revenuemix and cater for the international growthof Shari’ah-compliant banking activities’.These international interests include a49.5% share in QInvest, based in the QatarFinance Centre; a partnership with otherGCC financial institutions in the set up ofthe Arab Finance House in Lebanon; a 70%share in the Asian Finance Bank establishedin Malaysia in 2007 and QIB –UK (formerlyknown as the European Finance House).

Qatar International Islamic Bank

Despite its name, the Qatar InternationalIslamic Bank (QIIB) is first and foremost alocal Qatari bank with 12 branches in Qatar.At the announcement of the bank’s thirdquarter results, Sheikh Dr Khalid bin Thanibin Abdullah al-Thani, QIIB’s chairman andmanaging director said, ‘Good opportunitiesclearly exist in the Qatari economy now.QIIB’s focus is on the local economy.’Nevertheless, QIIB does have someinternational presence through its ownershipof the UK’s Islamic Bank of Britain (IBB).

When IBB ran into some difficulties in2010, QIIB increased its stake in IBB to

more than 80% with a capital injection of£20 million and approximately six monthslater, in March 2011, took full control ofthe bank. Speaking at the time, Sheikh DrKhalid bin Thani bin Abdullah al-Thanisaid, ‘Our long-term strategy is to build aninternational Shari’ah-compliant bankingbusiness and we believe that our extensiveexperience in Shari’ah banking will allow usto develop and integrate the IBB businessinto the QIIB group.’ It was even reportedthat QIIB expressed an interest in buyingstakes in the part-nationalised Lloyds andRoyal Bank of Scotland groups.

QIIB’s plans to play a more active role ininternational capital markets were given aboost in mid 2011 when ratings agencyMoody’s gave it a triple A rating, the firstQatari bank to achieve such a rating. In thewake of this accolade, QIIB has indicatedthat it is planning to issue a US dollardenominated benchmark sukuk, probablyearly in 2012.

Masraf Al Rayan

Masraf Al Rayan is a relative newcomer,established just five years ago. It has eightbranches in Qatar, but the retail bankingarm is a very small element of the bank’sbusiness accounting for just 16% ofoperating income and 18% of net profit.Corporate banking is by far the biggestcontributor to both income and profit. Thecorporate banking strategy is conservativeand risk averse, concentrating on thegovernment and quasi government sectors.

In 2007 Masraf Al Rayan launched Al RyanInvestment, a 100% owned assetmanagement and investment subsidiarylicensed by the QFC. Its aim is to build two-way links between the GCC and Asia. Theventure is growing comfortably, but to dateis a very small part of the overall operation.

Barwa Bank

Barwa Bank was set up in 2008 and is infact a subsidiary of the Barwa Real EstateCompany. It began operation in mid 2009and to some extent the spectacular growthrate of more than 700% in 2010 has beenachieved through acquisitions – First

Doha’s Khalifa Stadium

Courtesy of the Qatar Financial Centre


NEWHORIZON Safar-Rabi al Thani 1433 COUNTRY FOCUS

Finance, First Leasing and the FirstInvestment Company. Despite a verysignificant increase in operating expenses,net profit also increased by around 670%.

Although Barwa has always had a retailbanking remit, it is hard to avoid theimpression that until very recently the mainthrust of its activities was investmentbanking and asset management. This isperhaps unsurprising given that it is asubsidiary of the Barwa Real EstateCompany, which owns almost 68% of theshares in Barwa Bank. Recently, however,Barwa’s retail banking operations received aboost when it acquired the retail bankingoperations of the International Bank ofQatar, which was forced to dispose of theirIslamic window operation under the QCB’sFebruary directive. Barwa Bank now hasfive branches in Qatar.

Beyond Qatar’s Borders

Qatar’s ambitions extend beyond its ownborders. Recently members of the Qatariroyal family picked up some of the falloutfrom the recent breakup of the Dexiabanking group buying Dexia’s unit inLuxembourg. Earlier Qatar’s stateinvestment fund, Precision Capital, acquiredthe Luxembourg unit of Belgium’s KBCbanking group. (Luxembourg has ambitionsto establish itself as a centre of Islamicfinance in Europe and has been actively

promoting itself as an Islamic financefriendly jurisdiction.)

Through the Qatari Investment Authority(the emirate’s sovereign wealth fund withabout $85 billion in its coffers) Qatar alsohas stakes in Credit Suisse and the LondonStock Exchange and has expressed aninterest in stakes in the part-nationalised UKbanks, RBS and Lloyds. In the late summerof 2011 the Qataris invested $670 million ina merger between Greece’s two biggestlenders and have reportedly had talks withBNP Paribas about an investment to help thebank through the Eurozone crisis. (Frenchbanks are particularly exposed to Greek andItalian debt.) This rumour was in fact deniedby BNP Paribas, although it appearsindisputable that BNP executives did visitsome GCC states in the late summer.

A Window of Opportunity

It has been suggested that Qatar, whichstarted to ramp up its financial sector ratherlater than Dubai and Bahrain, has anopportunity to eclipse these two establishedfinancial hubs in the wake of the Dubaifinancial crisis and unrest in Bahrain earlyin 2011. In fact, Qatar was recently rated asthe No. 1 financial centre in the Middle Eastby the latest GFC Index, published inSeptember of this year, and a World Bankassessment of indicators relating to “theease of doing business” has also seen Qatar

rise in the annual business environmentrankings, securing 3rd place in the regionand 36th globally. Dubai and Bahrain onthe other hand believe they are bouncingback, but they would say that wouldn’t they.

Perhaps this overt competition betweencountries in the GCC region is in itself oneof the problems, particularly when it comesto the lucrative asset management sector,which is one that the Qataris have targeted.

Currently each country has its own stockexchange and its own set of rules andregulations, particularly in relation toforeign participation. Working together andharmonising regulations across the regioncould serve to create a formidable contenderon the international stage. Whetherindividual differences and ambitions can beput aside in pursuit of a common goal isanother matter.

Qatar, along with Bahrain and Dubai, alsohas some work to do in building theinfrastructure to support their ambitions;clearing, settlement and custody services needimprovement if the approximately $68 billionunder management in the region are tochallenge for a share of the trillions of dollarsunder management in the UK, for example.During 2011 various conferences in theregion have produced bullish forecasts, but ifthese opportunities are not to be squanderedQatar has some work to do and fast.

Doha Skyline

Courtesy of the Qatar Financial Centre


NEWHORIZON January–March 2012IN THE SPOTLIGHT

London-based QIB (UK) is a subsidiary ofQatar Islamic Bank, one of the oldest andlargest Islamic banks. When we interviewedAnouar Adham, Head of AssetManagement at QIB (UK) towards the endof 2011 we were interested to pick up onsome of the themes that had emerged fromour article on Islamic asset management inthe October to December 2011 issue ofNewHorizon, as well to examine moreclosely one of the financial institutionscovered in this quarter’s focus on Qatar.

Anouar Adham has extensive experiencewith international banks in Europe, SouthEast Asia and the Middle East. Hisexperience includes investment, finance,development, asset management andadvisory for HNWI (High Net WorthIndividuals). He was formerly with QatarIslamic Bank where he was a seniorbanker and was involved in real estateprojects, industrial development andcorporate advisory. He is a CharteredFinancial Analyst (CFA), has a Master’sdegree in Finance from the University ofClermont-Ferrand in France and holds theIslamic Finance Qualification.

In terms of geographical spread where doQIB’s clients come from and do you expectthis situation to change?

QIB (UK)’s clients are spread globally butwith most of the client coming from theMENA region. In the future we expect theGCC to stay as our main core market withcentral Asia as well as south East Asiashowing great potential.

Does the Islamic asset management industryin general and QIB (UK) in particularlargely serve HNWIs (High Net WorthIndividuals) rather than institutions such aspension funds? How is this situationchanging and how is QIB (UK) playing apart in that change?

Actually, our focus so far has been oninstitutional clients, especially takaful andretakaful operators. In 2012 we will

continue to serve institutional investors butwe were also looking at the opportunity totarget HNWIs via our Wealth ManagementPlatform. Over the last couple of years wehave seen most of the Islamic asset managersstarting to work on an HNWI strategy. Ithink that one of the main reasons is thatIslamic banks are focusing more and moreon serving private banking clients as theyneed to find a substitute for falling revenuesin their investment banking activities.

One criticism that has been levelled againstthe Islamic asset management sector is that ithas been too reliant on real estate in itsportfolios. Is this a reasonable criticism; doesQIB UK strive to follow the principles ofmodern portfolio management and is it inany way hampered by the absence of a strongsecondary market in Sukuk, for example?

For a long period of time Islamic assetmanagers focused on real estate fund for thesimple reason that this is what clientswanted and the real estate market wasbooming globally making it an attractiveasset class. Investors, however, have seenduring the crisis that real estate prices couldalso go down and that a diversified portfoliohas its advantages, one of which is to reducesystemic risk. QIB (UK) Asset Management’sfirst product was a global sukuk fund, thatwas launched almost three years ago withUS$30 million and is today close to US$175million, making it the biggest sukuk fund inthe market. We launched this fund becausewe had identified the need for income-generating products outside the real estatespace. Initially the secondary market was anissue and we just had to work with that, buttoday most of the high quality paper inwhich we invest (the average rating of thefund is A) is liquid.

We are also managing an investment plan inQatar called Themar that invests in sukukas well as the equity of Islamic financialinstitutions globally. This product, byinvesting globally in different asset classes,offers a great diversification to ourcustomers via a single product.

To summarise, real estate has been and stillis an asset class that Sharia’ah-compliantinvestors are exposed to but the level ofinvestment is being reduced progressively.

Have the dangers of real estate investmentbeen exaggerated; are investors tooinfluenced by events such as the bursting ofthe Dubai real estate bubble?

