Islamic Banking in Europe

Britain's First Islamic Mortgage

DMI Group: 1996 Sees Profitability

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Lahore: Ms Sara Khan Al-Faysal Investment Bank Ltd. 2nd Floor, Ajmal House, 27 Egerton Road Tel: (042) 6316000 Fax: (042) 6316500 Investing in the future Horizon MAY 1997. Issue No.63 ISSN 0955-095

Published by COMMENT Institute of Islamic Banking & Insurance ICIS House 2 Islamic Banking in Europe 144-146 King's Cross Road Only a decade and a half ago. Western bankers dismissed Islamic Banking as an unworkable dream. Today, thanks London WCIX 9DH largely to the efforts of Islamic scholars and economists, the Tel: 0171 833 8275 Fax: 0171 278 4797 Islamic sections of European and Western banks are man• E-mail: [email protected] aging Islamic funds worth billions of dollars. Remarkably, http://www.islamic-banking.com Islamic banking is successfully taking roots in an un- Islamic environment! EDITORIAL BOARD FEATURES Muazzam Ali 3 Britain's First Islamic Mortgage London From UBK

Mukarram Ali The new Manzil programme, being offered by the United London Bank of Kuwait (UBK), finally gives British Muslims a way out of the home-owning trap - the facility to purchase a Dr Reza Shiva home without entering into an interest-laden mortgage. Tehran The advent of an Islamic loan to buy homes, could be a Godsend for Britain's 2 million plus Muslims, of which Prof. Dr Murat Cizacka 40,000 families are estimated to seek finance for home pur• Istanbul chases each year. New Horizon talks to Keith Leach, a man• ager of the Islamic Investment Banking Unit at the UBK in Dr. Shahid H. Siddiqui Karachi London.

Al- Bagkir Youssef Mudawi 5 Islamic Project Financing Conference Khartoum Looking at the latest developments and rapid rate of evolu•

EXECUTIVE EDITOR tion in this area, and marvelling at the diverse spectrum of S. Ghazanfar Ali activity. Professor Dr Murat Cizakca reports on the Project Financing Conference organised by the Asia Business Forum in Kuala Lumpur. EDITORIAL ADVISER Asma Siddiqui 9 DMI Group: 1996 Sees Profitability EDITOR According to Chairman, HRH Prince Mohamed Al-Faisal Shahzad Sheikh Al-Saud, Dar Al-Maal Al-Islami (DMI) Group's 1996 results: "show a welcome return to profitability and we RESEARCH ASSOCIATE continue to reshape the DMI Trust for further profit Daphne Buckmaster improvement. In 1996, we recorded a net profit of US$10.1 million compared to a net loss of US$8.0 million in 1995. BSN 0955-095X Gross income of US$148.5 million was US$17.3 million The views expressed in this higher than the corresponding figure the previous year." Magazine are not necessarily those of the Publishers or ofllBI. NEWS MONITOR Price Per Copy Islamic Finance Conferences; Kuwait's new laws for Islamic UK £ 3.00 banks; MNI Takaful expects higher income; Islamic accout- Europe £ 4.00 ing committee set up, IDB's support for research projects; Rest of the World £5.00 Investor's race to world's biggest Islamic bank. Islamic Banking in Europe

I I Ihe concept of Islamic banking was raised at a studied and absorbed the philosophy of Islamic I meeting of Western bankers in London over a banking the Western bankers wasted no more time JL decade and a half ago, when it was in adopting the system. described, and dismissed, as "an unworkable Thus we have the present-day situation where dream". many major banks in the West have opened Islamic Western bankers expressed scepticism over the sections in their organisations. They operate Islamic system's merits, and were convinced that, according to the guidelines of Islamic Shariah, and like other Utopian projects, the dream would ulti• all of them have Shariah Advisers who supervise mately end as a nightmare. their activities. They are also constantly researching They simply refused to give the concept any and developing new products in keeping with the credence whatsoever, in their minds it was unfeasi• needs of the modern financial world. Furthermore, ble within the context of contemporary world-wide conversant as they are with the super-productive banking and finance systems. They ridiculed the modern marketing techniques, they are quick to notion of Islamic banking actually being introduced project their products and reach their clients effi• in parts of the Muslim world, and even considered ciently. withdrawing their operations from such countries. The overall popularity of Islamic banking can How things change. Within the relatively negli• be assessed by the sheer number of Islamic banking gible period of ten years the situation is all but seminars and conferences that are being organised reversed. This is thanks largely to the efforts of in many parts of Europe and USA, besides scores Islamic scholars and economists. Due to their dedi• more in the Middle and Far East. cation and un-wavering commitment to Islamic All these conferences are regularly attended, banking, what was once 'unworkable' is now a and participated in, by European bankers, econo• thriving reality, having made its mark in several mists and legal experts. countries, both Muslim and non-Muslim. Not surprisingly the Islamic sections of It was not easy to introduce the concept and European banks are managing Islamic funds worth practices in the absence of any forward planning, billions of dollars. research and training programmes. However, all A survey shows that there are many other rea• these short-comings were overcome by the commit• sons that prompt Islamic financers to place their ment of its operators. They spared no efforts to funds with European banks: develop Islamic banking in the light of the guide• a) They are convinced that their funds are used lines of Shariah. In the process they discovered the strictly in accordance with the Islamic Shariah, as superior qualities of the Islamic economic order - interpreted by Shariah scholars. an order which not only looked after the material b) They are impressed by what they term the needs of human beings, but also the moral needs. 'transparency' of the Islamic system of banking In effect it was a truly ethical system. And as the operations. caring 1990s approached, the world-wide mood c) Political instability in Islamic countries com• turned towards concern for the damage mankind pels them to keep their funds in what they regard has inflicted upon his environment and human as "secure" banks in Europe. society. d) They feel that the confidentiality of their Thus the same Western banks that were initially accounts through the Islamic windows of Western sceptical of Islamic banking, began to take a fresh banks is assured. look at the Islamic concept and its operations, slow• e) The rate of profit on their funds is also ly realising that the answers to many of the ethical attractive. dilemmas faced by financial institutions were to be All of which leads us to one remarkable conclu• found there. Several Islamic financial institutions sion: despite the initial hurdles. Islamic banking is operating in various parts of the world served as successfully taking roots in an un-Islamic environ• training grounds for them. Having thoroughly ment!

New Horizon May 1997 2 HI- • * ¥ l-fci Britain's First Islamic Mortgage From UBK The new Manzil programme, being offered by tiie United Banic of Kuwait (UBK), finally gives British Muslims a way out of the home-owning trap - the facility to purchase a home without entering into an interest-laden mortgage. The advent of an islamic loan to buy homes, could be a Godsend for Britain's 2 million plus Muslims, of which 40,000 families are estimated to seek finance for home purchases each year. New Horizon talks to Keith Leach, a manager of the Islamic Investment Banking Unit at the UBK in London.

