An informal interactive session was arranged by Habib Bank Limited (HBL) Islamic Banking on 11th December 2010 in Karachi. The overall theme was to discuss the issues and challenges that are being faced by Islamic banking, finance and insurance industry. The event was hosted by Mr. Mohammad Aslam - Head HBL, Islamic Banking (IB). A significant number of Islamic finance professionals graced this occasion with their presence and presented their views on various aspects of Islamic banking, finance and insurance, highlighting the areas that need improvement and gave suggestions for the same.

According to Mr. Mohammad Aslam, the growth of Islamic banking is limited as big players have not actively played their part in promoting the local industry. He floated the idea that a representation may be made to the right forum to reduce the corporate income tax rate for Islamic banking and IBDs of CBBs by 10% as this will indirectly stimulate growth of Islamic finance in Pakistan. Majority was of the view that there should be some form of incentive e.g. tax incentive to boost the industry. Another suggestion with respect to the tax rate was given by Mr. Pervez Said - CEO, Dawood Islamic Bank whereby increasing tax rate for conventional banks was advised, keeping in view the Govt’s psyche, as it will indirectly benefit the Islamic banks/IBDs.

Another view on the subject of tax was presented by Mr. Omar Mustafa Ansari - Partner, Ernst & Young. He said that people may exploit the field if tax benefits are provided and this will also hinder improvements in Islamic banking as every market player will be willing to get the tax benefit. He also emphasized the need of strengthening the Shariah compliance mechanism.

An argument against tax differential between Islamic and conventional banks was given by Mr. Fouad Farrukh - Head, Faysal Bank IB, as he considered it to be an economic

principle that protected industries/imperfect markets, leading to inefficient utilization of resources.

Mufti Irshad Ahmed Ijaz- Shariah Advisor, Bank Islami provided example of the attitude of the sales / front desk staff which is causing hindrance in the growth of Islamic finance, in the right manner. The observation was supported by Mufti Najeeb Khan - Shariah Advisor, HMB IB, by stressing on the need of proper training and development of Islamic banking staff. He also said that the Islamic banks should increase their outreach by

p r o v i d i n g i t s p r o d u c t s a n d services in different parts of the country as the market is still largely untapped. Mufti Ehsan Waquar

- Shariah Advisor, UBL IB, emphasized on overseeing the legal vetting of the contracts used in Islamic banking. Formation of an Association of Islamic banks was suggested by Mr. P. Ahmed - CEO, Pak-Qatar Family Takaful. He suggested that the matter should be referred to PBA subcommittee on Islamic banking, which was agreed upon by all participants.

Other prominent participants at the occassion included Mr. Ahmed Shuja Kidwai (Bank Albaraka), Mr. Aziz Adil (Bank Alfalah IB), Dr. Bhakht Jamal Sheikh (CEO, Dawood Takaful), Mr. Faisal Sheikh (Bankislami), Mr. Imtiaz Bhatti (Pak Kuwait Takaful), Mufti Ibrahim Essa (E&Y), Mufti Khalil Azmi (Bank Alfalah-IB), Mr. Muhammad Idrees (Soneri Bank), Nadym Ahmed Chandna (Pak-Qatar Family Takaful), Nusrat Ullah Khan (UBL IB) and Shariah Advisors and executives from HBL Islamic Banking Division such as Mr. Rafiq A. Khan, Mr. Faizan Ahmed Memon, Mr. Sheeraz Ali Sabri, Mr. Amir Mansoor, Mr. Jehanzeb Saeed and Mr. Muhammad Yahya Asim and Dr. Ejaz Samdani.

The event concluded with a dinner. *****

“These are the limits (imposed

by) Allah. Who so obeyeth Allah and His messenger, He will make him enter Gardens

underneath which rivers flow, where such will dwell forever.

That will be the great success. ”

(Surah Nisa, Ayat 13)

VOLUME 2 ISSUE 1 | JANUARY 2011

Gathering of

Islamic finance professionals in Karachi

ISLAMIC FINANCE PAKISTAN The Islamic Finance Industry Newsletter

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Editor’s Message

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Islamic banking - Is it really Islamic? By Omar Mustafa Ansari and Faizan Ahmed Memon

Local and International News Get a glimpse of what has been happening in the world of Islamic finance

In the Spotlight Meet Zulfiqar Ali Khan and find our read of the month.

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Majority was of the view that there should be some form of incentive e.g. tax incentive to boost the industry.

importance of Shariah audit

Page # 2 An initiative of Publicitas (Pvt.) Ltd.