Investment exposure in any one single assetclass is dangerous. Investors should alwayslook at diversifying their investmentpositions and discuss dynamic assetallocations that fit their risk profile withtheir investment adviser.

Given the current economic climate and thelevel of mistrust in many conventionalfinancial organisations, are you seeing anincreased interest in Islamic assetmanagement from non-Islamic institutionalinvestors?

You have some non-Islamic institutionalinvestors that are looking to invest inShari’ah-compliant products; however youcannot really identify a real trend of moneyflowing out the conventional products to beinvested in Shari’ah-compliant products.

Do you market your asset managementproducts only to Muslim investors or doyou also try to attract clients from theethical finance sector or more widely?

We do not build our strategy by segregatingIslamic and non-Islamic investors. Westructure products to be competitive in theglobal market and to answer clients’ needs.

How would you differentiate Islamic assetmanagement products from those of theethical finance sector?

Islamic finance is part of the ethical/SRI(Socially Responsible Investment) sector asthey share the common value of being apositive factor for society. I think that themain difference between Islamic finance andother forms of ethical finance is the use of‘haram’ financial instruments such asderivatives and riba-based products.

An Interview with Anouar Adham, QIB (UK)


NEWHORIZON Safar-Rabi al Thani 1433 IIBI NEWS

Keynote Address

Lord Sheik, Conservativemember of the House of Lords,Chairman of Iqra Ethical plcand Vice-Chairman of AssociateParliamentary Group on Islamic

Finance, set the scene for theworkshop. He reminded theaudience of the rapid growth ofIslamic finance and theopportunities presented by thesector. He noted the increasingappeal of Islamic finance, not

just to Muslims, but also tonon-Muslims looking for anethical financial alternative thatis concerned with deliveringbenefits to society and theenvironment. He stressed that itwas, therefore, critically

important for the Islamicfinance sector to ensure that itsproducts and services complywith the ‘form’ and ‘substance’of the Islamic principles.

The Form Over SubstanceDebate

In 2000 the late Mr Muzzam Ali,Founder and Chairman of theIIBI said, ‘One of the keyrequirements for the successfuloperations of Islamic banking isadherence to a prescribed codeof moral and ethical conduct.Some of the financialinstitutions, while promoting theinstruments of conventionalbanking, label these Shari’ah-compliant. Their minds are sofirmly set on Western financialconcepts that they cannot get ridof them.’ Bilal Khan, Shari’ahscholar and executive director ofthe Islamic Finance EducationCouncil (IFEC) speaking at theworkshop put it rather morepithily, ‘Just calling somethingIslamic does not make it Islamic.’

The first session moderated byRichard de Belder, partner and

Form and Substance in Islamic Finance – Challenges,Problems and the Way Forward

The 3rd annual thematic workshop organised by the Institute of Islamic Banking andInsurance (IIBI) and the International Shari’ah Research Academy for Islamic Finance(ISRA) took place on 12 December 2011. The workshop was sponsored by SNRDenton – an international legal practice and held at their London office. In the wakeof the Eurozone summit on 10 December, as European nations tried to decide how tofind a way out of the deep hole created by unsustainable levels of debt financing, itwas perhaps particularly appropriate to revisit the foundational concepts of Islamicfinance. Has the sector been able to adhere closely to its code of moral and ethicalfinance or has the need to compete and to coexist with the conventional financeindustry caused a drift away from its very high ideals?

Lord Sheikh




head of Islamic finance practiceat SNR Denton began with anexploration of the form oversubstance debate and why andhow it has arisen. Dr BashirAliyu Umar, a special adviser onnon-interest banking to theGovernor of Nigeria’s centralbank stated that the issue ofsubstance is crucial in Shari’ah.According to hadith, ‘actionsare judged by intentions’.Although the form of thetransactions may be relevant,the fatwa (Shari’ah scholar’sopinion) should seek to achievethe fulfilment of the substanceof the transactions.

Setting the historic backgroundNicholas Foster, Senior Lecturerin Commercial Law at theUniversity of London’s Schoolof Oriental and African Studiescommented that in the classicalperiod Shari’ah had a verysophisticated commercial legalsystem, but there was nomechanism to develop thesystem through changing times.Although the fundamentalprinciples of Shari’ah do notchange, the rules or lawsinformed by those principlesneed to change to reflect therealities of the moderncommercial world; to deal withsituations that could never havebeen imagined in the classicalperiod.

Richard Thomas, ChiefExecutive Officer of GatehouseBank had a rather shorterhistorical timeline covering his30 years experience of theIslamic banking industry. Henoted that when he first becameinvolved in Islamic finance thetype of deals with which he wasinvolved were true murabahacontracts, physical transactionsinvolving real ownership andtransference of goods. Over timechanges in the tax systems of

western countries put murabahacontracts at a disadvantage inthe broader market. It is at thatpoint that commodity murabahaor tawarruq, effectively a debtfinancing instrument mimickingthe conventional interest-basedloan in economic terms began topush out true murabaha. Just aswith an interest-based debtfinancing instrument,commodity murabaha allowsclients to claim tax advantagesthat stem from its classificationas a debt instrument.

Leaving aside the wholeargument about whethertawarruq is permissible at all(and you can read a very fulldiscussion of this in the Octoberto December 2010 issue ofNewHorizon), its use putsIslamic finance in the samecamp as conventional finance,which has created a debtmountain that Mr Thomasdescribed as unsolvable. Heconcluded that unless Islamicbanking differentiates itself, itwill not be seen as a potentialsolution to the problems thefinancial system has created.

It is easy to see why Islamicbanks chose to emulate theirconventional counterparts. Ifyou are the new guy on theblock, you have to at leastmatch or better what theestablished players have to offer.If you do not, you probablynever get off the ground. Thesituation at the end of 2011 is,however, rather different. Thereis widespread disillusion aboutthe banking sector, amplyillustrated in the article in thisissue titled ‘Against Mega-banking and in Favour ofMutuality’. There is also anincreasing sense of desperationabout how Western financialinstitutions are going to solvethe problem of the debt

mountain. Perhaps now is thetime when Islamic bankingneeds to revisit its code of ethicsand morality; demonstrate it isdifferent and that it does offer apotential solution to theproblems – Ed.

Dr Mehmet Asutay, Reader inMiddle Eastern and IslamicPolitical Economy and Financeat Durham University underlinedMr Thomas’s perception of theIslamic finance industry. He feltthat 1990s’ globalisation hadcaused Islamic banking to lose itsway; to forget that the conceptof a moral economy should be atthe heart of Islamic bankingpractices. It was not just aboutavoiding riba, but abouteconomic development that wasboth sustainable and linked toconcepts of social justice. Hesaid that the Shari’ah filtershould take these moral issuesinto account. Islamic bankingshould be about ethical profits,not profits at any cost. He calledfor Islamic banks to be morethan just money shops and to bepartners in projects anddevelopment.

In summary, the speakers,whether academics or industrypractitioners, did suggest thatthe Islamic finance industry hadexperienced a certain amount ofdrift away from its Shari’ahroots. The reasons for this driftare complex, but certainlyinclude the lack of a formalmechanism for adapting therules to meet the requirementsof the modern world, whilekeeping faith with the objectivesof Shari’ah and the need tocompete with the monster thatthe conventional financeindustry had become by the endof the 20th century.

There was a feeling that, giventhe current disillusion with the

NEWHORIZON January–March 2012IIBI NEWS

Over time changes inthe tax systems ofwestern countries putmurabaha contracts ata disadvantage in thebroader market. It isat that point thatcommodity murabahaor tawarruq,effectively a debtfinancing instrumentmimicking theconventionalinterest-based loan ineconomic termsbegan to push outtrue murabaha.



conventional finance industry,the key to success in Islamicfinance was its difference – itsroots in the concept of a moraleconomy. The subtext was thatperhaps now is the right timefor the Islamic finance industryto ask itself some soul-searchingquestions, return to its roots andoffer a real alternative. Thespeakers were, however, veryaware that this would be noeasy task; it would require alevel of cooperation betweeninstitutions and nation statesthat might be difficult toachieve.

Disputes Highlight the FormOver Substance Issue

The second session, ‘Howdisputes can highlight the form

over substance issue’, moderatedby Professor Mahmood Faruqui,senior advisor at the Bank ofLondon and the Middle East(BLME), discussed the ways inwhich the resolution of disputescan highlight the form oversubstance issue. Richard deBelder and Sheikh MuddassirSiddiqui from SNR Denton and Madzlan MohamedHussain of Zaid Ibrahim & Coin Malaysia looked at some ofthe problems.

First and foremost, is it possibleto somehow blend a nationallegal system and Shari’ah toproduce a resolution to adispute that satisfies both therequirements of national lawsand the spirit of Shari’ah?Currently, Mr de Belder

suggested that secular courtsfavoured form, the detail of thelegal contract. To expect judges,particularly those in countriessuch as the UK to take thesubstance of Shari’ah intoaccount when delivering ajudgement was perhaps adifficult concept. He noted,however, that even in Muslimmajority countries such as thosein the Middle East and NorthAfrica (MENA), judges wouldprobably be unwilling to refer toa Shari’ah board’s opinion,especially as these Shari’ahboards were an integral part ofone or other of the parties indispute. It is worth noting,however, that the RomeConvention of 1980 does allownon-state law to be applied incommercial contracts.

It is unfortunately truethat if you ask two orthree different Shari’ahscholars for anopinion on thepermissibility ofcertain transactions,you are quite likely toget two or threedifferent opinions.

Richard de Belder


One possible approach to theissue is arbitration. Richard deBelder noted that UK courtsappear to have backed theoutcomes of arbitration whereboth parties have managed toreach agreement.