Q. The new Manzil programme being offered by the duced. Islamic Investment Banking Unit of the London- Q. Has permission to set up this loan programme based United Bank of Kuwait, is being hailed as the been obtained from the Bank of England? first mortgage for Muslims in Britain. How does this The form of Manzil is such that it is a permitted activity so-called 'halal' mortgage operate? for the Bank under our banking licence. The Bank of A. The concept is simple. The purchaser locates the England has, however, been separately advised of our desired property and agrees a price with the vendor plans. (seller). The purchaser then approaches us for financial assistance of a certain sum (up to 75% of the purchase Q. Who will be able to apply for this Mortgage? cost of the property). A. Manzil (subject to applicants meeting the applicable If we are happy that the purchaser can afford the criteria) is available to everyone over the age of 18, projected monthly instalments, we whether resident or non-resident of the will buy the property for the originally UK, and whether Muslim or non- agreed purchase price, and immedi• Muslim. ately sell it to our purchaser at a high• er price with payment deferred over a Q. What will be the ceiling for loans? number of years and months as A. There is no ceiling, although differ• agreed before hand, and as specified ent criteria might apply for very large in the Murabaha contract, the prime properties. Islamic document. Q. How long will the repayment peri• Q. How does it differ from conven• ods be, and what will happen in the tional mortgages? case of defaulters? A. Conventional mortgages operate on A. At the launch date, the term of the the basis of a loan or mortgage deferred sale can be either 5, 7.5, 10, account to which interest is charged. 12.5, or 15 years, however this might Manzil is different because it is a pur• change in light of experience. chase and sale with payment deferred over an agreed With regard to defaulters, the bank is a member of term. the Council of Mortgage Lenders and we will follow its volimtary code, where this is compatible with Manzil. Q. How big is the fund made available for this facili- We will consider cases of financial difficulty and ty? arrears sjonpathetically and positively, and will always A.There are currently no plans to limit the size of the act in a reasonable manner. funds available. It should be clear, however, that our documenta• tion will give us the right to repossess and sell the Q. What prompted UBK to venture into this area and property as a last resort. make this facility available? A. The needs of our clients drives IIBU's activities. Q. Since it was featured on BBC television's The With up to 2 million Muslims in the UK, there was an Money Programme, have you had many inquiries? obvious need for such a facility. The same is also true We continue to receive enquiries following the piece on for the USA where Manzil will also be shortly intro• The Money Programme on the 2"^ Feb 1997. We have

New Horizon May 1997 3 fNTEItViSW now received over 1000 phone calls and letters. Q. How will you be advertising this service and Q. The UBK in London, is geared primarily towards bringing it to the attention of Britain's estimated 2 catering for the needs of Middle Eastern clients that million strong Muslim community? require banking facilities in the UK, and understand• A. In many respects Manzil will publicise itself and we ably so. But the Manzil programme is aimed at a already have a sufficient demand to make the whole potentially huge UK market well outside of your nor• development of the programme viable. In the long term mal client base. Is this a major new departure for we will keep the awareness of Manzil by selective UBK, and how well prepared are you to deal with the advertising, visits to Mosques and through the raising demand generated? of our profile as we develop other financial services for A. By early 1998 we plan to offer the Muslim communi• the Muslim communities. ty in the UK a range of financial services (savings plans, pension schemes, investment products etc) and see Q. Will those British Muslims who already have con• Manzil as the first step in this process. The infrastruc• ventional mortgages with non-Islamic British banks ture is already in place to cater for the likely demand or building societies be able to transfer their house for Manzil. loan to the Manzil programme? A. The method of Islamic finance used, 'Murabaha', Q. When will this facility become fully available? means that Manzil will only work for new purchases, A. Manzil will be available before the end of April 97. people moving house or first time buyers. We are cur• rently working to provide a different version of Manzil, Q. How widely throughout the UK will it be avail• which will allow those forced by circumstances, to able, and how will potential customers have access to switch from an interest mortgage to a 'halal' scheme. it? A. We plan to offer Manzil throughout the UK (and a different version in the US). At present it will only work Q. Do you expect other UK financial organisations to in England and Wales while legal opinions are awaited follow your example and begin offering Islamic from Scottish & Northern Ireland Lawyers. loans/mortgages in the near future? We have plans to distribute Manzil through a A.I am sure other UK financial institutions will try, in network of Solicitors and Independent Financial the not too distant future.I believe, however, that it will Advisors (IFAs). We are, at present, finalising be difficult for 'Western' banks and building societies to plans and we hope that the Solicitor's and IFA's bring the same degree of integrity to their schemes that will be either Muslims and/or Urdu and/or we can offer from our historical ties with Islamic Arabic speakers. Institutions in the Middle-East.

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New Horizon May 1997 4 FEATURE Islamic Project Financing Conference- A Personal Observation Looking at tiie latest developments and rapid rate of evolution in this area, and marvelling at the diverse spectrum of activity. Professor Dr Murat Cizakca reports on the Project Financing Conference organised by the Asia Business Forum in Kuala Lumpur. I I Ihe Islamic Project Financin.g Another support will apparently addressed on this problem by an I Conference organised by the be provided by Bank Rakyat authority from the IMF. -L Asia Business Forum Sdn Bhd Malaysia, a co-operative bank that has Khan had arranged the structure was convened in the pleasant premis• committed itself in establishing all its of his paper in three sections: 1) es of Hotel Renaissance in Kuala new branches as fully fledged Islamic Operation of a traditional central Lumpur on March 10-11. banking branches while its existing bank; 2) Operation of a typical Islamic The conference was attended by branches are also in the final phase of bank; and 3) Operation of a central Islamic bankers and others interested being converted into Islamic banking Bank in a mixed banking system. in the latest developments in Islamic branches. Since the first two sections are finance. In nine different panels Affifudin also announced that well known to most of the readers of (Policies and Regulatory Framework, Bank Negara, the Malaysian Central this journal, I will concentrate on the Conceptual Definitions, Risk Bank, is in the process of establishing last, ie. Islamic central banking in a Management, Legal Issues, a Shariah Advisory Council. This dual system. Accounting and Taxation, Financial council will complement another sim• Khan identified the chief role of Facilities, Islamic Securities, Case ilar bodies already formed by the central banking in such an environ• Studies, and Comparative Analysis), a Suruhanjaya Sekuriti looking after the ment as one of developing financial total of fifteen papers were presented. Islamic Capital Market. institutions and instruments that facil• His Excellency Y B Dato Dr Afifuddin Hj Omar, Deputy Minister >l5 far as ttie initial establishment of an Islamic of Finance, Malaysia, inaugurated at financial system is concerned, the basic problem, the conference. In his short speech, HE Affifudin explained that the most according to Khan, would be not so much lower important development in Malaysia savings but lower investment. Indeed, unless firm since the establishment of the first legal protection is provided, risk-averse bankers Islamic bank about 14 years ago has been the introduction and the pursu• and savers may simply refuse to provide funds on ing diffusion of 'interest free the basis of profit-sharing arrangements. schemes', the so called SPTFs, all over the country by banks and investment In his concluding remarks, itate efficient mobilisation of savings companies. Affifudin further reiterated the con• and allocation of resources. Thus, He explained further that genuine tinuing and firm commitment of the according to Khan not only are new need of the Muslims as well as full Malaysian government to the sphere instruments needed in Islamic bank• government support for such services of Islamic banking and the eventual ing, but the central banks must also were the main reason for such an goal of establishing a completely dual play an essential role in their develop• expansion. This expansion has appar• banking system. In such an environ• ment. ently reached to such a momentum ment the public would be the ultimate He argued further that profit- that other countries in the region, ie, decision-maker as to which system is sharing schemes would have signifi• Indonesia and the Philippines have superior to the other. cant positive influence on the saving- asked for Malaysian expertise for Mohsin S Khan of the IMF pre• investment process. But this would establishing similar institutions in sented the next paper. The Role of the necessitate monetisation of transac• their countries. Central Bank in the Operation of Islamic tions in rural areas. The Malaysian government also Banks. Both the subject matter of the As far as the initial establishment feels that many conventional banks paper as well as the position of the of an Islamic financial system is con• should be converted into SPTF bank• speaker captured the attention of the cerned, the basic problem, according ing. This conversion, Affifudin has audience. The linkage between central to Khan, would be not so much lower argued, would further support the banks and Islamic banks has long savings but lower investment. Indeed, move to expand interest free schemes been regarded as a crucial and sensi• unless firm legal protection is provid• throughout the country. tive issue, and we were about to be ed, risk-averse bankers and savers