Editor’s Message Advisory Board

• Mufti Irshad Ahmed Aijaz

• Mufti Najeeb Khan

• Anwar Ahmed Meenai

• Mohammad Aslam

• Mujeeb Beig

• Nusratullah Khan

Advisory Board

Editor-in-Chief

Associate Editors

• Syed Shahjahan Salahuddin

• Arshad Hussain Zubairi

• Bisma Salahuddin

Let us know, if you know friends or colleagues who, in your view, may benefit from this newsletter. Send us their email addresses at ifp@publicitas.com.pk

Dear Readers! Assalam o Alaikum The raison d’être’ of Islamic Banking has been the desire on the part of Muslim masses to conduct their economic and financial affairs in accordance with the precepts of Islamic Shariah. Shariah scholars/board provides legitimacy to Islamic banks, though scholars are non-executive and as such not responsible for commercial performance of the business. Scholars provide critical support to IFIs in the development of new products. Standardization is the watchword for the industry. To sustain the momentum and gain the confidence of the masses that the newly introduced system is different from the conventional banking in vogue, it is imperative that there be an independent mechanism and set up of Shariah Audit, internal as well as external, to vouch the bona fide of the new system. This aspect cannot be left to the Shariah scholars for two reasons. Firstly, they have not been trained in this area which requires specialized skills and mindset. Secondly, there is a conflict of interest in that Shariah scholars are already involved in the approval of transaction structures and documentation. That their approvals are being implemented in the right earnest is something which independent Shariah Audit, by competent professionals alone can ensure. IFIs must appreciate that adherence to international best practices, which includes audit by external agencies, qualified to do the job, will enhance their reputation and help them gain respect of their customers as well as Regulators. Lately I was invited to attend a certificate distribution ceremony at Al-Muneeb Shariah Accademy where the chief guest Mr Pervez Said had very elaborately and clearly given an analogy on the importance of training our Shariah scholars and veteran bankers simultaneously. In house training indeed possesses importance of its existence but external training gives out-of-the-box perspective and generates better solutions to existing challenges.

Happy reading! Syed Shahjahan Salahuddin

Issues in development of Islamic finance Although Islamic finance has gained rapid popularity thanks to abundant Sukuk issuance, but it is facing the challenge of distinguishing the Islamic from the non-Islamic transaction. Bahrain based AAOIFI has played a significant role in providing Shariah standards for a large number of contracts based on the principles of the Shariah. But most of the IFIs have not adopted the AAOIFI’s Shariah standards. The practices like Ba‘i al ‘Inah (sale and buy-back transaction of an asset by a seller), organized Tawarruq (getting liquidity by way of purchasing a

commodity on credit and selling it forthwith to any third party as a pre-agreed arrangement) and Sukuk with repurchase agreements have made Islamic finance almost similar to the conventional finance. Even in Mudarabah and Musharakah based Sukuk, the issuers make an upfront promise to pay back Sukuks’ face value at maturity. Even though, the Islamic Fiqh Academy issued, in April 2009 a decree outlawing organized Tawarruq as a "deception”; but still IFIs continue to use Tawarruq based products causing more doubts to the emerging system. Islamic banks should have availed the opportunity! When the conventional banking collapsed, Islamic banking industry should have not only escaped unharmed, it should also have availed the opportunity of developing into the mainstream system with a new paradigm; but, it failed to take advantage of the opportunity because Islamic banks also adopted the same

products with some minor legal amendments – its instruments and the products are not really distinguishable from those of interest-based institutions. Re-purchase promises in most of the

Sukuk and Tawarruq based $100 billion commodity Murabaha market have almost diluted any difference between the two systems in operation. So much so that, w h i l e s o m e I s l a m i c i nv e s t me nt ma na g e r s attempt to develop ‘Sharia-

compliant’, short-selling techniques, several Western authorities are banning the practice, on account of the instability that it causes. As a result, even the pious Muslims who had been the supporters of any move for Shariah based system of finance have been expressing concerns about the Islamic banks’ products. Following are some of their concerns: • “Islamic banking” as in vogue does not

reflect the ethos of Islamic teachings; • Particularly, the ‘Structured products’

do not reflect spirit of the Shariah; • Strayed from the theoretical foundation:

joint-risk and reward sharing; • Seeking to strike a deal with the

conventional institutions, particularly to enter the derivatives market - separating risk from real economic activities and making it traded separately;

• Shariah conditions not being faithfully observed – Hiyal have been adopted;

• Tawarruq - originally a solution to

Volume 2 Issue 1 | JANUARY 2011

(…...continued from the previous issue ) Reward coincides with the risk In Islamic finance, the business risk can be managed, but not eliminated from economic activities. The classical maxim, “gain is justified by taking liability of loss” serves as the basis of Islamic finance and implies that risk cannot be separated from the ownership – the owner of an asset has both risk and reward of that asset. Similarly, Islamic finance has the provision of forward trading with strict conditions of delivery and settlement to ensure that risks and liabilities pertaining to an asset are properly assumed by the owner. It is particularly relevant in the case of Forex b u s i n e s s w h e r e t h e requirements of Bai´ al sarf (trading in monetary units and currencies) have to be observed. Delivery of the Salam goods has to be made irrespective of the upward or downward movement of the price. It implies that forward trading can be used only for promoting real productive and exchange purposes. The modern derivatives like options, futures and swaps, on the other hand, do not even have a valid subject matter. Obviously against the above principles, the conventional investment products and particularly the ‘derivatives’, separate risk from real economic activities and make it traded separately. Risk is treated as a commodity that becomes a basis for financial engineering without any valid assets and compounded derivatives are derived based on market indices and volatilities, where no ownership of any sort exists. It ultimately multiplies the risk in the economy and only the speculators are better off while real economic agents like producers and consumers, individuals as well as economies, are worse off – they are better off if risk is minimized. Hence, the artificial risks distort real economic activities with negative impact on real investment opportunities.