A second problem arises wherenational laws have nomechanism for dealing withparticular issues. In the MENAregion, for example, there areno laws geared to dealing withsecuritisation.

There are then a whole range ofproblems around the drafting ofcontracts. Sheikh Siddiquisuggested that a major source ofdisputes was when there was amismatch between the contractand the reality of therelationship between a bank orother financial institution andthe customer.

Finally, there is the whole issueabout what is actuallypermissible under Shari’ah. Thisparticular debate washighlighted by Muhammad TaqiUsman in 2007 when he calledinto question the permissibilityof some sukuk transactions. Thedebate is, however, not limitedto sukuk. For example, the firstsession highlighted the wholeissue of tawarruq. Is itreasonable for judges to lookbeyond the nuts and bolts of acontract and consider whetheror not that contract waspermissible under Shari’ah inthe first place? This would add awhole new dimension to theproblem of applying the law toresolve a dispute and in manyjurisdictions judges wouldprobably be reluctant to gothere.

Even if it is accepted thatnon-state law such as Shari’ahcan be applied in commercial

contracts, how do you apply alaw if you are not sure what itis. It is unfortunately true that ifyou ask two or three differentShari’ah scholars for an opinionon the permissibility of certaintransactions, you are quite likelyto get two or three differentopinions.

Madzlan Mohamad Hussainsuggested that a legalframework, standards andtransparency were the answer.

In Malaysia there is a dedicatedHigh Court for cases related toIslamic finance with a Shari’ahAdvisory Council, which judgesmay consult. Malaysia wouldlike to see their system becomethe first choice for the resolutionof international disputes, butwhether they can realise thatambition will be dependent onthe willingness of othercountries to accept Malay law,the robustness of their legalsystem and particularly theirinterpretation of Shari’ah. Italso fails to address the issue ofdisputes in a national contextoutside Malaysia.

Shari’ah Risk Management andGovernance Mechanisms

The post lunch session wastitled ‘Shari’ah RiskManagement and Shari’ahGovernance Mechanisms; TheJourney So Far’. The sessionwas moderated by Dr AsyrafWajdi Dusuki, head of researchaffairs at ISRA and speakerswere Bilal Khan a Shari’ahscholar in the UK; Dr MohamedFairooz Abdul Khir, ISRAresearcher and Dr Bashir AliyuUmar.

Mr Khan observed that rate ofgrowth in the Islamic financesector had left the objectives ofShari’ah behind. Current Islamic


Shari’ah scholarsneeded a professionalbody like lawyers andaccountants to beresponsible formaintaining standardsand representing theinterests of theprofession.

Sheikh Muddassdiremphasised that thereis a real need foropenness over theissue of the time valueof money. In fact, hedid point out thatShari’ah principles dorecognise the timevalue of money aslong as it is anintegral part of thesales contract.



finance products in his opinionwere simply mimicking those inthe conventional sector. He feltstrongly that part of theproblem was the narrow focusof most Shari’ah scholars. He suggested that what wasneeded were multidisciplinaryscholars; scholars who also had a background andqualification in accountancy,economics or law. He furthersuggested that Shari’ah scholars needed a professionalbody like lawyers andaccountants to be responsiblefor maintaining standards andrepresenting the interests of theprofession.

He was critical of some of thepractices that in his opinionwere fairly common amongscholars such as individualscholars sitting on multipleboards, which leads to conflictsof interest and it also raisesquestions about their capacity toreview all the transactiondocuments with due care anddiligence. He also felt that theuse of Shari’ah advisors, i.e.lawyers, accountants andeconomists without propertraining and experience asShari’ah scholars, should bediscouraged, because they poseda reputational risk to properscholars.

Dr Bashir Aliyu Umar and DrMohamed Fairooz commentedon the evolution of Shari’ahgovernance mechanisms andvarious issues in Shari’ah riskmanagement.

The Way Forward

The final session, ‘The WayForward’ was moderated byProfessor Dr. Habib Ahmed,Sharjah Chair in Islamic Lawand Finance at DurhamUniversity and speakers wereProfessor Mahmood Faruqui;Sheikh Muddassir Siddiqui;Abdullah Haron, assistantsecretary general at the IslamicFinancial Services Board (IFSB);

Trevor Norman, director –Islamic finance & funds groupat Volaw Trust Company andMushtak Parker, editor ofIslamic Banker.

Professor Mahmood Faruquireinforced Mr Khan’s points. Hesaid that members of Shari’ahboards must be fit and properindividuals, who enjoyed a highreputation in the industry.Without these qualities Shari’ahscholars would put a bank’sreputation at risk. He alsoquestioned whether Shari’ahboards were given enoughassistance in their task; thenature of the relationshipbetween Shari’ah boards and

The Way Forward Panel


internal Shari’ah advisors.Above all, he said that Shari’ahboards must be seen to beindependent.

Trevor Norman, whilesupporting the idea thatShari’ah compliance needed tobe a level playing field (difficultgiven that there are five differentShari’ah practices around theworld), was not in favour of atotally codified system, which hebelieved would kill innovation.

Sheikh Muddassdir emphasisedthat there is a real need foropenness over the issue of thetime value of money. In fact, hedid point out that Shari’ahprinciples do recognise the timevalue of money as long as it isan integral part of the salescontract. For example amerchant can offer to sell anitem for £100 if the purchaserpays for it at once, but if thepurchaser pays in 12 months theprice will be £110. It is not,however, permissible to givesomeone cash today for morecash later; in other words a debtcondition.

Abdullah Haron discussed therole of IFSB in developingShari’ah governance standardswhile Mushtak Parkerhighlighted the importance of

clear and concisecommunication about Islamicfinancial products and services.He mentioned that althoughthere have been some positivedevelopments over time, there isfurther room for improvementin Islamic financial institutions’media policy.

In Conclusion

It was clear from the openingsession of the workshop thatthere is very real concern thatthe Islamic finance industry isbecoming a slightly sanitisedversion of the conventionalfinance industry; that to someextent it has lost its moralcompass and that there are anumber of reasons for this. Thecurrent degree of disillusionwith the conventional financeindustry, however, provides aunique opportunity for Islamicfinance to return to its roots; todemonstrate that there is a realalternative to the greed and selfinterest that has created thefinancial crises that have besetthe world since 2008. Whetheryou want to take the slightlycynical, world-weary view thatthis is a great marketingmessage or whether you simplywant Islamic finance to deliveron its promise of a system thatadheres to a code of moral and

ethical conduct and deliversbenefits to society and theenvironment, the argument fortrying to work more closelywith the substance of Shari’ahprinciples is compelling.

As the rest of the daydemonstrated, however, this willnot be an easy task. There aredifferent interpretations ofShari’ah around the globe anddifferent bodies settingstandards, whose guidancefinancial institutions are ingeneral free to follow or not asthey see fit. Secular courts donot have to take Shari’ahrequirements into account whensettling disputes, although underthe Rome Convention there isprovision to allow them to dothis. They may, however, beunwilling or feel uncomfortabledoing this. Perhaps the answer isto make the form fit moreclosely with the substance ofShari’ah; to make the reality ofthe contract a true reflection ofthe relationship between thecustomer and the financialinstitution.

There seemed to be somesupport for the idea that oneway of achieving greatertransparency and bringing thereality of Islamic finance intoline with the concepts enshrined

in Shari’ah is to make sureShari’ah scholars are suitablyequipped to deal with the worldof 21st century finance. It wassuggested that not only shouldthey have recognisedqualifications in Shari’ah law,but should have some widertraining in finance, economicsor accountancy, for example. Itwas also suggested that theyperhaps needed a governingbody, much as lawyers andaccountant do, to make surethat scholars’ interests areprotected and that the standardsof the profession are beingmaintained.

Lord Sheik in his openingaddress said, ‘The Islamicfinance system is founded uponthe central theme of achievingsustainable growth and sharedprosperity whilst promotinginnovation. The window ofopportunity which has openedfor Islamic finance as a result ofthe disaster created by the crisisin conventional banking canonly be seized if we address thecritical issues with diligence andcreativity.’ It is a big ask and itis unlikely that the solutionsdevised will be absolutelyperfect and acceptable toeveryone, but the potentialrewards make this a task that iswell worth attempting.




Samer Hijazi – DiplomaGraduate 2000

What was your job when youdecided to study for the diploma?

I was an audit executive withErnst & Young (E&Y) in AbuDhabi.

What is your job now?

I am a director in FinancialServices with KPMG in Londonresponsible for a portfolio ofmore than 45 clients coveringboth audit and advisory services.

Why did you decide to study forthe diploma?

At the time one of my mostimportant audit clients was theAbu Dhabi Islamic Bank (ADIB).This was only the second year ofaudit of ADIB and it was by farthe most significant Islamicbanking client of E&Y in AbuDhabi. I personally had no priorexperience of Islamic finance andthere was a lack of depth ofknowledge and experience inIslamic finance in the office suchthat an engagement partner wasbrought in from E&Y in Kuwaitwhere there was more experienceof Islamic finance.

I decided to study for thediploma because I wanted toachieve a better understandingof Islamic finance in order to doa good job, but also because Iimmediately found Islamicbanking at ADIB quite unique,interesting and challenging. Irealised that Islamic finance waslikely to grow further and Ithought it worth investing timeand effort in it. I studied for thediploma in the late 1990s andthere weren’t many options forstudying Islamic finance at thetime but the IIBI diplomaseemed like the best for me as Iwas able to complete it whilestill working full-time while thecosts of the diploma were alsoquite reasonable and somethingI could manage on my salary atthat level.

Is there anything you wouldhave changed about the diplomaor did it meet your expectationsfully?

Islamic finance and banking hasmoved on a lot in the pastdecade but I remember I wasquite satisfied with it at the timeand felt it helped me in mycareer.