New Horizon May 1997 5 may simply refuse to provide funds that the central bank would basically sented the next paper. Approaching on the basis of profit-sharing arrange• operate through equity shares trans• modern Islamic finance from a histori• ments. He argued further that unless actions. cal perspective, Dr Bakar pointed out the returns fully reflected risk com• In such a system the central bank the idea of guarantee (daman) in pensation and the cost of monitoring, would invest in the real sector on a deposits, a concept introduced for the principals and agents may engage in profit-sharing basis, as well as to take first time by Ali, the fourth Caliph, in transactions that may be Islamic only equity positions in joint ventures response to some complaints. This, in appearance. along with other banks. It goes with• obviously, appears to have been the These rather cryptical comments out saying that by central bank original current account. need to be taken as a warning. The involvement in the real sector. Khan Another interesting Islamic con• argument that the introduction of a means mega joint projects; central tract form Dr Bakar referred to was viable Islamic Financial system would bank investments in small scale busi• the so-called Ju'alah which was basi• not necessarily reduce the savings is nesses via third parties is simply not cally a commission contract. The dif• sound and confirms the long held considered. ference between the Ju'alah and the belief of Dr Ahmad al-Naggar. Khan This is a pity. In a future Islamic Mudaraba was that whereas in the implied that the problem might financial system, central banks should former the profit-sharing could be emerge in the transfer of these savings be imaginative enough to be involved realised in a ratio as well as in an into investment and urged the provi• in enhancing entrepreneurship via absolute amount, in Mudaraba only a sion of firm legal protection. equity investments in venture capital predetermined ratio was permitted. It is the opinion of this author that (Mudaraba) companies specialising in According to Dr Bakar, attitudes a whole spectrum of Islamic financial the finance of small scale businesses. of Islamic bankers, mismatch of funds instruments, ranging from Mufawada Finally, we come to the reserve and customer attitudes constitute the to Mudaraba, can provide the neces• requirements. As Khan says, changes primary impediments to the full-scale sary flexibility the bankers need. His second warning that: "unless Approaching modern Islamic finance from a histor• the returns fully reflected risk com• pensation and the cost of monitoring, ical perspective, Dr Dakar pointed out the idea of principals and agents would continue guarantee (daman) in deposits, a concept intro• to be engaged in transactions that duced for the first time by Ali, the fourth Caliph, in may be Islamic only in appearance" (presumably Murabaha) should be response to some complaints. This, obviously, taken seriously. appears to have been the original Current Actually it is for this reason that Account. the present author had suggested the imposition of a differential tax burden in these requirements should be con• utilisation of Mudaraba by Islamic upon the existing Islamic instruments. sidered and such changes, in them• banks. He considers the inability to More specifically, he had argued that selves, should constitute an instru• impose collateral on Mudaraba trans• tax burden and risk should be ment of monetary policy. actions as a further impediment. The inversely correlated, ie, Murabaha, As for the suggestion once made present author disagrees with this last the least risky of the Islamic financial by Professor Siddiqi concerning the statement, for we cannot talk about a instruments should be taxed most regulation of profit-sharing ratios by Mudaraba anymore if collateral is heavily and the Mudaraba, the riski• the central banks. Khan has rightly demanded from the agent. est of the instruments, should not be expressed his scepticism on the Be that as it may, having thus taxed at all. Imposition of these differ• grounds the adoption of such a policy identified the above-mentioned ential tax rates would reflect the risk would not only have resource alloca- impediments, Dr Bakar suggested compensation and the cost of moni• tional implications, but would also two remedies: toring which Khan seeks as a way out limit freedom of contracts with seri• 1) Referring to an article recently of the present dilemma of the Islamic ous consequences for property rights. published by this author in the banking. The property rights implications Encyclopaedia of Islamic Banking, he In response to the writings of of Professor Siddiqi's suggestion suggested that a policy of differential some Islamic economists who have would indeed become clear if we tax rates should be implemented. envisaged an active monetary policy assume for one moment a central Thus, at the same time confirming the in the maintenance of currency stabili• bank regulation requiring a lower policy suggestion made above con• ty and in promoting full employment return from profits than from the cerning Khan's paper. and growth without inflation. Khan share in losses. 2) Referring to a recent amend• has argued that the usual control Dr Mohd Daud Bakar, a young ment to the Malaysian Islamic Bank functions of the central bank would scholar from the Faculty of Law of Act of 1983, he informed the audience continue in the Islamic system but International Islamic University, pre• that all the basic Islamic instruments