Some Islamic investment managers attempt to develop ‘Sharia-compliant’, short-selling techniques which several Western authorities are banning on account of the instability that it causes

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Islamic finance must return to the roots! By Muhammad Ayub

incomes for socio-economic benefit of the mankind as a whole. The solution lies in

disciplining the creation of money, limiting the self-interest with social interest and the business ethics, and transforming the corrupt financial system to make it free of exploitation and games of chance and thus enabling the mankind to optimally use the resources for benefits at the larger scale. Islamic finance provides a solid basis for these reformatory measures; it is up to the human beings how to realize the potential. The global crisis and the recent Sukuk

related defaults in many parts of the world, particularly the Sukuk problem of Dubai, have made it sufficiently clear that Islamic finance must return to its roots and avoid imitating the practices of conventional banking if it is to avoid the same fate as faced by the capitalistic system. They must move from Tawarruq to Mudaraba and

from Bai’ al Dayn-based to equity and Ijara-based Sukuk ensuring the adherence to the Shariah essentials of all underlying contracts. If projected properly, Islamic finance would have appeal for followers of all the religions. By introducing it as religious as well as ethical banking in all societies of the world, Islamic finance can become an engine of economic growth by mobilizing savings from so far untapped groups of people and channeling them to healthy and real assets based investments. Prohibition of Riba in all revealed religions could be instrumental in enhancing this appeal. Also, Islamic modes of business and investment have the possibility of being used as an efficient alternative to interest based deficit financing along with added benefit of disciplining the fiscal behavior of the sovereigns. In that case, each economy would be able to get real benchmarks for pricing of goods, their usufruct and the services, both in cash and credit markets, representing the real demand/supply

provide monetary funding in crunch has become the predominant instrument for investment and liquidity management;

• "Shariah Conversion Technology” coined to allow the total return swaps (TRS)

• LIBOR and other such benchmarks used as a determinant of interest on non-Shariah compliant assets, not only as a pricing tool.

There are concerns about the nature and extent of supervision by the Shariah experts / advisors. Shariah committees of individual institutions provide relaxations, but when the practitioners make exploitative use of such relaxations, Fatawa are followed by retraction / criticism. The most prominent example of such criticism is that of Sukuk, each of which was allowed by the Shariah scholars, but afterwards it was said that most of the Sukuk did not comply with Islamic principles. There have been some general and macro-economic problems as well, some of which were not in control of any individual Islamic financial institutions. These problems were: • Excessive money and credit

creation by banks (lending) and the States (borrowing);

• Banking and finance only a part of economics and socio-political economy;

• Lack of coordinated work by the economists for finding the real benchmarks / reference rates;

• Lack of Shariah scholars’ – the opinion makers - familiarity with the tools and instruments of modern finance;

• Lacking human resources with Shariah inspiration and professional expertise

During the recent years, a significant change has been the increase in use of Commodity Murabaha as a financing device - Tawarruq by way of Murabaha in metals that is reluctantly accepted by some Shariah scholars. May be that the transaction in such Murabaha is Shariah-compliant in form, but actually it is unrelated to the substance of the commodity: the commodity is a vehicle to facilitate the transaction, not its object. The IFIs are not allowed exposure to CDOs, derivative products and the kind of intra-financial counterparty risk that crippled the conventional system. However, many IFIs mimicked the conventional product of ‘total return

swaps’ to deliver ‘Shariah compliant’ returns from non-compliant investments. The ‘conversion technique’ is being adopted to use non-compliant assets to bring returns into a so-called Shariah—compliant investment. Shariah requires that underlying assets of any contract must be Halal and any return must be subject to fulfillment of rules of the relevant contracts. Hence, the Islamic finance system, as in vogue at present, is not fully prepared to play a significant role in ensuring the health and stability of the national and global financial systems. The world is looking for fairer values that we cannot find in the current so-called market based capitalistic system. The economists and the policy makers have to draw up the system based on ethical principles of risk and profit sharing. Only that is the way to salvation by dint of which we can lead the humankind to happiness, security, justice and prosperity.

The system needs radical change in the approach, principles and operation of economic and financial systems. Creation of money, and lending it on interest – interest based debts and financial obligations leading to undue receivables for the lenders, is the biggest and primary problem of the conventional system. Islamic finance must try to avoid doing the same before the process becomes irreversible. Islamic finance principles have the potential Islamic theory of finance has potential in terms of its principles and instruments that allow the minimum possible loop-holes. Enhanced supply of risk-related permanent and redeemable capital, restricted risk taking, balanced return rate structure based on the real assets backed economic activities, and supply of money commensurate with prospects of growth in an economy, provide a sound basis for sustainable development and evenly shared

Page # 4 An initiative of Publicitas (Pvt.) Ltd.