How did your Diploma helpyou in your career?

As I said above, it helped medeepen my understanding ofIslamic finance and bankingproducts and principles whichhelped me perform better on theADIB audit and identify ways ofadding value to our client. I wasable to leverage this knowledgeand experience on other Islamicfinance assignments eventuallybecoming the office specialist inAbu Dhabi. I joined KPMG inLondon in 2000 and whenIslamic finance began to take offin the UK a couple of yearsafterwards I was fortunate to beable to be in the ‘thick’ of thiswith KPMG due to theknowledge and experience Ibrought over from Abu Dhabion the back of the Diploma.

Has the Islamic finance industrydeveloped as you thought itwould over the past 10–15 years;has it exceeded your growthexpectations and if not, why not?

The industry has probablyexceeded my growth expecta-tions over the past 10–15 years interms of volume and innovationas well as global reach.

How do you think the Islamicfinance industry will develop inthe next five years? Whichsectors of the industry do youthink will do best and whichwill be slower to develop?

The Islamic finance industry isstill a small part of the globalfinancial services industry and,as such, faces similar challengesto conventional financialinstitutions in the currentenvironment. It is probably at astage now where it needs toadapt to the current climate andconsolidate to ensure it is wellplaced to meet the capital andliquidity demands facing theentire industry. I expect thegreatest growth will be seen inconsumer banking andinsurance in the short term. Thewholesale markets are still quitevolatile with a lot ofparticipants quite apprehensiveabout what 2012 will bring. Thecontinuously evolving andunpredictable requirements ofglobal regulators also presentcomplications. Having said that,I believe that once the Islamicwholesale banks have weatheredthese challenges, they will be atthe forefront of a new era of

Where Are They Now?

The IIBI began running diploma courses in Islamic finance in 1994 and was the firstorganisation in the West to offer such a course. The course was upgraded to a PostGraduate Diploma in Islamic Banking and Insurance in 2003. This has been a keyelement in the IIBI’s objective to increase the knowledge and understanding ofIslamic finance and to contribute to a skill pool of practitioners in the industry. Whilewe regularly report on the exam success of our students, we have not until now hada look at how our graduates have fared in the years following the completion of theirstudies. This regular feature will do just that. We hope you will enjoy reading abouttheir success and their views on the future of Islamic finance and perhaps beinspired to follow their example.



growth and diversification asthey were in the last decade.

How have the financial crises of2008 and 2011 affected theIslamic finance industry and doyou think the general move togreater financial control andprobity will tend to favourIslamic finance or make it harderto compete with conventionalfinancial institutions?

The ‘buzzwords’ for the wholefinancial services industry goingforward are going to be riskmanagement and governance.Islamic financial institutions arealready known to be robust andconservative in both these areasand should be well positioned toadapt to developments in theseareas going forward. The lackof global standardisation in theIslamic finance industry aroundwhat exactly constitutes true oracceptable Shari’ah compliance,however, is likely to remain aparticular issue for Islamicfinancial institutions. There isoften a wealth of guidance andpractice around this, but some,not necessarily absolute,standardisation of practicearound this area would help theindustry.

Which countries or regions willdrive growth in Islamic financein future?

Always a difficult question . . .the GCC region, Malaysia andthe UK will continue to take theindustry to new frontiers, but Iexpect significant organicgrowth to come from marketssuch as Indonesia, Central Asiaand Africa.

Fares Mourad – DiplomaGraduate 2002

What was your job when youdecided to study for thediploma?

A senior portfolio manager,overseeing the management ofvarious money market and fixedincome mutual funds of UBSwith assets under managementof CHF 6 billion.

What is your job now?

Head of Islamic Finance at BankSarasin, which is the first andonly Swiss Bank offering the fullrange of Islamic private bankingproducts and services.

Why did you decide to study forthe diploma?

Having a Eurasian origin Iwanted to build a bridgebetween East and West in thearea of finance, combining thefinancial knowledge gathered inthe West with related Shari’ahknowledge. This was the basisof my dream.

Is there anything you wouldhave changed about theDiploma or did it meet yourexpectations fully?

It has been a long time since Iobtained the Diploma and Iexpect the programme haschanged. Perhaps a seconddiploma level might beappropriate in which criticaland more advanced issues areaddressed and subjects such asfinancial engineering, theenvironment, sustainability, etc.are discussed.

How did your Diploma helpyou in your career?

It was the basis for everythingthat I have achieved. I am a truebeliever that nothing comesfrom nothing. The Diploma gaveme a profound basis from whichto develop and create productsand services and from which toexcel. I wouldn’t have achievedwhat I have today without thebasis I obtained from IIBI.

Has the Islamic Finance industrydeveloped as you thought itwould over the past 10–15years; has it exceeded yourgrowth expectations and if not,why not?

Looking just at the numbersIslamic Finance has grown asexpected. It has, however,remained concentrated onmurabaha-type transactions andvery much focused on real estate.The trend has been to mimic theconventional industry, to theextent that the discussion onform and substance is strongerthan ever. While the industry hasgrown in size, it has not yetmanaged to establish itself in theWest as an alternative toconventional banking as anenabler of real economic activitybased on moral, ethical andsustainable beliefs.

How do you think the IslamicFinance industry will develop inthe next five years? Whichsectors of the industry do youthink will do best and whichwill be slower to develop?

The Islamic finance productsand services that will be thewinners in the long run will bethose that address the genuinespiritual source of the industry.The industry must addressenvironmental, social andpersonal issues to continue togain momentum. Finally theindustry needs to address thedaily needs of the individual –going beyond offering products– by providing advice on Islamicfinancial planning and Islamicestate planning.

How have the financial crises of2008 and 2011 affected theIslamic Finance industry and doyou think the general move togreater financial control andprobity will tend to favourIslamic finance or make it harder

to compete with conventionalfinancial institutions?

I disagree with the statementthat Islamic finance is competingwith conventional finance. Eachsystem addresses the needs andrequirements of two differenttypes of client. While the Islamicfinance industry is addressingclients’ needs and requirementsin this world and the hereafter,the conventional one is onlyfocusing on the activities in thisworld.

The financial crisis was initiatedby low and loose creditstandards. This is not a religiousissue and the Islamic financeindustry is not immune to theinitial causes of the financialcrises. Personally, I believe thecontrols and measures put inplace by the regulators serve toprotect the investor andultimately the industry itself. Ialso believe, and in particular inview of Basel III, that many ofthe mechanisms or tools used bythe Islamic finance industry willbe adopted by the conventionalfinance industry, albeit withoutthe religious overtones.Wouldn’t this be a greatcontribution by the industry tomankind.

Which countries or regions willdrive growth in Islamic Financein future?

The factors that have drivengrowth so far will continue todrive growth in the future. Themarket for Islamic finance,however, will be more crowdedwith new entrants. Bank Sarasinis proud to be the first SwissBank to offer the full range ofIslamic private banking services.Others will follow. We arealready witnessing Westerncountries and head of stateslooking closely at Islamic finance,the latest example being France.



Aliyu Buhari Ali, Head ofMarketing and Strategy,Valid Insurance Brokers,Nigeria

Bello Umar, Trainer,Economic and FinancialCrimes Commission,Nigeria

Boubkeur Ajdir, ProjectManager, IFAAS, France

Christoforos Symirotius,Consultant, Jordan

Khaled Walid Qutob,Investment Officer,International FinanceCorporation, Israel

Mohamed Azeem Saheer,Assistant Supervisor –Banking, Doha Bank, Qatar

Mohammad Aslam, UnitedKingdom

Mark Naylor, ManagingDirector, TransOceanCapital Inc., USA

Adebanji Hakeem Bakare,Consultant, UniqueSolutions International Ltd.,Nigeria

Ms Snober Usman, Pakistan

Badar ul Islam, CorporateServices Executive, BarclaysBank, United Kingdom

Kareem Alsadi, UnitedKingdom

Mohammed Haji Ali,United Kingdom

IIBI Awards Post Graduate Awards

Ms Azmina Siddeeque, Fundraising Officer, Muslim Aid, Sri Lanka

The course covered all aspects of Islamic banking andinsurance and also parts of conventional banking. I acquireda deep knowledge of Islamic banking and takaful products.

Jaweed Abdul Latif Gaya, Head of Branch Operations andInternal Control, Commercial Bank of Dubai, United ArabEmirates

The best aspect of this course was the encouraging commentsfrom my tutor, which served as a motivation for me tocontinue till its completion. I was impressed by the supportextended by the Institute, by way of providing study materialin an organised and timely manner, which enabled me toutilise my time in an efficient manner. Also, this course givesyou a clear idea about all aspects of the Islamic finance, thuspreparing a person to be capable of entering the industry as aprofessional.

Serdar Ahmet Guner, Senior Manager, Dubai FinancialServices Authority, United Arab Emirates

This was a very good introduction to the Islamic banking forme. Although I have been in the industry for some time Ihave not really studied the basic elements of Islamic bankingand spent critical time over its main principles. The best partfor me was this aspect, which allowed me to apply criticalthinking and assess the risks, reward and the overallapproach deployed by Islamic banking.

To date students from nearly 80 countries have enrolled in the PGD course. In the period October to December 2011, the followingstudents successfully completed their studies:


NEWHORIZON January–March 2012IIBI LECTURES

After the onslaught of the recent financialcrisis, governments in the West took stepsto consider reforming the financial systemin order to avoid or at least minimise theseverity of financial crises in future. In UK,Sir John Vickers, Chairman of theIndependent Commission on Banking(ICB) presented a report in September2011 for the reform of the UK financialsector. Professor Faruqui discussed thesalient features of the various proposals toreform the financial system. He alsoconsidered the challenges faced by theIslamic finance industry and emphasisedthat, despite some issues, the Islamicfinancial business model deservesempathetic consideration by policymakers for providing stability in thefinancial system.