New Horizon May 1997 6 ; FEATURE of finance can now be combined in a answer to this question was provided would be wrong. But this does not package. from the floor, as we will see below. rule out the fact that KFH also feels It is not often that we observe a Concerning the legality of the impeded by the danger of fund mis• scholar who can, in a flight of Murabaha contract in Malaysia, matching. thought, cover 14 centuries. Dr Bakar Illiayas referred to two cases where To quote Matloob Khan directly: was able to do this with such confi• the defendants had refused to honour "I carmot collect weekly deposits and dence that it almost seemed easy! He their obligations on the grounds that be involved at the same time in long was able to refer to classical instru• this contract was un-Islamic. Needless term finance." ments of finance and make sugges• to say, their case was rejected. But then one wonders, is this not tions for the present. This is what. Sir Illiayas also referred to the possi• the raison d'etre of a banker and can John Maunard Keynes had once sug• bility of the agent giving up and dis• we take such an excuse seriously? Is a gested that a master economist should continuing the venture. He advised banker not supposed to arrange his be able to do, yet, Dr Bakar does not the audience that Mudaraba and portfolio such that he can be involved even consider himself an economist! Musharaka contracts should contain in long term financing even with Ironically, the only critique came provisions allowing the principals to short-term deposits? These questions from the present author who is an appoint another contractor. All in all, are not addressed to Khan personally, economic historian, on the grounds the speaker announced that there are for many other Islamic bankers repeat that Dr Bakar dwelled too much in no fundamental differences between them. the extremes of the time dimension, Islamic and conventional methods of At this juncture a comparative and that he had ignored the most Project Finance and that any differ• analysis of risk averseness between recent research done in the Ottoman ence that exists pertains to mechanical Islamic and conventional bankers archives. implementations. would be of immense value: unless Thanks to such research, Muslims The question as to which system such a study establishes, beyond any do not have to rely on segmented of law would prevail in case of con• doubt, a bias among Islamic bankers information from the early centuries flict, was indirectly answered by the towards risk averseness, we should of Islam, but can instead turn to the present author when the floor was not jump into hasty conclusions. In nearly continuous wealth of informa• invited to comment. Referring to the any case, we need to take another tion from the seventh century until famous 19th century Indian case of problem mentioned by Khan serious• today. Abdul Fata Mahommed Ishak Vs ly - the inability of Islamic banks to Dr Khayruddin Dam Hoeri, the Russnoy Rasamaya Dhur Chowdhiri, borrow from other conventional next speaker, basically summarised it was stated that although this case banks in case of emergency. This the general issues on risk manage• refers to the family waqfs, it demon• inability no doubt plays a significant ment in the West and scarcely strates without any doubt that at the role behind the risk averseness of the touched upon the Islamic perspective end, the Shariah prevails. The reason Islamic bankers. on risk management. The message for this is that if the case is of suffi• The relative risk averseness of was clear; there is a huge gap in our cient importance and concern to the Islamic bankers was also demonstrat• knowledge here. Muslims, the case eventually assumes ed by another very interesting paper The paper presented by Mohd a political character and the law presented by Ismail Zainal Musa of Illiayas drew our attention to the co• yields to the politics. the Qatar Islamic Bank. The most existence of the Shariah with Western Matloob Ahmed Khan of the interesting aspect of this paper was law and the inherent problems associ• Kuwait Finance House gave the final the announcement that the Qatar ated with this situation. More specifi• paper of the first day of the confer• Islamic Bank was involved extensive• cally, he informed the audience that ence. Mafloob Khan reiterated that the ly in Mudaraba financing. in Malaysia three different systems of KFH projects have two basic charac• In view of everything said above law govern the Islamic banks: The teristics: and the experience of the last thirty Shariah; the civil law with all its legis• 1) Since the KWF is known to years or so, this was indeed a very lations and statutes; and the common have one of the most conservative pleasant surprise. But as Musa read law. The last one, moreover, could be Shariah councils, the projects it through his paper the enthusiasm of considered under the following head• decides to finance are all Islamically the audience was replaced first by a ings: Malaysian, Singaporean, sound, sense of bewilderment and then that Common Wealth and other Muslim 2) They are mostly high finance, of disappointment. jurisdictions. high visibility projects. Musa announced first of all that In view of all this, Illiayas could Referring to the desirability of the Mudaraba contracts signed by his not resist the temptation and asked long term financing, he reminded the banks were basically in the construc• what would happen if a situation audience that the KFH has been using tion of major infrastructure projects. arose so that an Islamic Bank found the Murabaha also in long term pro• This statement alone made the pre• itself in a contradiction between the jects. Thus associating the Murabaha sent author wonder how a young Shariah and the civil law. An indirect purely with short term financing Mudarib could enter into such a high

New Horizon May 1997 7 finance joint venture. When Musa First of all, unlike all the high huge country like Indonesia there are began to explain the criteria which the finance mega projects and the endless some obvious impediments to achieve KFH uses in choosing a constructor, Murabahas mentioned throughout the this. It has therefore been decided to our curiosity was satisfied: The conference, Noor was talking about establish a hierarchy of Islamic finan• Mudaraba being described was the huge potential in Indonesia for cial institutions in the new Banking unique to KFH and had nothing to do small scale investments, ensuring the Law no. 7, dated 1992 and it is with the classical Mudaraba recom• co-operation of the Ulema in choosing through these intermediate institu• mended for so long by the Muslim the agents in rural areas and their par• tions (Islamic Financial Institutions) scholars. ticipation in the contract signing cere• established with a capital as small as As is well known, the classical monies as witnesses. US$ 25,000 as well as the even smaller Mudaraba involves a principal who These Indonesian realities differ Baitulmal Wattamwil (BMT)s, estab• supplies capital and an agent who from the mega financing, Murabaha- lished with as little capital as US$ supplies labour and entrepreneurship. obsessed, well established, conven- 1,500 to US$ 4,000, that the system But then Musa explained that the tional(!) Islamic banks as day differs reaches out to the myriad of rural KFH examined, among others, the fol• from night. In short, Indonesian entrepreneurs. lowing criteria about a Islamic banking appears to reflect all constructor/Mudarib: the financial the original ideas of Dr Ahmad al- The Bank Muamalat, itself, has standing of the Mudarib; his past per• Naggar, the father of Islamic banking. considerable capital, US$40million, formance in similar projects in terms The linkage to the original ideas is and is considered to be the of size and nature; and his subcon• so obvious that this author wonders if Indonesian bank with the biggest paid tractors and their capabilities and per• the Indonesian revolution is headed up capital. Another unique character• formance. by young bankers who were Dr istic of the bank is its share-holder Thus it was made abundantly Naggar's students at the International structure: There are 800,000 of them! clear that KFH did not seek a young, Institute of Islamic Banking and Half of this figure is constituted by energetic entrepreneur who would Economics in the Turkish Republic of the Indonesian pilgrims of the years supply nothing but his own labour Northern Cyprus during the early 1992, 1993 and 1994 thus reminding and knowledge, but a well established 1980's. us the well-known Tabung Haji of constructor who would supply his Noor explained the active Malaysia. The only difference is that own substantial machine park and involvement of the Ulema in contract whereas the former is an Islamic bank business contacts. Such an arrange• formation as ensuring collateral from the latter is basically a co-operative. ment cannot be called a Mudaraba, the Shariah perspective. Since, as we To conclude the Islamic Project but should be called, at best, a would expect, obtaining collateral Financing Conference has successfully Musharaka. from the poverty stricken potential exhibited the latest developments in rural entrepreneurs would simply be This is also attested by the profit- this field and demonstrated once out of question, members of the sharing ratios. The present author was again how rapidly it is evolving. not at all surprised to learn that the Ulema are asked to bring forth poten• We were given the impression by KFH had to share at least half of the tial agents (Mudaribs) and when the the speakers that a whole spectrum of profits. The standard rate applied by venture is brought to a successful con• Islamic banking has emerged. While the European Mudarabas (commen- clusion, the Ulema are granted a prof• da) throughout history, by contrast, it share. on the one hand we have the mighty central banks operating in dual finan• was known as ad quartem partem It goes without saying that these lucri, ie, one fourth to the entrepre• Mudaribs would be under constant cial systems and manipulating the neur and three fourths to the princi• surveillance of the Ulema throughout actions of powerful Islamic banks pal. With such risk averseness, no the duration of the contract. dealing in mega projects, on the other, wonder the KFH had to sacrifice so Therefore, the term, ensuring collater• we have the Indonesian BMTs dealing much of its profits, it certainly did not al from the Shariah perspective, could with the tiny rural entrepreneurs deserve anything higher! not have been more appropriate. through the co-operation of the local The last paper that will be consid• Another method of finance Ulema. ered here was presented by applied in Indonesia is the Islamic Islamic banking has certainly Zainulbahar Noor of the PT Bank muzara'a, or share cropping. Since the come a long way since the Mit Ghamr Muamalat Indonesia which is spear• peasants have used this in Indonesia experiment of the late Dr Ahmad al- heading Islamic banking in that huge for centuries, the bank experiences no Naggar. country. This was truly a fascinating difficulty in its implementation. paper not only because it summarised During his presentation Noor Professor Dr Murat Cizakca the experience of the largest Islamic emphasised the PT Bank Muamalat (International Institute of Islamic country in the world but also because Indonesia's firm decision not to be Thought and Civilisation, Kuala Lumpur of the unique characteristics of that involved in mega projects and to con• and Bogazici University, Istanbul) experience. centrate on small enterprises. But in a

New Horizon May 1997 8 FEATURE

DMI Group: 1996 Sees Profitability According to Chairman, HRH Prince Mohamed Al-Faisai Ai-Saud, Dar AI-A/iaai Ai-lsiami {DMI) Group's 1996 results: "show a welcome return to profitability and we continue to reshape the DMI Trust for further profit improvement. In 1996, we recorded a net profit of US$10.1 million compared to a net loss of US$8.0 million in 1995. Gross income of US$148.5 million was US$17.3 mil• lion higher than the corresponding figure the previous year."