Islamic finance must return to its roots and avoid imitating the practices of conventional banking if it is to avoid the same fate as faced by the capitalistic system

Changing the approach of the practitioners that all banking products should have Shariah based alternatives is a big challenge; they have to understand that ensuring the real difference between the two systems is the main key to stable and long-term growth of the new system. The economists have to make joint efforts for developing benchmark based on real performance of the economy and that would be possible by linking the money and credit expansion to the growth of real economy. There is a need for a global move in this regard. Efforts also need to be strengthened to enhance supply of well

educated and trained human resources having Shariah inspiration and confidence to operate the system as per its requirement. The standards setting, including Shariah, risk

management, regulatory, accounting and market standards, constitutes a big challenge for the emerging industry. This standardization must be based on the cardinal principles of Shariah that have been better taken care of by the AAOIFI Standards. But unfortunately, the practitioners who are using the dubious structures like that of Ba‘i al Inah and Tawarruq and are operating ‘Islamic’ hedge funds based on options and derivatives do not really feel any need for standardization. Conclusion

scenario and the strength of the economy. Obtaining a benchmark for Shariah compliant securities in present situation is almost impossible. The economists and the policy makers are, therefore, required to come out of the syndrome of allowing creation of monetary assets without any meaningful limit on the one hand and allowing a fixed rent on such assets on the other; and be encouraged to adopt the real economic activity based regimes that allow ex-post profit or loss sharing as also fixed or quasi-fixed return through pricing of real goods, assets or their usufruct. It would require some bold

measures that of course are not novel, as these are being taken in many economies in various parts of the world. The conventional financial system has developed through a prolonged and continuous process moving away from the gold to the electronic medium of exchange. Putting it on the right track would require a lot of work and sacrifice by the present generation for bright and safe future of the mankind. Challenges in achieving the objective

Q: If insurance is prohibited in Islam, how do Islamic banks get their assets insured?

A: Indeed the conventional insurance is not allowed in Shariah because it is based on interest, Qimar and Gharar which are impermissible in Shariah. Therefore it is not allowed for Islamic banks to get their asset(s) insured under conventional insurance. However, the Islamic banks can get their assets covered under the contract of Takaful which is the Islamic alternative of conventional insurance.

Before the start of Takaful operation in Pakistan, Islamic banks were entering into the insurance contracts with conventional insurance companies for the coverage of their assets. This practice was allowed by most of the Shariah scholars on the basis of Iztirar (اضطرار) and Hajah (حاجة). The reason being that no bank was allowed to lease its assets without acquiring insurance coverage as per the Banking regulation, therefore for the fulfillment of this regulation, Islamic banks were allowed to acquire insurance coverage, but on the condition that they should move towards Takaful eventually and they should not get the claims more than their premiums paid to that insurance company.

Now the Takaful companies have started their operations in Pakistan, hence Islamic banks are obliged to depend only on Takaful companies for the insurance coverage of their assets. However, if all the Takaful companies available in the country deny protecting any product/asset under the concept of Takaful, then for the time being insurance coverage is permitted only for that product/asset.

ASK US!

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Volume 2 Issue 1 | JANUARY 2011

Islamic banking conducted in accordance with the Shariah precepts is in position to play crucial role interrelating finance, economy, community and society enabling the world to avoid crises in future. For this, Islamic banks and financial institutions must turn to the roots, to carry out their operations according to the fundamental principles of Islamic economics and finance and also play a role in socioeconomic development by combining the goals of efficiency and social justice. They must be ready to take business risks and expand their role in the real sector rather than just provide credit. The current trend may not help in achieving the objective. But, it is not due to any weakness in the philosophy and theory of Islamic finance. For such a model of socioeconomic development they will have to design different financial structures than what they are presently following in effort to compete with conventional system for ‘profit maximization’. The universities and business schools may come forward to educate Shariah scholars enabling them to understand the principles properly and guide the banking industry and the public. AAOIFI’s Standards must be applied for all banks and relevant areas. Regulators need to ensure that the bankers deal with investors justly and the financiers bear the risk of default by prohibiting the sale of debt, thereby ensuring that he / she evaluates risk more carefully. *****

Ensuring the real difference between the two systems is the main key to the stable and long-term growth of the new system

a difference of Takaful / insurance cost which in Islamic mode is to be borne by the lessor and accordingly, the same is built-in the rentals. The basic r e a s o n behind this similarity is to ensure t h r e e objectives . The first one, which is m o r e i m p o r t a n t one, is to provide an “even playing ground” to the IFIs in order to ensure their survival in the overall banking system. The second one, is that even by IFIs, it has to be ensured that their shareholders and depositors get some return and preferably a return equivalent to those of conventional banks. And the third reason is to avoid arbitrage amongst Islamic and conventional financial systems which may be exploited by a few big-guns to get the benefit of pricing difference between the two parallel financial systems. For such reason, time value of money concept is used for performance measurement and pricing of financial products. Most importantly, it should be kept in

mind that in some areas Haram and Halal have a v e r y t h i n difference. For example, only

saying the name of Allah Almighty on an animal at the time of slaughter makes it Halal and permissible while by not saying that name we make it Haram or by just a few words of acceptance in Nikah, in presence of a few persons, a man and woman become Halal for each other. Similarly, if a transaction can be engineered in a way that the same becomes Shariah compliant, then we should not conclude that it is Haram only due to its resemblance with interest based financing.