Professor Faruqui began by brieflyexplaining the key reasons for the recentfinancial crisis – imprudent lending, highlyleveraged structures, opaque financialinstruments, the role of light touchregulations and the ballooning size ofhousehold, corporate and sovereign debts.He briefly enumerated American andEuropean initiatives for reform of thebanking system and paid particularattention to the UK ICB’s views on ringfencing contained in their September 2011report.

Professor Faruqui presented his hypothesisthat the following four principles of Islamicfinance, albeit needing some refinements interms of regulation and standardisation,

should be considered in developing anarchitecture for financial stability:

Firstly, Islamic finance prohibits interest,which is a predetermined return on capital,independent of the actual income earned bythe loan capital. This nips in the bud theunsustainable gap between the interestpayable by the entrepreneur and the incomeearned, trapping the investor-banker-entrepreneur triumvirate in an endless huntfor higher-yield assets. As margins narrow,they are caught in an asset spiral involvinghigher risks and higher volume. Thisintensifies credit expansion bubbles and theunsound practice of underreporting assetsand over-reporting interest income, which isat least partly illusory, as subsequent auditsreveal.

Secondly, Islamic finance eschews thefinancialisation of the economy andencourages investment in the real economy.The financial crisis exposed the ruthlessfinancialisation of the economy in the lasttwo decades. The volume of foreignexchange trade has increased exponentiallyfrom twice to fifty times the volume of realtrade recently. Financial markets,particularly banks and shadow banks, aresusceptible to irrational herd instincts andmomentum movement – in both theexuberance of upswing and the despair ofdownswing. He pointed out that thehigh-speed, cross-continent movements –just a few computer clicks – of very largefunds and asset amongst banks, moneymarket funds and hedge funds adds tointensification. Further, the cross holdings ofeach others’ assets adds to the confusion,complexity and instability in theinterconnected system. This has nothappened in the real economy.

Thirdly, Islamic finance encourages thesharing of profit and loss and eschewsfinancing debt simpliciter unrelated to anyreal economy transaction. The tenor,certainty and harsh consequences ofdebt-based finance encourage moral

hazards. A fair profit and loss sharingcontract minimises exploitative andunethical conduct.

Fourthly, Islamic finance permits onlylimited use of derivatives, not forspeculation, but as risk hedging tools. Therule avoiding gharar (avoid excessiveuncertainty and unquantifiable risk)promotes due diligence and transparencyand reduces embedded surprises or inherentuncertainty. He emphasised that the generalrule of Islamic finance that the seller mustown and possess the subject of sale,prevents short selling and marketmanipulation particularly in the opaqueculture of hedge fund and StructuredInvestment Vehicles (SIVs). Speculativederivatives only shift, but do not eliminaterisk, as shown by the failed trades of several high-flying traders whose billions oflosses are borne by stakeholders. In thecrisis, as trust broke down, derivativeproducts were hard to shift because ofsuspicion as to which bank had whatquantum of toxic assets parked in whichSIV. This uncertainty congealed individualbanks’ funding liquidity and temporarilyfroze market liquidity, reflective of theclassic Minsky moment: the investmentbanker orders ‘sell’ and the broker replies‘to whom?’

He then went on to discuss the recent issuesfaced by the Islamic financial sector such asthe need for a legal and regulatoryframework, Shari’ah governance and,importantly, lack of genuine focus onlong-term vision at the expense ofshort-term gains by the senior managementof Islamic finance institutions. Hehighlighted that the stakeholders in Islamicfinance – heads of government, centralbanks, Shari’ah scholars, supervisors andmarket players must seek wisdom andtolerance to develop a long-term vision forIslamic finance.

In conclusion, Professor Faruqui made tworecommendations:

Promoting Islamic Finance


NEWHORIZON Safar-Rabi al Thani 1433 IIBI LECTURES

1. TheCityUK, as the City’s champion andconstructive lobbyist with government,the Bank of England (BoE) and marketplayers should promote Islamic financeas a way to enhance the globalcompetitiveness of the City of London.

2. Islamic finance should be seen to providepractical solutions and directionalcredibility in promoting the role andscope of Maqasid al Shari’ah (Objectivesof Shari’ah) and maslaha (PublicInterest); governance and measuredreinterpretation of principles of fiqh ulmuamlaat (jurisprudence of transactions)by dynamic ijtehad (the making of aShari’ah decision by personal effort,independent of any school of thought)leading to the standardisation ofcross-border regulatory and tax regimesand a legal architecture that is secure andcapable of being enforced.

The modern Islamic finance industryemerged in early 1970s as part of thelarger Islamic moral economy to respondto the developmental needs of the Muslimworld in particular, and the largerdeveloping world in general. Dr Asutaycritically evaluated the points of departureof the modern Islamic finance industryfrom the value system and aspirations ofthe Islamic moral economy. He alsodiscussed the sources of and underlyingreasons for this observed deviation andits impact on the wider acceptance of thisindustry.

Dr Asutay started the lecture by stating thatagainst the backdrop of global financialcrisis, Islamic banks and financialinstitutions (IBFIs) have managed to achievemodest growth in their asset base and alsoin other institutional and financial variables.This has resulted in a new discourse aboutthe ‘resilience of IBFIs’, which is attributedto the religio-ethical foundations of the

Professor Mahmood Faruqui is senior advisor to the Bank of London and the Middle East(BLME) and a former Vice Chairman of IIBI. He is a Fulbright Fellow with Master ofComparative Laws and a London-based senior lawyer with over 30 years involvement inIslamic finance advising on policy, governance and Shari’ah aspects of product structuringand documentation. He previously worked as board member and advisor to Habib Bank andHabib Bank AG Zurich as well as the Dar Maal Al-Islami group and some of the group’sIslamic banks and several professional firms including Clifford Chance and ThompsonReuters. He is a frequent speaker at international conferences on issues related to Islamicfinance.



Islamic finance industry. It should be noted,however, that defaults in certain Islamicfinance transactions were also witnessedduring the same period, which implies thatIslamic banking and finance is a sociallyconstructed reality not a divine revelationand is therefore prone to the fallibility of allthings human.

Looking critically at the reality and progressof IBFIs, Dr Asutay highlighted that thereappears to be an overwhelming convergenceof IBFIs with conventional banks andfinancial institutions in terms of operationsand products. Such a development quashesany hope of a ‘miracle’ in terms of ‘divineresilience’ of IBFIs. Over the years, as partof this convergence, IBFIs havecompromised on their ‘moral economy’related objectives and outcomes by locatingthemselves within neo-classical economics.In other words, their drive for efficiency hasbeen at the cost of equity, while the Islamicmoral economy (IME) as the foundationand framework for IBFIs prioritises social aswell as economic optimality.

According to Dr Asutay, the IMEconceptually suggests that the Islamic financeindustry should be more than financialcontracts, as it represents a holistic approachto financing a society. In addition,conceptually, Islamic finance is rooted indevelopmental aims, and therefore isconceptualised as providing the financialmeans for the development of societies ratherthan the servicing of markets and therefore,the embedding of the IBFIs’ financing in thereal economy is an essential feature.

Dr Asutay emphasised that a criticalanalysis of the performance of IBFIs,however, indicates that there is a growingdivergence between the aspirations of theIME and the realities of IBFIs. Thisdivergence mainly demonstrates itself inareas related to ethical and socialexpectations and therefore it is valid toclaim the ‘social failure’ of IBFIs with theevidence produced by a growing body ofempirical literature. The debate in recentyears, hence, has been around ‘form versussubstance’ or ‘Shari’ah-compliant financeversus Islamic-based finance’, which indeedbrings the entire legitimacy of the current

practice of the Islamic finance industry intoquestion. It should be noted that thesubstance in this debate is defined throughthe IME’s suggested ethical anddevelopmental or social economy orientedvalue proposition.

In order to be able to remedy the observedfailure, Dr Asutay mentioned that it istherefore important to locate the sources ofthis failure, which are briefly discussedbelow:

(i) The paradigm shift from the IME to theIslamic finance industry and inparticular the adoption of thecommercial institutionalisation of thisindustry since the mid-1970s representsan important divergence. (The former isaimed at developing an ‘Islamic-basedenvironment’ in which the Islamicfinance industry can be located.)Developments in the theory of IME,moreover, have been very sluggish andinadequate and it is, therefore, anincomplete body of theory. Theshortcomings in knowledgedevelopment resulted in IBFIs followinga neoclassical economic framework.The IME’s call for social andsustainable development is, therefore,not considered as an aim by IBFIs; thesocial good, hence, is not prioritised.

(ii) In the observed social failure of IBFIs,commercial banking, as an institutionalformat of the Islamic finance industry isalso important to mention. CommercialIBFIs totally ignore developmentalefforts; their main aim is entirely profitmaximisation rather than ethical profit.The result has been the‘financialisation’ as opposed to the‘financing’ objectives of the IME. Whilethe latter prioritises embeddedfinancing in the real economy, theformer brings debt-enhancing financialproducts to the market. For example,the recent controversies over sukuk andtawarruq demonstrate the furtherfinancialisation of the Islamic financeindustry, while debt-based financialcontracts have already come to largelydominate the IBFI industry.Considering that financialisation is one

of the major sources of the currentglobal financial crisis, furtherfinancialisation of the Islamic financeindustry should be viewed withconsiderable unease. It is alsoimportant to note that, whiledevelopment necessitates the financingof the long-term anddevelopment-oriented sectors, financialdata from IBFIs does not suggest anyinclination in that direction either.