Tounded in 1981, the Islamic and financial affairs, audit and tech• itability. The increase in income I financial institution has an nical assistance to subsidiaries. from fees and commissions also F extensive network stretching Noting the return to profitabili• contributed to the improved results. over four continents, boasting well ty, HRH Prince Faisal explained Our clients can now benefit from a integrated regional subsidiaries that this trend reversal required wide array of DMI Group products responding to local business needs broad-based efforts: "Over the past and expertise in structured finance and conditions. As such, DMI acts ten years we have built our Group and syndications, treasury and capi• as a financial bridge between the by focusing on our strengths and tal markets, as well as management world's leading financial centres withdrawing from areas where we of long-term and short-term mutual and Islamic countries. met financial losses. Group flagship funds," he said. DMI Trust includes banking, subsidiaries undertook internal Another key factor was the investment, takafol (Islamic insur• turnaround in the business ance) and retakafol (Islamic reinsur• prospects of Faisal Islamic Bank of ance) companies. The investment Egypt and the reversal of 40% of the companies are located in Bahrain, provision made by DMI sub• Egypt, Pakistan, Qatar and the sidiaries in this associated company. United Arab Emirates, while the The establishment of two new banks and finance companies oper• operating subsidiaries in Morocco ate in Bahrain, Guinea, Jersey, and Jersey illustrated the optimism Pakistan, Switzerland and Turkey. of the group. Faisal Finance There are DMI takafol and retakafol Morocco will be performing invest• companies in the Bahamas, Bahrain, ment-banking operations, whereas Luxembourg and the United Faisal Finance Jersey is and will be Kingdom. The Group also has a rep• launching international Islamic resentative office in Indonesia help• investment funds. ing to expand its business opera• In 1996, DMI Group results tions in the emerging economies of restructuring. All the restructuring show a net profit of US$ 1 0.1 mil• the Asia-Pacific region. has been completed except that of lion, compared to a net loss of US$ Asset management is the Faisal Finance Institution, Turkey, 8.0 million in the previous year. Group's core business activity. DMI which is in the process of restructur• Gross income increased by US$ has devised a comprehensive range ing its activities. 17.3 million from US$ 131.2 million of Islamic financial instruments to "Operating expenses have been in 1995 to US$ 148.5 miUion in 1996. channel funds into viable operations well controlled during the period The highest contribution to earnings in projects, leasing, real estate, ven• coupled with increased income. was from higher investment ture capital, trade financing, and Cost saving measures will continue income, both short-term (21 per other business activities. to be relentlessly pursued and a cent) and long-term (44 per cent). To ensure strict conformity with greater use of information technolo• Moreover, there was a significant Islamic principles, all DMI opera• gy will further assist in the increase in fee and commission tions are reviewed and approved by improvement of our productivity income (52 per cent). Almost all its Religious Board. The Trust's and efficiency. income generated in 1996 was administrator, Dar AI-Maai AI- "The expansion of investment derived from core operations. Islami (DMI) SA, located in Geneva, banking activities at corporate and Profits paid to clients amounted Switzerland, focuses on Group subsidiary levels was an important to US$ 49.3 miUion in 1996. hicome strategy, corporate activities, legal component of the return to prof• after payments to clients increased

New Horizon May 1997 9 FEATURE from US$ 79.7 million in 1995 to the said institutions. It has a target sponsored with Kleinwort Benson US$ 99.3 million. Notwithstanding of reaching US$ 100.0 million in the Limited. this sizeable increase in total year 1997. income, net, expenditure decreased The shareholder value enhance• by US$ 1.9 million from US$ 68.2 ment programme started in 1994 islamic banks (Massaref) In Pakistan, the financial sector million in 1995 to US$ 66.3 million. has continued to produce excellent suffered as a result of the weak eco• This represents 67 per cent of total results for the Islamic Investment nomic performance. Competitive operating income, compared to 85 Company of the Gulf (IICG) pressures reduced profit margins. In per cent in 1995. Reducing the Bahrain, the investment banking this challenging environment, AI- Group's operating expenses franchise of DMI Group. All the Faysal Investment Bank Ltd remains an ongoing objective. strategic business units ("SBUs") (AFIBL) was able to achieve a Total funds under management have further consolidated their growth of 31 per cent in revenue. increased from US$ 2,935 milUon in businesses and enhanced core com• Barring the capital market, all other 1995 to US$ 3,292 million in 1996, petencies in their area of specialisa• sectors made very useful contribu• reflecting growing customer confi• tion. IICG Bahrain has generated a tions to the income. The operating dence in the Group subsidiaries, all 25 per cent return on equity and a profit before tax and provisions of which have delivered competi• 20 per cent dividend for DMI Trust. increased by 61 per cent. Deposits tive returns and services during the The Structured Finance and increased by 26 per cent to Rs 10.4 year imder review. Syndication Group continued with billion. The growth was mainly in its focus on the belt of OIC coimtries long-term certificates of investment. and originated deals in excess of Islamic investment For Faisal Finance Institution, US$ 900 million during 1996. The Turkey (FFI), 1996 was a year of companies Group also launched value added In addition to its investment activities, the Islamic Investment Asset management is tfie Group's core business Company of the Gulf (Bahamas), fimctioning as the marketing arm of activity. DMI has devised a comprehensive range the Islamic Investment Company of of Islamic financial instruments to channel funds the Gulf (IICG) group of companies, into viable operations in projects, leasing, real continues to play its leading role in estate, venture capital, trade financing, and other raising funds. In the course of 1996, IICG Bahamas marketed six differ• business activities. ent Mudarabas under its own name, products in the infrastructure along with six others for both IICG improvement. FFI is in the process finance and increased its market Bahrain and IICG Sharjah. of completing its restructuring. share in the Islamic syndication Despite this, FFI achieved good Overall funds under IICG market. This Group has been the results in its banking and trading Bahamas management rose to US$ main contributor to the profitability operations. Net operating income 590.0 million at the year end, an of IICG. increase of 9.6 per cent over the pre• before taxes stood at TL 112.7 billion The Capital Markets Group con• vious year. Most of the major com• in 1996 compared to TL 134.7 billion tinues to actively invest in pre-lPO, mercial banks based in the Gulf in 1995. Funds under management IPO and secondary markets in the now have their own Islamic financ• reached TL 20 trillion at the year belt of Islamic and OECD countries. ing windows and are gaining a end, an increase of 81 per cent over During the year it played a signifi• share of the market. the previous year. cant role in the underwriting and After completing internal Li 1996, IICG Bahamas expand• distribution of securities in excess of restructuring and upgrading the ed its business relations with DMI US$ 250 million. This group is now professional quality of its staff, Group companies and with other evolving to focus on merchant Faisal Finance (Switzerland) SA Islamic financial institutions for the banking and direct investment (FFS) is now looking forward to purpose of sharing investment opportunities in the OIC World. opportunities and exchanging achieving superior and sustainable The Institutional Marketing know-how and established the growth. At present, FFS offers inno• Group successfully distributed Islamic Financial Institutions (IFI) in vative products to a clientele base deals in excess of US$ 450 million. 1995 for this purpose. Most of this made up of high net worth individ• The Group launched the AI-Meezan Mudaraba's funds, now totalling uals, financial institutions and Commodity Fund, which is jointly US$ 71.0 million, are invested with Group companies.