(…...continued from the previous issue )

Merely change in name and documents The most common and most discussed argument against contemporary Islamic banking is that there is “NO DIFFERENCE AT ALL” between the conventional banking and Islamic banking and this is merely a change of name and documents. The second argument, which is in-fact a derivative of the first argument, is that even in Islamic banking, the most common products being used e.g. Murabaha, Musawwama, Salam, Istisna, Diminishing Musharaka and Ijara Muntahia Bittamleek are on fixed return basis. Even the Musharaka and Modaraba based products are engineered in a way that the profits are “virtually-fixed”. One should realize the fact that unless we can distinguish an Islamic bank from a conventional bank, it would be difficult for any of us to rely on the same. Particularly, it is observed that they try to make sure that their product is similar to the conventional product in all respects, even if they have to incorporate a few provisions in it which are not considered to be good or a few of them are considered Makrooh. In addition, their endeavors are focused towards

minimization of their risk through every possible option and accordingly, the essence of Islamic finance which is based on risk taking is killed. We can note that most IFIs market their products on the models very much similar to those used by conventional banks. As an example, an Ijara Muntahia Bittamleek transaction introduced by an IFI might be very similar to a finance lease transaction offered by a conventional leasing company, except for

Page # 6 An initiative of Publicitas (Pvt.) Ltd.

Islamic banking: Is it really “Islamic”? By Omar Mustafa Ansari & Faizan Ahmed Memon

It is also pertinent to note that since the Islamic financial services sector is in its infancy phase, as compared to the conventional banking, we unfortunately

have to follow the conventional system in the pattern of financial products and are still not in a position to invent absolutely new financial services. During the last few centuries, the conventional banking system has well read the human needs and psychology and has

invented a considerable number of financial products and accordingly, it is not simple to just invent a new financial tool just for the purpose of inventing one. For example, if they have running finance and overdraft as a financing tool, we have invented an alternate to the same in form of Istijrar with Murabaha or Musharaka based running finance model. Similarly, if they use finance leases as a financing tool, we have converted the same in a Shariah compliant form in the form of Ijara Muntahia Bittamleek or in the form of Diminishing Musharaka. These are only two examples, but the tally is practically

It is observed that Islamic banks try to make sure that their product is similar to the conventional products in all respects, even if for that purpose they have to incorporate a few provisions in these products which are not considered to be good or a few of them are considered Makrooh

Unless we can distinguish an Islamic bank from a conventional bank, it would be difficult for any of us to rely on the same

very high and for each interest based financial product except for those explicitly Haram, more than one alternates have been engineered. The objective of this discussion was just to emphasize that merely an amortization schedule similar to the one offered by a conventional bank, is not a basis for declaring a Halal product to be Haram. If just a pricing model or just the similarity of a cash-flow model makes the transaction Haram, what will you say

about a conventional loan offered at a price much higher or much lower than the market prevailing rates for which the pricing model and the cash-flow model are not similar to those generally applied in the industry. Does anybody think that such dissimilarity will make it Halal? Accordingly, from Shariah principles it is rightly concluded that it is the substance of a transaction that makes it Halal or Haram and not a pricing model used to price the

transaction or the cash-flow model used for payments and repayments in monetary terms. Socio-economic effects of Islamic banking and finance Second most significant argument from such group, predominantly by certain

Volume 2 Issue 1 | JANUARY 2011

Page # 7

Islamic economists and certain Islamic revolutionary movements, is about the socio-economic factors of Islamic banking. They feel that since Islamic banking is also based on profit motive and in present form, it generally works on “virtually-fixed” return basis; hence it cannot attribute anything-positive towards the socio-economic changes that Islam desires. This is a crucial question and, we believe that, every conscious Muslim will concur with the

concerns of those who raise the same, although the conclusions d e r i v e d b y different people might vary. Nobody can a r g u e t h a t

virtually-fixed return based banking, although being Shariah compliant, is not what has been desired by Islam as a complete way of living. In addition, the current-day Islamic banking is emphasizing more o n c o n s u m e r f i n a n c e a s c o m p a r e d t o financing to SME sector, agricultural

s e c t o r , a n d m o r e importantly, on the micro-finance; hence, it is not c ont r i bu t i ng e nou gh towards the “just and equitable monetary system” that Islam needs. Having due regard for these arguments, may we remind you that the Islamic economic system is not something that can work in isolation from the geo-political and legislative

system, as well as, and more importantly the society’s behavior towards the injunctions of Islamic Shariah in personal and collective matters. Accordingly, one can easily imagine that in an economy whereby most of the businessmen are not honest in fairly presenting the financial statements of their businesses, how

difficult it is to introduce a profit and loss sharing based financial solution. Similarly, in most of the cases payment of Zakat and Sadaqat depends on the individual and particularly, in view of the gigantic volume of the black economy in the country, what can be expected even if a good system for Zakat and Ushr is introduced? It needs to be emphasized that only the change in banking system is not a solution to the overall revolution of economic system unless other facets of Islamic economic system, as well as, Islamic social system are not implemented simultaneously. Accordingly, the complete transition of economy to an Islamic economic system can be performed, when and only when, the overall consensus of the society is developed towards practical application of Shariah in all the facets of human life, particularly including the governmental, political and legislative structures. Despite such an unsatisfactory and rather discouraging attitude of the society towards application of Islamic Shariah, it should be noted that such a situation does not absolve a