(iii) The legalistic-rational method appliedby the Shari’ah scholars should beconsidered as an important part of thisobserved social failure, which bydefinition ignores the substance byprioritising the form. While substancerequires a consequential approach interms of outcomes; in the ‘form’oriented approach, the entire emphasisis relegated to the process ofconstructing a product by ignoring itsoutcomes. For this, Ibn Kayyim’sposition from many centuries ago iscritically important; he referred toriba-free products leading to greater‘harm’ in society if not designedaccording to the identified moralobjectives.

(iv) The IME defines the objective ofShari’ah as ‘human well-being’, whichis expressed through its maqasid(objectives of Shari’ah). The narrowdefinition of maqasid, which isconfined to the safeguarding of limiteditems (the Ghazalian position), fails,however, to internalise larger social anddevelopmental issues, which are bydefinition policy matters. This impliesthat IBFIs’ operations are formulatedwith such a narrow and individualisticlist of maqasids by the Shari’ahscholars. This resembles the AdamSmithian ‘invisible hand’, whichconsequently could not prevent marketfailure. The progress of IBFIs,therefore, within such safeguarding(not proactive) and limited maqasid hasfollowed the same fate, i.e. ‘socialfailure’. The Shari’ah interpretation forIBFI product development and activityto meet the unlimited nature of theneeds of modern society must,



therefore, be endogenised through acomprehensive maqasid position suchas Ibn Kayyim’s proposal.

(v) The IBFI’s role as an institution hasbeen made possible through thetransformational intellectual positiondeveloped by the Islamisation ofknowledge movement in late 1960s,which aimed at Islamising theinstitutions of Western constructwithout considering the existentialquestion of whether the concept ofcommercial banking should be theinstitution of Islamic construct. As thehistory and financial anthropology ofMuslim and Mediterraneangeographies indicate, perhaps otherinstitutions could also be consideredand developed to respond to‘substance’ related expectations or infulfilling the aspirations of the IME.The reason is that in the existingconstruct there is a conflict betweenaims referring to the social economyand development and the instrumentsand institutions, namely banks.Courtesy of the commercial IBFIs, theIslamisation of capitalism has beentaking place in recent years in theMuslim world; considering that Weberargued for religious work ethics(Protestantism) generating capitalism, itseems that IBFIs are now delivering thenew capitalism in the Muslim world. Itis very important to consider whetherthis is desirable considering thesystematic and chronic economic andfinancial crises which have beenexperienced over many decades. Surelythe IME came into existence as aresponse to the developmental failuresof capitalism and socialism implyingthat the perceived and increasingcapitalism through IBFIs is notnecessarily delivering on theexpectations of the IME. Given thesefacts the institutional construct ofIslamic financing in the form ofcommercial banks has to be questioned.

(vi) While the supply side (IBFIs) isimportant, the demand side should alsobe critically analysed in assessing itsimportance in shaping the nature of

IBFIs. Considering that the ethicalfinance movement in the West is verymuch the product of demands fromethically motivated individuals, theclients of IBFIs should be in a positionto express their demands in relation to‘social and developmental’ objectives inthe way their monies are invested byIBFIs. The role of civil society is,therefore, important in taming the‘capitalist’ trends in IBFIs. Theevidence, however, indicates that clientsof IBFIs have surrendered themselves tothe will of Shari’ah boards in terms of

their responsibilities with theexpectation that such boards willdeliver according to the ethical andsocial expectations of the IME. Theevidence contradicts this and therefore,a proactive civil society is essential forthe robust development of the Islamicfinance industry, which has so far beenshaped by the markets.

Dr Asutay concluded the lecture by statingthat since ‘development’ is a larger concept,Islamic finance industry with its currentstructure has not been able to affect nor has

Dr Mehmet Asutay is the director of the newly established Durham Centre for IslamicEconomics and Finance and Reader of the Middle East and Islamic Political Economy. Heis also the course director of the MA/MSc in Islamic Finance and the director of theDurham Islamic Finance Summer School. He teaches and also supervises masters anddoctoral research on various aspects of Islamic moral economy; Islamic finance; thepolitical economy of the Middle East, Turkey and the Kurds and economic developmentrelated subjects. He is the managing editor of the Review of Islamic Economics and anassociate editor of the American Journal of Islamic Social Sciences. He is a frequent speakerat Islamic finance conferences and seminars and his articles on his research interests haveappeared in various journals.



it aimed at affecting the development ofsocieties in which IBFIs operate in asystematic manner. This does not mean thatIBFIs do not have impact on economicgrowth; on the contrary due to financialdevelopment and pooling of funds these docontribute to economic growth.Development, however, is about far morethan the growth of the economy and it isthis broader remit that is the aim of theIME. It should be reiterated that ‘Islamic’ in

the Islamic finance industry refers to aparticular value system beyond theunderstanding of conventional banking;IBFIs are expected to fulfil the maqasid asidentified through the values and norms ofIslam. This suggests a socially acceptablefinancing option for the development ofsociety, which by definition is incontradiction with the ‘financialisation’trends observed in the Islamic financeindustry.

He stressed that the correction of theobserved ‘social and developmental’ failureis essential for sustainable development andhence for fulfilling the promise of the IME.In serving such objectives, new Islamicfinancial institutions, beyond but inadditions to IBFIs, are necessary andessential. In the new institutionalisationstage, therefore, IBFIs should relate to‘substance’ and ‘consequences’ rather thanthe ‘form’.

The modern Islamic finance industry hasexperienced phenomenal growth in thelast four decades. It is, however,confronted with a fundamental legalproblem for, although the shari’ah haseternal validity for Muslims, the legalsystem in which it was developed andapplied in the classical period no longerexists.

In our November lecture, Nicholas Foster(Senior Lecturer in Commercial Law,School of Oriental and African Studies,University of London, quondam co-directorof the Centre for Islamic and MiddleEastern Law, founding editor of the Journalof Comparative Law and member of theAdvisory Board of the Islamic StudiesNetwork) considered the consequences ofthis situation. He asked whether the way inwhich it has been addressed is a viableoption or a dead end.

After acknowledging his debt to ProfessorSimon Archer, whilst making clear that theresponsibility for the content of this lecturewas his own, Mr Foster stated that hewould consider the topic through the lens ofcomparative legal system analysis. Hestressed that this was part of a more general

approach he was advocating for the study ofIslamic finance: a greater degree ofspecialisation, including legal specialisation.A vital element of comparative legal systemanalysis is the notion of ‘legal system’. Thisterm denotes not just the law, but also theinfrastructure in which the law is developed,taught and applied.

It is clear that, in the classical period of theshari’ah, despite the absence of the nationstate, a functioning legal system existed. Itis, however, important to note that the law’sauthority did not come from the state forthere was none, but from Allah and fromthe manifestations of Islam throughoutsociety. On the commercial and financialside, there was a sophisticated body ofspecialist law which, it seems, was practicaland efficient.

This changed with the transformationsassociated with modernity. The politicalstructures of classical Islam were replacedby those of the Western-style nation state,including the legal system. The nation statetook control of the legal system and theshari’ah legal system disappeared; notably,shari’ah commercial law was entirelyreplaced. This replacement was accepteduntil the early 20th century, when somegroundbreaking Muslim thinkers andeconomists put forward proposals for anIslamic economic system, leading to thebeginnings of Islamic finance.

The pioneers of the modern industry,however, had a problem. The basis of

Islamic finance was the law (i.e. theshari’ah), which needed to be adapted forthe needs of modern finance. Suchadaptation needs a legal system; a legalsystem is also necessary for the functioningof law, notably its enforcement, but theshari’ah legal system no longer existed.

The solution adopted was to proceed on atransaction-by-transaction basis, withlawyers and shari’ah scholars workingtogether to produce alternatives toconventional products, using ‘carrier legalsystems’, such as English law, to provide aframework in which Islamic finance couldoperate.

Eventually, a nascent legal system started toemerge, with some characteristics typical oflegal systems, such as figures of authority(the shari’ah scholars), standardisedtransaction types, collation of rulings(fatwa), quasi-model legislation (AAOIFI‘shari’ah standards’). This nascent legalsystem, however, still depends on the statelaw of a particular jurisdiction for itsapplication and in particular for disputeresolution. Arbitration is a possibility, buthas various drawbacks.

The legal situation is also the source of theauthority problem. A legal system’sauthority and legitimacy ultimately derivefrom a basic authority source, such as apolitical model, as in modern Western law,or religious authority, as in the classicalMuslim world. The Islamic finance legalsystem, however, does not yet have such a



definitive authority source, despite attemptsto create one, such as the activities ofAAOIFI, the IFSB and the OIC FiqhAcademy. This is a source of uncertainty, aserious problem for financial markets. Anotable example is the 2007 statement bySheikh Taki Usmani on sukuk.

This is a fundamental problem. If there is nodefinitive legal authority, there can be nodefinitive declaration of shari’ahcompliance.

In the last section of the lecture, Mr Fosterreturned to his initial question. Is theapproach used so far a practical method ora dead end? Given the problems, one mightbe tempted to conclude that we havereached a dead end. This may, however, betoo pessimistic. Great steps have been madetowards consensus and efforts arecontinuing in this direction and theproblems have not impeded the recentexceptional growth in Islamic finance.

Perhaps neither absolute legal authority norabsolute certainty is necessary. If enoughusers believe in the authority of the shari’ahscholars and the multilateral institutions,this may be sufficient. The same applies forcertainty. In addition we should not forget acompromise solution, the recognition andapplication of Islamic finance law by, and itsincorporation into, municipal law. Forexample, the Bahraini regulator and theNational Shari’ah Council in Sudan requiretheir institutions to follow AAOIFI’sshari’ah standards and the State Bank ofPakistan applies some of them.

Mr Foster concluded by pointing out that apragmatic approach, although untidy, canget better results than a neat grand plan butthat, as Islamic finance moves on, dueconsideration of the legal foundations hasan important place in the development ofthe field.