New Horizon May 1997 10 Gross income reached Sfr 8.8 European Directive on life insur• clients. In co-ordination with milhon, equivalent to US$ 7.0 mil• ance products, which lifted cross- Takafol SA Luxembourg, Takafol Uon; net profit amounted to Sfr border restrictions between member (UK) Ltd is developing new prod• 3,9 million or US$ 3.1 million; and countries, has theoretically extend• ucts. These include personal pen• return on capital stood at 44.3 per ed the market for Takafol SA. sion schemes, old-age care schemes. cent and on average equity was 14.8 Takafol S.A. managed to collect Islamic mortgage and health care per cent. Total funds under manage• a total premium income of US$ 3 plans. ment reached Sfr 727 million, or million during the year under Takafol Islamic Insurance US$ 540 miUion. review. The total number of Saaks Company, Bahrain EC's (TlIC) During the year under review, (policies) issued since inception has FFS launched the US$ 100 million TIIC's main focus is on consolidat• closed-ended "Faisal Finance Real now exceeded 12,000 and the total ing its position in the Gulf countries Estate Fund 11". Another mutual funds under management in vari• market which has a high growth fund was launched from Labuan, ous currencies amounted to US$ potential. By the end of the year, a Malaysia, to invest in Islamic equi• 16.7 million at the end of the year. total of US$ 3 million in general ties in the expanding markets of The growing difficulties of state Takafol premium was generated. Southeast Asia, The target for this social security and pension systems Life Takafol funds amormted to US$ open-ended "ADIL Investment in most European countries have 6.0 million. Fund" is US$ 50 million. A third boosted private pension products. Competition has intensified private fund, "Faisal Finance Takafol SA has responded to this in the insurance and reinsur• Mezzanine Fund", was also struc• growing need by developing a new ance business. To meet this tured for the account of one institu• pension product, the "Life Long heightened competition. tional client to invest exclusively in initial public offerings and venture 30 equities. In addition to these and other 20 'new' products, FFS, in cooperation with American Express Bank, Luxembourg, developed a joint 10 short-term investment product called "Islamic Strategic Invest Product", an Islamically structured money-market instrument. -10 Faysal Islamic Bank of Bahrain EC (FIBB) recorded a consoUdated net profit after taxation and minori• -20 ty interest of US$ 13.9 miUion. The

profit paid to investment account -30 1 1 1 1 1 holders was US$ 89.3 miUion repre• 87 88 89 90 91 92 93 94 95 96 senting gn increase of 19 per cent over the previous year. This was Net Profit/(Loss) in Millions of US$ primarily achieved from its core banking activities accompanied by a Pension Scheme" with life cover Islamic Takafol and Retakafol sustainable growth of its asset base (Takafol benefit) which will initially Company (ITRC) increased its and enhancement of shareholder's be offered in 1997 to Muslims resid• capital from US$ 1 0 million to equity. ing in Germany and Holland. US$ 15 million. The strength• Durmg 1996, Takafol (UK) Ltd ening of the capital base has Takafol and Retakafol managed to increase its regular pre• positioned ITRC to meet the mium income by 580 per cent and new challenges. Despite companies lump sum income by 58 per cent intense competition, the total In Luxembourg, Takafol SA compared to 1995. Takafol (UK) Ltd premium income amounted to continued to fulfil the expectations achieved these results by providing US$ 9.0 million at the end of of Muslim minorities in Europe for a committed and well organised ser• the year compared to US$ 10.3 life Takafol products. The third vice to its existing and prospective million in 1995.

New Horizon May 1997 11 STRUCTURING, DISTRIBUTING & MANAGING

FUNOS 23 - 24 JUNE 1997 • RENAISSANCE HOTEL • KUALA LUMPUR

OVERVIEW on ISLAMIC CAPITAL MARKET AND FUNDS • Overview on the development of Islamic Capital Market • The source of Islamic Funds • Tapping & capitalising on Islamic Funds - A business opportunities for Fund Managers REGULATORY & SYARIAH FRAMEWORK • Syariah / Islamic Legal Issues & Economic Considerations circumscribing the Islamic capital market and funds PRODUCT DESIGN. PRICING AND STRUCTURING • Structuring & Pricing of Islamic Funds • The Cleansing Mechanism • Trend and Development of Islamic Equity Markets • Venture Capital • Treatment of Islamic Investment Trust Funds • Structuring Asset Backed Securities • Islamic Private Debt Securities • Islamic infrastructure project funds MARKETING & DISTRIBUTION • Demographic of retail and institutional investors for Islamic funds • Marketing to non-Islamic institutional and retail investors • Launching of Islamic funds for international and local markets ASSET ALLOCATION AND MANAGEMENT • Managing legal and regulatory issues for Islamic investment funds in Western countries and Asia* Liquidity, returns and diversification challenges in Islamic financial market • Investing in Islamic funds for America and Europe to Asia and vice-versa • Portfolio diversification strategies for Islamic investors • Managing Islamic funds in the conventional 'private banking environment • Mobilising pilgrimage funds, EPF and pension funds for investments • Islamic Index and Derivatives CREDIT RATING, TAX AND ACCOUNTING • Accounting and tax treatment for Islamic investment funds • Performance Rating and Islamic financial institution CUSTODIAN AND ADMINISTRATION • The role of custodian and Trustee in Islamic unit trusts and mutual funds