Muslim from the applicability of Shariah principles, but rather increases his responsibilities in the way that it becomes his duty not only to try to abide by all applicable Shariah requirements in his personal capacity but also to put his endeavors towards improvement in such system. Consequently, in case the Islamic banking, in your opinion, is not contributing enough towards betterment of society, you cannot blame this on others alone. The responsibilities of the Muslim Ummah as a whole (or of the State) can not be expected to be borne by a single sector only, which, at this point of time is in its infancy stages.

(to be continued in the next issue ……)

Nobody can argue that virtually-fixed return based banking, although being Shariah compliant, is not what has been desired by Islam as a complete way of living

Merely an amortization schedule similar to the one offered by a conventional bank, is not a basis for declaring a Halal product to be Haram

MOODY’S rate Pak banking system fragile Moody’s Investors Service has continued with its negative outlook on Pakistan’s banking system, due to its increasing

exposure to government debt and deteriorating asset quality. The heavy flooding in August 2010 resulted in precipitated deteriorating macroeconomic conditions, weakening the banks’ operating environment further.

In the times to come, higher inflation may lead to rising lending rates, which, together with the weakened economy, will challenge borrowers’ payment capacity, contributing to further asset-quality deterioration for banks.

Pakistan tops regulatory framework rating Pakistan has topped the ranking in microfinance regulatory framework category, according to the rating given by Economist

Intelligence Unit (EIU) in its report. A marked improvement in rankings is the result of the State Bank of Pakistan's proactive approach to microfinance regulations. EIU is a business information arm of the Economist Group, publisher of the world renowned magazine ‘The Economist’. The EIU Report provides annual ranking and in-depth analysis of the microfinance business environment in 54 countries.

SBP grants license for Sindh Bank The provincial government was granted license for Sindh Bank by State Bank of Pakistan in December 2010. According to

Mr. Bilal Sheikh - President of Sindh Bank, a no-objection-certificate (NOC) for setting up the bank was issued to Sindh government by the State Bank in October 2010, however the NOC was linked with compliance of the regulatory requirements, which have also been fulfilled by the bank.

According to Mr. Bilal, in the first phase, Sindh Bank would start its operations within the province and in the second phase its network would be extended to the entire country. The Sindh government has planned to open 50 branches of the bank in the country by the end of 2011, with one branch in every district of Sindh province and one each in every provincial headquarter.

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Page # 8 An initiative of Publicitas (Pvt.) Ltd.

Gathering of Islamic finance professionals Habib Bank Limited (HBL) Islamic Banking arranged an interactive session followed by a dinner for professionals of Islamic

finance industry on 11th December 2010. The theme of the event was to discuss the issues and challenges that are being faced by the industry. Various participants from Islamic banking, finance and Takaful companies graced the occasion with their presence.

For details, please refer to the cover page.

Disclaimer: The news included here is on the basis of information obtained from local and international print and electronic media sources. Publicitas (Pvt.) Ltd does not accept any responsibility about their bona - fide.

VISIT : www.publicitas.com.pk/IFP

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Volume 2 Issue 1 | JANUARY 2011

Page # 9

Sukuk Al-Salam Islamic securities oversubscribed The monthly issue of Sukuk Al Salam Islamic securities, issue by the Central Bank of Bahrain on behalf of the Government of

the Kingdom of Bahrain, was oversubscribed for December 2010. Subscriptions worth BD46.8 million were received for the BD12 million issue with a maturity of 91 days. The expected return on the issue, maturing on 30 March 2011, is 0.85%.

Ithmaar Bank, AUB sign $167m deal Bahrain-based Ithmaar Bank (IB), an Islamic retail and commercial bank, and Ahli United Bank (AUB), a full commercial

banking institution, signed a $167 million deal for five-year secured Morabaha facility. The secured Morabaha facility, Sharia-compliant Islamic finance, is fully underwritten by AUB.

IB is listed on the Bahrain and Kuwait stock exchanges and holds a full Islamic retail banking license issued by the Central bank of Bahrain while AUB is a regional banking group based in Bahrain with subsidiary and associate banks in Kuwait, Qatar, Oman, Egypt, Iraq, Libya and the UK.

Australia launches its first Islamic finance e-learning program Ethica Institute and La Trobe University launched Australia's first ever Islamic finance e-learning Program. This will be the

first time ever that a 100% online course in Islamic finance is offered as part of an on-campus course. Enrollment for the award-winning Islamic Finance Professional Development (IFPD) course is now open and online classes begin on January 15, 2011.

Ethica, the Dubai-based institute received the award nomination for "Best Islamic Finance Training Institution" in 2009 and 2010 by Islamic Business and Finance Magazine while La Trobe's Islamic Finance Professional Development (IFPD) course was recipient of the prestigious ALTC 2010 Award.