Professor Nicholas Foster has been Co-Director of the Centre for Islamic and MiddleEastern Law, School of Oriental and African Studies, University of London, was thefounding editor of the Journal of Comparative Law and is a member of the Advisory Boardof the Islamic Studies Network. He has written on Islamic commercial and financial law,UAE commercial law, corporate law theory and comparative commercial and corporate law.He is working at present on the history and spread of corporate law and the role ofcommercial law in the westernisation of law in the Middle East.



January

30: Scalable Business Models for IslamicMicrofinance, Turkey

This year’s two-day conference sets out toclarify new policies and regulations relatingto Islamic microfinance and to identifywhich microfinance business models worksbest in practice. Speakers come from a widerange of countries including Pakistan,Yemen, Syria, Iraq and the Middle East.

Contact: Amy MillerTel: +44 (0)203 141 8700Email: [email protected]

February

7-8:8th Annual Middle East InsuranceForum, Bahrain

This forum covers the whole of theinsurance industry, conventional andtakaful. It has the rather lengthy title‘Transforming the Regional InsuranceMarkets: Building Scale, BoostingCompetitiveness, Seizing GrowthOpportunities’ Although there is only onesession on day two dedicated to takaful andretakaful, many of the topics in theconference, such as regulatory issues anddrivers of growth in the Middle East arelikely to be of value to both conventionaland Islamic insurance organisations.

Contact: Andrew ChopraTel: +9714 343 1200Email: [email protected]

21–22: 11th Annual Islamic FinanceSummit, London

This influential gathering will include all ofits regular features such as the audiencediscussion with Shari’ah scholars and thepanel discussion with industry leaderstaking about progress and developments inthe industry. The plenary session includesspeakers from Malaysia, Kazakhstan and

Kuwait talking about recent developmentsand opportunities in those countries andstreamed sessions include risk, capital andliquidity management; corporate finance,sukuk and capital markets and funds. Onthe day preceding the conference there willbe a workshop for those wishing to learnabout the basics of Islamic finance, as wellas the women in Islamic finance event.

Contact: Charles GouldTel: +44 (0)207 779 8999Email: [email protected]/islamic

March

24–25: 10th Harvard University Forum onIslamic Finance, USA

The theme of the 2012 forum is ‘IslamicFinance and Development’. It will criticallyexamine traditional frameworks underwhich Islamic finance has developed as wellas the new challenges raised by recentevents, including the global financial crisisand the ‘Arab Spring’ movements in theMiddle East. The topics for this year’s eventare global economic developments, SMEsand alternative economic thinking.

Contact: S Nazim AliTel: +001 617 496 2297Email: [email protected]://ifp.law.harvard.edu

27–28: 2nd Annual World IslamicFinance Conference, London

Key topics for this conference includeregulatory issues, taxation and the legaloutlook, corporate and social responsibilityand emerging and growing markets, as wellas a concluding Open Fatwa session with apanel of Shari’ah scholars.

Contact: Sandeep PokkaliTel: +971 4609 1570Email: [email protected]

27–28: Oman Islamic Banking andFinance Conference, Oman

This conference comes just under a yearafter Oman’s decision to allow theestablishment of Islamic banking in theSultanate. It aims to provide a platform fordiscussion of the strategies that willrevolutionise the Sultanate’s currentfinancial structure and investment climate.

Contact: Ammar AhmadTel: +968 24 564303Email: [email protected]

April

16–17: 7th Annual World TakafulConference, Dubai

The takaful industry is forecast to reach$25 billion by 2015, but if this growth is tobe realised the industry will need to becomemore competitive and better attuned to theneeds of the market. Subtitled ‘GlobalChallenges and Growth Opportunities’, thistwo-day conference will focus on whatindustry players need to do to take advantageof the market’s growth potential. It will asusual include the release of Ernst & Young’s2012 edition of the World Takaful Report.

Contact: Andrew ChopraTel: +9714 343 1200Email: [email protected]

25–26: MEFTEC, Dubai

This year the event will take place in Dubai.Traditionally, this major technology showtook place in Bahrain, but in 2011 it had tomove date and location at the last minutedue to civil unrest in Bahrain. After one yearin Abu Dhabi, it has elected to stage thisyear’s show at Dubai’s InternationalConference and Exhibition Centre.Admission to the conference, exhibition andnetworking events is via MEFTEC’s HostedDelegate Programme.

Contact: Syed Faisal AbbasTel: +973 1721 5665Email: [email protected]

Diary of Events endorsed by the IIBI


NEWHORIZON Safar-Rabi al Thani 1433 APPOINTMENTS

Kuwait Finance House (KFH) has recentlymade new appointments in Malaysia andBahrain. Dr Nabeel Al-Mannae has beenappointed as the independent non-executivechairman and director of KFH Malaysia. Anexperienced economist and banker withover 20 years in the financial industry, DrNabeel will play a pivotal role as the newchairman of the first foreign Islamic bank inMalaysia. Dr Nabeel joined KFH Kuwait asVice Chairman on 16 March 2011. He isalso the Chairman and Managing Directorof the Hayat Investment Company. Prior tojoining KFH Kuwait, Dr Nabeel served atthe Central Bank of Kuwait in a career thatspanned 21 years, during which he heldnumerous key positions, including DeputyGovernor for a period of 10 years.

MazarRashed Jalalhas beenappointed asHead ofComplianceand MoneyLaunderingReportingOfficer atKFHBahrain. Hepreviously

held a similar position at InternationalInvestment Bank.

Saudi Re has strengthened its executivemanagement team with the appointment ofAndreas Bollmann as Chief UnderwritingOfficer. Andreas brings to Saudi Re adiverse experience of more than 12 years inglobal reinsurance. Prior to joining SaudiRe, Andreas was formerly the Head of SwissRe’s Korea branch and also headed thePublic Sector Business Development Team(Asia) for Swiss Re. In his new capacity asChief Underwriting Officer for Saudi Re,Bollmann’s primary role will be leading theunderwriting function and developing SaudiRe’s client-focused approach.

Standard Chartered Bank announced thatSheikha Hanadi Nasser Bin Khaled AlThani has been appointed as a SpecialAdviser to the bank and a member of thebank’s Gulf Advisory Council (GAC). In herrole on the GAC, Sheikha Hanadi willsupport V Shankar, CEO, Europe, MiddleEast, Africa and Americas, and ChristosPapadopoulos, Regional CEO, Middle East.The GAC is a strategic advisory forum onthe business, economic and politicalenvironment in the Middle East, providinginsights that help the bank build lastingrelationships with communities andbusinesses and which aims to be positiveforce in driving continued growth within theregion.

V Shankar said of the appointment, ‘We aredelighted that Sheikha Hanadi has agreed tojoin the bank as special adviser. SheikhaHanadi is well known for her significantcontribution in developing Qatar’s economicand social presence in the Arab world. Herexperience and visionary leadership willhelp deepen our commitment to building asustainable business as a bank in theregion.’

Sheikha Hanadi is the Founder &Chairperson of Amwal, CEO of AL WaabCity Real Estate development project andDeputy CEO of Nasser Bin Khaled ALThani & Sons Group.

Daud VicaryAbdullah,formerGlobalHead ofIslamicFinance atDeloitte,took over asthe newPresidentand ChiefExecutiveOfficer of

the International Centre for Education inIslamic Finance (INCEIF), the internationalIslamic finance university on 1 August2011. He succeeds Agil Natt who retired on 31 July 2011 and who headed INCEIFsince its establishment in 2005 to offer postgraduate Islamic Financeprogrammes, namely the Chartered Islamic Finance Professional (CIFP),Masters in Islamic Finance and PhD inIslamic Finance.

Simmons & Simmons has announced thatAhmed Butt has joined their Middle Eastfinancial markets practice as Of Counsel tofocus primarily on the Saudi Arabianmarket. Ahmed joins from Hogan Lovells’Dubai office where he was a foundingmember of the Islamic finance team. He haspreviously worked for international lawfirms in London and Dubai, as well asspending a period on secondment withStandard Chartered Bank as legal counsel.He has extensive experience in advising leadbank arrangers on complex structuredsyndicated financings with cross-bordersecurity, primarily specialising inShari’ah-compliant syndications in theMiddle East, Turkey, Central Asia andSouth East Asia. The move represents thelatest step in Simmons & Simmons’ SaudiArabian initiative following the formationof their alliance with Hammad, Al Mehdar& Co in early 2011.

On the Move

Mazar Rashed Jalal

Daud Vicary Abdullah Ahmed Butt


Oracle have announced anupdate for its Basel IIapplication that provides open,quick, out-of-the-boxcompliance with Basel IIguidelines in multiplejurisdictions, while enablingstrategic decision making andcapital planning with theextensibility to meet futureregulatory requirements.

With this new release, OracleFinancial Services Basel II nowsupports the capital adequacycompliance requirements forIslamic banking products basedon Shari’ah law. The IslamicFinancial Services Board (IFSB)provides guidance on how toapply Basel II regulations forbanks offering Islamic bankingproducts.

Oracle claim that using OracleFinancial Services Basel II,Islamic banks and financialservices institutions offeringIslamic banking products canfacilitate compliance with IFSBguidelines and standardise theirapproach to identifying andmeasuring risk-based capitalunder Basel II.

The easy-to-deploy applicationfully covers the IFSB regulationson computation and disclosure.Fully transparent and auditable,Oracle Financial Services BaselII eases supervisory review.

Oracle Financial Services BaselII enables regulatory capitalcomputation at granular andaggregated levels and the newattribution analysis capabilityprovides an in-depth

understanding of cross-timechanges in risk weighted assets(RWA) and capital adequacyratios (CAR).