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CANADA MALAYSIA UK Globilisation of Islamic Funds Islamic Equity Funds he UK media company, IBC Asia, uro Forum Finance is organising a Islamic Banking Tis organising a Islamic finance con• Econference entitled: 'Strategies, une 2nd & 3rd, 1997, are the dates ference to be held in Kuala Lumpur, Structuring Techniques and Practical Jfor Canada's second conference on Malaysia, during 23-24 June, 1997. Developments for Islamic Equity Islamic banking and finance, to be The conference, entitled: 'Islamic Funds', aimed at constructing and held in Toronto and chaired by Derek Funds - Structuring, Distributing, managing a well diversified portfolio Lee, a Member of Parliament. Marketing & Managing', will be based for the Organisation of Islamic The conference, entitled: upon a survey into Islamic funds con• Countries (OIC). 'Globalisation of Islamic Banking - Is ducted by IBC. The conference is to take place Canada Next?' is being sponsored by The conference aims to provide a during 14th & 15th juiy^ ^997 the following: Islamic Co-operative comprehensive understanding and London. Housing Corp, Toronto; Arab Bankers update on the recent development in The areas covered will include: Association of North America; Islamic funds and the identified topi• realising the huge potential for Islamic Canadian Bankers Association; Centre cal issues. Among the key issues are: Equity Funds; pinpointing major for Middle East Studies (Harvard); 1. Why are Islamic funds grow• requirements in structuring the funds and the Islamic Society of North ing at such an unprecedented rate? to meet Shariah and consumer America. 2. How are these funds devel• demands; being aware of the risks; exploring various approaches; identi• Topics will include: defining the oped, structured, marketed, distrib• fying critical success factors; selecting role of Shariah; strategies; Harvard uted and managed in line with the process of stocks; acquiring techniques survey; Takafol; Islamic housing; and Islamic Shariah? to determine size of universal stock; US experiences. Speakers include the 3. What is the potential and overcoming the barriers of floating Institute of Islamic Banking of Islamic prospect for fund managers to pene• Islamic equity funds in the Western Banking and Insurance's Shariah trate the niche markets? market; and being able to identify Advisor, Justice Taqi Usmani 4. What are the growth poten• opportunities in emerging Muslim (Pakistan), and Duncan Smith of the tial, rate and speed, and opportunity markets. United Bank of Kuwait's London- of Islamic investment funds in Asia, Contributors to the conference based Islamic Investment Unit. America and Europe? will include: Basil Al-Ghalayini, The The conference is dedicated to the The topics for the two-day confer• International Investor, London; Dr establishment of appropriate Islamic ence, supported by the Institute of Farah Fadzil, Kuwait Finance House; financial institutions in Canada to tap Islamic Banking and Insurance, are: Dr Abdul Sattar Abdul Kareem the significant financial resources of Islamic Capital Market & Islamic AbuGhuddah, Secretary General, the North American Muslim commu• Funds - Overview; Capital Market Dallah Albaraka; Mohammad Tariq, nity thereby providing them with a Framework; Product Design and Faysal Bank of Bahrain; Stella Cox, realistic alternative to the existing Structuring; Marketing & Distribution; Kleinwort Benson; Richard Thomas, financial structure. Asset Allocation and Management; Islamic Investment Unit, United Bank It is hailed as an ideal opportunity Performance Measurement & of Kuwait; Syed Tariq Husain, ANZ to learn of the increasing relevance of Attribution; Custodian and Investment Bank; Nagib Baroudi, Islamic finance in meeting today's eco• Administration and Tax and Citibank; and Dr Rodney Wilson, nomic challenges. Accounting Issues. University of Durham, UK. BAHRAIN Murabaha Financing Facility to Ministry of Petroleum

slamic Investment Company of the Gulf (Bahrain) EC, Ministry. The Financing Facility has been done I(IICG Bahrain) and Citibank International Pic have joint• through the IICG Bahrain's agent. Citibank NA, ly structured and arranged syndicated Murabaha Bahrain Branch. Financing Facility of US$30 million to the Ministry of The one-year Murabaha Financing Facility is for pur• Petroleum and Natural Resources, Pakistan. chase of crude requirement of Pakistan and is to be repaid The State Bank of Pakistan unconditionally and in twelve instalments. The deal was lead managed by nCG irrevocably guarantees the obligations of the Bahrain.

New Horizon May 1997 13 Institute of Islamic and Insurance Publica )7

Banking and Finance- Binding Date Pages ISBN Price per copy Islamic concept pback 1993 204 (out of stock) £ 25 Accounting Issues in Islamic Banking pback 1994 144 1 898420 20 3 £25 Islamic Banking - And Its Problems pback 1995 32 1 898420 00 9 £5 Encyclopaedia of Islamic Banking and Insurance hback 1995 436 1 898420 05 X £150 Journey Towards Islamic Banking hback 1996 160 1898420 15 7 f.?5 Islamic Banking - An Overview hback 1996 184 1 898420 1 06 £25 European Perceptions of Islamic Banking hback 1996 136 1 898420 2 54 £25 Concise Directory of Islamic Financial Institutions pback 1997 32 1 898420 3 00 £5 The Monthly 'New Horizon' Annual subscription * Magazine 1992 24 ISSN 0955 095

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BAHRAIN MALAYSIA

GIB Ratifies ccounts MNI Takaful ulf International Bank's (GIB) "The General Assembly placed G1996 accounts were ratified at on record its thanks to Ghazi Abdul- Expects Higher the 20th meeting of the General Jawad, the previous General Income Assembly recently. The year's profits Manager, for the Bank's achieve• NI Takaful Sdn Bhd expects at at $94.5 million were up 5.2 per cent ments under his stewardship and Mleast RM109 million in premi• against the previous year following warmly welcomed Dr Abdullah El- um income for its fiscal year 1997/1998. strong contributions from the diversi• Kuwaiz as his successor. The bank is Its managing director Dr fied core business activities and con• well-placed and in robust financial Kamaruddin Shariff said the compa• condition and I am confident of its tinued cost containment. ny hoped to surpass last year's fig• HE Ibrahim Abdul-Karim, future prosperity under Dr El- ure of RM70 million as demand for Minister of Finance and National Kuwaiz's leadership." its products had been increasing Economy of the State of Bahrain and GIB is wholesale commercial steadily. Chairman of the board commented: bank based in Bahrain. It is wholly He said that the company had a "This has been another very success• owned by Gulf Investment variety of policies that suited both ful year with profits at their highest Corporation (GIC), the international non-Muslims and Muslims alike. "Our products can fulfil differ• level. Since 1991 profits have investment banking corporation ent needs and there is even one par• advanced at an annual compound owned equally by the governments of ticular policy where over 70 per cent the six GCC States. rate of 15.2 per cent. of the policy holders are non- Muslims," Dr Kamaruddin said after KUWAIT the signing of a memorandum of Kuwait Drafting understanding (MoU) between MNI and the armed force's religious corps New Law for Islamic Banks (KAGAT). uwait's central bank is drafting legislation for supervising Islamic banks He said the MoU would allow Kaimed at encouraging more opportunities for Muslims to save in line with KAGAT to participate in the Pelan religious law, governor Shaikh Salem Abdel Aziz Al Sabah has told a Kuwaiti Takaful Keluarga Barakah, allowing daily. the corps to provide better care for The Central Bank of Kuwait "has begun taking the steps to prepare a draft its members. law for Islamic banks and it has made considerable progress in this are," the Up to now, Dr Kamaruddin governor said. said, 658 armed forces personnel If the Islamic finance sector in the country is not developed, many Kuwaiti had taken out policies under the Muslims who want to save money according to Islamic traditions may take scheme and MNI hoped to increase their funds abroad, he warned. the number through better informa• Islamic banks operate according to rules laid down in Shariah. Kuwait has tion programmes. just one Islamic bank - Kuwait Finance House - against seven conventional "The scheme is aimed at those in banks, although there are several finance houses that operate investment funds the lower to middle income brackets according to the Islamic code. as we feel there is a need to provide viable policies to such groups," he said. Kuwait Finance House Invests in Labuan He said premiums were as low uwait Finance House, the parent company of KFH Ijarah House (M) Sdn as RMIO month and payout upon KBhd, has acted as principal Mudarib with a participation of US$65 million death was RM12,000 or RM24,000, (RM162 million) for a US$100 million (RM250 million) Islamic investment into depending on the circumstances. Citibank Malaysia (L) Ltd for the purpose of Murabaha financing into Dr Kamaruddin said the scheme Malaysia. had nearly 28,000 policyholders and The Murabaha financing, represents the first major investment by a Middle contributed RM2.6 million to last Eastern Islamic financial institution into Labuan, said KFH Ijarah House in a year's turnover. statement. Additionally, Kamaruddin said, KFH Ijarah House, the first Islamic leasing company in Malaysia, has been sales of its insurance schemes via offering for the past 18 months Islamic financial services, mainly al-Ijarah, a post offices were gaining momen• leasing scheme, and al-Murabaha, to the corporate and retail market in tum as this made insurance more Malaysia. - Bernama accessible to those in remote areas.