Shariah hedging derivatives start in Malaysia Standard Chartered Plc and Bank Islam Malaysia Bhd. plan to offer Shariah-compliant derivatives in Malaysia that will allow

investors to hedge against interest rates and commodity prices. Standard Chartered will begin selling contracts in the first quarter of 2011, aimed to provide protection from fluctuations in the cost of items such as rice and oil. Bank Islam Malaysia, the country’s oldest Islamic lender, will offer swaps that allow two parties to exchange different forms of payments from an underlying asset.

India launches Sharia stock index for Muslims India’s Bombay Stock Exchange launched a share index of Sharia compliant companies on Monday in an attempt to open

stock-trading to more Muslims. The BSE TASIS Sharia 50 consists of the largest and most liquid Sharia-compliant stocks within the BSE 500 index. All the companies have been vetted to ensure they comply with Islamic law, which does not allow investors to put money into firms that benefit from interest or the sale of sinful goods such as alcohol, tobacco or firearms.

Companies included in the index have been screened by Taqwaa Advisory and Shariah Investment Solutions (TASIS), an Indian Islamic finance company based in Mumbai, whose board members include Islamic scholars and legal experts.

This book written by Mufti Syed Sabir Hussain is a valuable contribution to the Urdu literature on this subject. His work deserves special praise because of the young age at which he has completed this onerous task. Further, despite his multi faceted pre occupations including full time services for an Islamic bank and a Takaful company, completion of this book is definitely a blessing from Allah and a result of the grooming provided by his parents and teachers. An overview of this book brings to light its various specialties, which distinguishes it from other books on the subject. Some of these are:

• Shariah principles related to Islamic banking and finance have been explained with the help of relevant narrations from authentic sources.

• Most of the books related to Islamic banking explain practical aspects of Islamic finance but for understanding of relevant principles of Shariah and their basis, it is a valuable guide.

• Various issues have been explained not only in the light of Holy Quran and Sunnah but also from the resolutions of OIC Fiqh Academy, Mejellatul Ahkaam and various Fatawa including those from Alamgeeri, Hidaya, Qazi Khan and Razvia. Some worth mentioning fatawa from Fatawa Razvia include use of KIBOR as

which are particularly useful not only for Islamic bankers and educational institutes conducting special classes on Islamic banking; but also for teachers, students and researchers of the subject. Some practical issues where scholars have a difference of opinion have been explained briefly which leaves room for more explanation. It is hoped that next edition of the book will explain them in more detail. Fiqh terms relevant to Shariah principles of Islamic banking and finance have been defined in this book along with some explanations. This aspect of the book is particularly useful for teachers and students of Madaris (Islamic learning institutes) trying to understand books on Islamic finance even though practical bankers may find them somewhat difficult. This book can be used as a reference guide for bankers, students and teachers since it explains Shariah regulations commonly used by Islamic banks and Takaful companies. Even though some further details related to Takaful could have been added and Takaful companies stand to benefit from a book solely written in their perspective. These are some major points which emerged from an overview of this book and a detailed review can highlight other significant aspects. Nevertheless, it can be confidently said that this book is a valuable addition to the Urdu literature related to Islamic banking and can be of great help in understanding its Shariah aspects.

benchmark, Murabaha transaction mechanism (which is wrongfully believed by some to be a concocted sale), appointment of client as agent for purchase of goods, etc.

• Moreover, Shariah principles regarding Muzara’a (Crop sharing), Musaqaat, Waqf and Hibah and their types have also been elucidated, which are normally not found in the books on Islamic banking and finance and are valuable addition and guide for Islamic bankers.

In this book a sincere effort has been made to compile Shariah principles related to Islamic banking in a concise manner,

‘Sarmaya Kaari ke Sharaii Ahkam’ (Shariah Principles of Financing)

By Mufti Syed Sabir Hussain

Review by Mahmood Shafqat

Book in the Spotlight

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Mr. Zulfiqar Ali Khan is a professional from the global Islamic finance industry. He is the Director of Islamic Banking Division, Da Afghanistan Bank (Central Bank). He did his Bachelor in Economics from IIIE, International Islamic University Islamabad, Pakistan, followed by a Master in Islamic Banking & Finance from the same university. He has also done various professional certification courses in Islamic Banking and Central Banking from BNM Malaysia, IBFIM Malayisa, Central Bank of Indonesia, NIBAF, Reserve Bank of India and Central Bank of Turkey. His current roles and responsibilities at the Central Bank of Afghanistan include determining direction of development of Islamic banking in Afghanistan, setting the high-level direction of each WG & providing final approval of the working charter, creating sound legal and Shariah infrastructure, market development and public awareness, introducing regulatory and prudential policies for development of

Mr. Zulfiqar Ali Khan

Islamic banking industry, monitoring financial conditions of Islamic financial institution to ensure compliance with laws, regulations and guidelines, promoting industry best practices and credit culture, developing Shariah policies for the industry, performing product reviews and examination of Islamic banks. He is also the Secretary to the Shariah advisory board and advisor to the industry. He chose the field of Islamic finance because his academics comprise core economics and Islamic finance discipline, and he considers Islamic finance as a system based on justice and the only solution for current financial crisis. After choosing Islamic finance as his career, he laid the foundation and initiated Islamic banking and finance in Afghanistan. He considers it to be the responsibility of the entire Muslim Ummah to work for the promotion and development of Islamic financial system.