With Oracle Financial ServicesBasel II, banks can simultaneouslyapply different capital adequacyapproaches against differentportfolios enabling institutionsto carry out impact analysis ofalternate options/approachesavailable to them underjurisdiction-specific guidelines.This allows for the selection ofthe best set of options/approaches for their specificcapital adequacy strategies.

Oracle Financial Services BaselII is fully engineered to workwith existing Oracle FinancialServices Analytical Applicationsand integrates easily with other

third-party solutions, enablingcustomers to further leveragetheir current IT investments.

‘As Islamic banking operationsscale and expand into newgeographies, there is an urgentneed to reconcile their approachto risk and capital adequacywith Basel and other globalregulatory standards,’ said S.Ramakrishnan, group vicepresident and general manager,Oracle Financial ServicesAnalytical Applications. ‘Oraclesupports the emerging analyticalrequirements of Islamic bankinginstitutions with easy-to-deployand comprehensive solutions,such as the newest release ofOracle Financial Services BaselII, which facilitates compliancewith IFSB capital adequacyguidelines and Basel II.’

NEWHORIZON January–March 2012TECHNOLOGY NEWS

Oracle Updates Its Basel II Application

Muslim Commercial Bank Select IBMand Misys to Streamline OperationsIBM and IBM Business PartnerMisys have been selected by theKarachi-based MuslimCommercial Bank (MCB)Limited, one of the largestprivate banks in Pakistan, toautomate the bank’s treasuryoperations. It is claimed that theproject will improve efficienciesand help the bank to complywith new regulations from theState Bank of Pakistan. IBM willprovide implementation servicesalongside business partner,Misys, to deploy Misys Opics

Plus, which will standardisefinancial mechanisms andminimise complexity, helping tosustain MCB Bank’s position asone of the leading banks in theregion.

The new solution will integratebank’s financial instruments anddepartments, improving thetransparency and accountabilityof financial management andsupporting decision making andgovernance. The bank’s clientswill get a single point of access

to a diverse set of services. Theproject is part of bank’s effortsto streamline their existingoperations in line with the newregulations aiming at revampingand integrating financial servicesby making collection and creditoperations much more efficient.

MCB has more than 1,100branches in Pakistan andgrowing. In an effort to driveefficiency and enhanceoperational speed and flexibility,IBM will provide MCB Bank a

centralised approach to systemsand operations enabling thebank to meet the variouschallenges of complex capitalmarkets and prepare for futuregrowth. IBM will provideimplementation, projectmanagement and testing andtraining services along with theMisys Opics Plus treasury andcapital markets solution.

Misys Opics Plus runs on the.NET service-orientedarchitecture (SOA) platform


NEWHORIZON Safar-Rabi al Thani 1433 TECHNOLOGY NEWS

designed to deliver the ability tocustomise and scale solutions tosuit customer requirements. Italso allows financial institutionsto manage risk more effectively,consolidate systems, reducecosts and get back to thebusiness of serving the evolvingneeds of their clients.

‘Innovation is what has helpedMCB become one of the leadingbanks in the region,’ saidMohamad Ramzan, Head ofTreasury & Foreign Exchange atMCB Bank. ‘IBM’s services andthe deployment of Misys OpicsPlus will enable us to take newproducts to the market faster,while meeting central bankregulatory requirements.’

Once it is completed, the MCBfinance system will play animportant role in providing

faster and higher-qualityfinancial services that benefitindividual citizens as well as theeconomy. Through its design itcan have an important impacton the growth rate andallocation of resources in thelocal economy.

‘The application of smartersolutions has a key role to playin the transformation ofbanking around the world,’ saidFarhan Ashfaq, FinancialServices Sector Leader at IBMPakistan. ‘In countries likePakistan where companies arestill building theirinfrastructures, banks have anopportunity to implementsystems that increase theefficiency, stability andmanageability of theirorganisations and help managerisks, allowing them to leapfrog

the competition and win newcustomers.’

‘Now more than ever, banksrequire a comprehensivetechnology to handle theintricate requirements of theglobal marketplace,’ said MichelDaenen, Sales Director for theCapital Markets Business inMiddle East and Africa atMisys. ‘The flexible architecture

of Misys Opics Plus ensuresrapid pricing and riskcalculations, allowing users tomanage high volume andcomplex financial instrumentsmore effectively. This, in turn,means banks need fewer systemsand less manual processing,enabling them to take newproducts to market much morequickly and more efficiently.’

The City of Karachi

Ahlibank Select iMalAhlibank, one of the Sultanateof Oman’s most importantcommercial banks, announcedthat it has entered into anagreement with Path Solutions,to deliver and implement theIslamic Core banking system,iMAL, for the operations of thebank’s proposed Islamic bankingfunctions, which are set to comeonline sometime towards theend of the first quarter of 2012.The system will be deployed atthe bank’s headquarters inMuscat and across its proposednetwork of Islamic bankingbranches. The announcementcoincided with Path Solutionsparticipation in the first OmanIslamic Economic Forum.

‘We are very pleased to forge thepartnership with Ahlibank’, said

Mohammed Kateeb, PathSolutions’ Group Chairman &CEO. ‘Path Solutions offersfocused services frominstallation and implementationthrough to project managementand help-desk. Besides, theadvanced architecture of iMALwill allow Ahlibank to expandeasily, to keep on innovatingand quickly launch new Islamicbanking products, thusguaranteeing superior customerexperience. We look forward toachieving mission success forAhlibank’.

Ahlibank S.A.O.G., erstwhileAlliance Housing Bank, was bornwith its new identity on January5, 2008, following its strategicpartnership with Ahli UnitedBank (AUB), a leading regional

commercial bank andInternational FinanceCorporation (IFC), a member ofthe World Bank Group. Ahlibankhas since successfully embarkedupon the route of establishingitself as a full-fledged Omanicommercial bank.

Following the royal decreeissued in early May 2011 inOman paving the way for theauthorisation of the country’sfirst standalone Islamic bankand for other interested banksto set up dedicated Islamicbanking windows and thesubsequent landmark circularBM 1081 issued by the CentralBank of Oman (CBO) on June15 2011 allowing conventionalbanks to operate their Islamicbanking business through a

‘window’ operation, Ahlibankapplied for a CBO license.

‘We know there is incredibledemand in the market forShari’ah-compliant products.This initiative marks a dynamicmove into cutting-edgetechnologies that Ahlibankexpects to use as a platform tothrive and outperformcompetition’, commentedAbdulaziz Al Balushi, CEO,Ahlibank. ‘We are confidentthat with Path Solutions’knowledge of our business,proven methodology andteamwork approach, we will beable to capitalise on strong,continued growth in the sector,achieve higher returns andgreater customer satisfaction,alongside cost saving’.


NEWHORIZON January–March 2012GLOSSARY

An Islamic version of option, a deposit for the delivery ofa specified quantity of a commodity on a predetermineddate.

This refers to the selling of an asset by the bank to thecustomer on a deferred payments basis, then buying backthe asset at a lower price, and paying the customer incash terms.

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

Islamic jurisprudence. This is an important source ofIslamic economics.

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

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

Activities which are permissible according to Shari’ah.

Activities which are prohibited according to Shari’ah.

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

A sukuk having ijara as an underlying structure.

The same as ijara except the business owner iscommitted to buying the building or equipment orfacility at the end of the lease period. Fees previouslypaid constitute part of the purchase price. It is commonly used for home and commercial equipmentfinancing.

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

Gambling – a prohibited activity, as it is a zero-sumgame just transferring the wealth not creating newwealth.

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

In a mudarabah contract, the person or party who actsas entrepreneur.

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

musharakahAn agreement under which the Islamic bank providesfunds which are mingled with the funds of the businessenterprise and others. All providers of capital are entitledto participate in the management but not necessarilyrequired to do so. The profit is distributed among thepartners in predetermined ratios, while the loss is borneby each partner in proportion to his contribution.

An agreement which allows equity participation andsharing of profit on a pro rata basis, but also provides a method through which the bank keeps on reducing its equity in the project and ultimately transfers theownership of the asset to the participants.

An interest-free loan given for either welfare purposes or for fulfilling short-term funding requirements. Theborrower is only obligated to pay back the principalamount of the loan.

In a mudarabah contract the person who invests thecapital.

Reinsurance based on Islamic principles. It is amechanism used by direct insurance companies toprotect their retained business by achieving geographicspread and obtaining protection, above certain thresholdvalues, from larger, specialist reinsurance companies andpools.

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

Salam means a contract in which advance payment ismade for goods to be delivered later on.

Refers to the laws contained in or derived from theQuran and the Sunnah (practice and traditions of theProphet Muhammad (PBUH).

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

A contract between two or more persons who launch a business or financial enterprise to make profit.

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

A principle of mutual assistance.

A donation covenant in which the participants agree to mutually help each other by contributingfinancially.

A form of Islamic insurance based on the Quranicprinciple of mutual assistance (ta’awuni). It providesmutual protection of assets and property and offers joint risk sharing in the event of a loss by one of itsmembers.

A sale of a commodity to the customer by a bank ondeferred payment at cost plus profit. The customer thensells the commodities to a third party on a spot basis and gets instant cash.

The diaspora or ‘Community of the Believers’ (ummatal-mu’minin), the world-wide community of Muslims.

A promise to buy or sell certain goods in a certainquantity at a certain time in future at a certain price. It is not a legally binding agreement.

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

An appropriation or tying-up of a property in perpetuityso that no propriety rights can be exercised over theusufruct. The waqf property can neither be sold norinherited nor donated to anyone.

An obligation on Muslims to pay a prescribed percentageof their wealth to specified categories in their society,when their wealth exceeds a certain limit. Zakat purifieswealth. The objective is to take away a part of thewealth of the well-to-do and to distribute it among the poor and the needy.


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