Mr. Zulfiqar thinks that Islamic banking and finance is growing very well around the world and it is the only alternate to the conventional system, especially in Muslim countries. From the perspective of Afghanistan, the main factor contributing to the success and development of Islamic banking is stronger support from the Government organizations including Da Afghanistan Bank (central bank), public will and support for Islamic banking, interest of commercial banks in Islamic banking products and services. Today, there are six commercial banks doing Islamic banking while a few more are in the implementation phase. Together, these factors add up to the development of Islamic banking in Afghanistan. But he believes that there is still need to truly understand Islamic finance and promote the current interest towards the development of Islamic banking and finance in South-East Asia, Middle east and Pakistan.

"It is time we make a move from individuals to institutions. It could be a global Shariah board…. the reason is people deal with you on international standards. You have to have the right standards." ADNAN YOUSIF

CHIEF EXECUTIVE, ALBARAKA BANKING GROUP

Personality in the Spotlight

Volume 2 Issue 1 | JANUARY 2011

Page # 11

Weekend Certificate Program at ICAP Karachi 2-30 January 2011

The Guidance Institute is conducting a one month weekend certificate program at ICAP, Karachi. The sessions will be conducted by top Islamic finance industry professionals and leading Shariah scholars. The program uses a balanced combination of theory and real

life examples to give participants a rich understanding of the discipline. The program is reviewed and endorsed by ICAP Karachi and

carries 24 CPD Hours for ICAP Members. The workshop sessions will be held only on Sundays from 2nd to 30th January 2011. The Guidance Institute was established in Nov, 2008. It is the research and training initiative of Hikmah Foundation, a not-for-profit organization.

International Conference on ‘Islamic Business & Finance in Pakistan: The Present State and the Way Forward’ 8-9 February 2011 Riphah Centre of Islamic Business is organizing an international conference on 8-9 February 2011 titled ‘Islamic Business & Finance in Pakistan: The Present State and the Way Forward’. The conference is being held primarily in collaboration with Meezan Bank Limited and support from Islamic Development Bank (IDB) and Islamic Research & Training Institute (IRTI), Jeddah and State bank of Pakistan. Other collaboration and cooperation is being provided by Islamic banks, Islamic banking divisions of conventional banks, Takaful companies, Ernst & Young Ford Rhodes Sidat Hyder, Publicitas and leading corporate sector entities among others. The Conference would be a major event and will provide an excellent platform for coming together of the Islamic economics, business and finance intellectuals, practitioners of Islamic finance industry, Ph. D. / research scholars of the Universities and other stakeholders to discuss the achievements, the challenges and issues faced, future potential available, in the fields of Islamic business, banking and finance. The areas to be discussed include Shariah compliant business, Islamic business education, Islamic banking and finance, role of State institutions in Islamizing the economies, regulation and supervision of Islamic banking and finance institutions and corporate governance in Shariah compliant businesses.

• Dr. Abbas Mirakhor • Mr. Mahmood Shafqat

• Dr. Monzer Kahf • Mr. Amer Khalil ur Rehman

• Dr. Anas Zarqa • Dr. Shabbir

• Dr. Mabid Ali Al Jarhi • Ms. Shazia Hasan

• Dr. Salman Syed Ali • Mr. Amjad Saqib

• Dr. Tariqullah Khan • Mr. Khaleequzzaman

• Mr. Rustam M. Idrees • Dr. Zeeshan Ahmed

• Dr. Munawar Iqbal • Mr. P.Ahmed

• Dr. Akram Laldin • Mr. Farhan Noor

• Dr. Muhammad Tahir Mansuri • Mr. Atiquzzafar Khan

• Mr. Riaz Riazuddin • Mr. Khawaja Amjad Saeed

• Mr. Saleemullah • Sheikh Naeem

• Mufti Hassaan Kaleem • Sheikh Hashim Ahmad

• Mr. Shamim • Mr. Hamad Rasool Bhullar

• Mr. Omar Mustafa Ansari • Prof. Iqbal Hashmi Advocate

• Dr. Shahid Hasan Siddiqi • Mr. Zakiuddin Ahmed

• Mr. Suhail Nadeem • Muhammad Javaid Ismail

• Dr. Abdel Rehman Yousri

KEY SPEAKERS / PAPER PRESENTERS:

Page # 12 An initiative of Publicitas (Pvt.) Ltd.

For further details, please contact: Muhammad Ayub (Conference Secretary General) Riphah Centre of Islamic Business, Riphah International University Al-Mizan IIMCT Complex, 274-Peshawar Road, Rawalpindi, Pakistan muhammad.ayub@riphah.edu.pk Dir. ph: + 92 51 5824747 | Exchange: (051) 5125161-67; Ext. 284 | Fax: + 92 51 5125169, 5125170

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