New Horizon May 1997 15 NEWS MONITOR

MALAYSIAN Bank Negara Islamic Accounting Committee Set Up Governor's term n Islamic financial accounting ment was committed to promoting Extended Aworking committee has been set Islamic finance. up to provide technical support and He said credible and high quality ank Negara Governor Dato advice relating to Islamic reporting accounting standards that catered to BAhmad Mohamed Don's tenure and accounting standards. the needs of players would help has been extended for another three Securities Commission (SC) chair• make Kuala Lumpur the leading years from IMay, 1997 to 30 April, man Datuk Dr Munir Majid said the Islamic capital market centre. 2000, Finance Minister Dato Sri committee was formed on the initia• Munir said the government clear• Anwar Ibrahim armounced. Ahmad, the former managing tive of the Malaysian Association of ly recognised the critical role played director and chief executive officer of Certified Public Accountants and by a sound financial reporting and Malayan Banking Bhd, was appoint• comprised representatives from standard-setting environment in ed Governor on 1 May, 1994, and has financial institutions, certified public developing a transparent, fair and since been working hard to prepare accountants and academicians as well efficient capital market. the banking system for increasing as representatives from Bank Negara He said the standards of the globalisation. Accounting and Auditing and the SC. He introduced a series of mea:- Organisation for Islamic Financial Munir said this when delivering sures which include strengthening Institutions (AAOIFI) were increas• the opening address at the public the capital base of financial institu• hearing on Islamic accounting and ingly being used by central banks tions as well as improving their size auditing standards held here yester• around the world as an integral part and capability to undertake bigger day. of their function. and more complex transactions. The group will be responsible for: Munir said the AAOIFI had Ahmad, appointed chairman of developing an accounting framework helped to standardise accounting the Labuan Offshore Financial in Islamic finance; defining and practices of Islamic financial institu• Services Authority on 15 Feb, 1996, is resolving issues concerning the tions, making the financial informa• also committed towards making the accounting and reporting practices of tion of these institutions comparable Labuan international offshore finan• transactions based on Shariah princi• and transparent. cial centre a success. ples; and identifying problems and However, he added, the growing submitting recommendations to the acceptance and implementation of Amanah Factors: Shariah advisory council (SAC) on these standards would require a high accounting and reporting matters degree of co-operation between stan• First to offer Islamic arising from the council's administra• dard-setters and regulators. factoring tion of Islamic modalities, products Munir said the Malaysian manah Factors Sdn Bhd, a pio• and processes. Accounting Standards Board would Aneer in the local factoring indus• Munir said the setting-up of the probably want to work closely with try, has become the first in the coun• try to offer Islamic factoring. Its chair• SACs by the SC and Bank Negara AAOIFI in establishing a framework man Abdullah A Rasol said that indicated that from the groundwork for the Islamic accounting and audit• Islamic factoring would serve to ing standards. - Star and legislative efforts, the govern• expand an industry which held excel• lent potential. Interest-free Banking at BSN He said the total factoring vol• Commercial Branches ume in Malaysia last year was about RM7.5 billion, having attained an BSN Commercial Bank (M) Bhd Islamic banking in Malaysia organ• annual growth rate of 30 per cent for plans to open two branches soon ised by the bank in Kuala the last five years. which would offer interest-free bank• Terengganu. "The launch of Islamic factoring ing, revealed its chairman Raja Dato Raja Abd Aziz said the bank by Amanah Factors is a milestone in Seri Abd Aziz Raja Salim. He said the was identifying locations for the the development of the factoring bank had obtained permission from Kota Baru and Seremban branches industry worldwide which is estimat• Bank Negara to open three such but the branches were expected to ed at US$395 bilUon (RM987.5 bil• branches and that initially it would be in operation in three to six lion)," he said. open one in Kota Baru and one in months. Factoring is a financial instru• Seremban. BSN Commercial Bank's branches ment that enables clients to raise A third branch would be opened were already offering interest-free funds through the sale of invoices to in Kuching, he told reporters after a banking together with the conven• a factoring company. In conventional seminar on approaches towards tional system. - Bernama

New Horizon May 1997 16 N£WS MONITOR factoring, a factoring company would timely, given the nation's push to PAKISTAN advance up to 80 per cent of the value develop a thriving Islamic financial of an invoice factored by a client. and banking industry not only locally "The underlying concept of fac• but around the world. MCB branch robbed toring, such as the sale and purchase "As consensus is being of Rs5.6m of debt, is permitted under the bai al- sought among Islamic nations dayn (debt trading) Islamic financing towards a broader and deeper n the biggest bank robbery of the concept," Abdullah said. Islamic financial market interna• Iyear committed last month (April) "Several structural modifications, tionally, we in Malaysia could in the Cloth Market branch of the however, have been made to ensure continue developing innovative Muslim Commercial Bank in the lim• full compliance with Shariah princi• Islamic financial products and its of the Kharadar police, robbers ples." services in our effort to become looted over Rs5.6 million and walked In Islamic factoring, invoices and the Islamic financial centre of the debts to be factored would involve world," he added. away facing no resistance. transactions for the supply of goods Amanah Factors is a wholly- Ninteen bank staffers and two and services sanctioned under owned subsidiary of Komplek armed guards were present in the Shariah. All elements of interest or Kewangan Malaysia Bhd, an invest• bank when the eight-member gang Riba are removed. ment holding company with interests entered it at 9:30am. Two of them in finance, property development and Abdullah described the introduc• went straight to the cash counter and tion of Islamic factoring in Malaysia as management. - Star told the cashier that they wanted to deposit US$1,000 in the prime minis• Islamic banking share still small ter's national debt retiring scheme, while two others moved to the upper he share of Islamic banking in mobilised under Islamic banking, TMalaysia's financial system is still although its share declined to 45.2 per portion of the bank where the bank's small despite its successful presence cent at the end of 1996 from 65.7 per guard, Mohammad Nawaz, was in the market, according to Bank cent a year earlier. positioned. The other guard, Negara (State Bank) armual report for Investment deposits (59.6 per Khushrang, belonging to a multi• 1996. It said the proportion of Islamic cent) continued to dominate types of national private security agency, was banking deposits and financing deposit followed by savings (20.8 per on the ground section. accounted for only 2 per cent and 2.2 cent) and demand deposits (19.6 per As the two gang members pre• per cent respectively of the total cent). Growth in total financing tending to be depositors held the deposits and loans of the banking sys• extended under Islamic banking cashier at gunpoint, their partners tem. remained strong in 1996. Financing overpowered the guards and took The share of deposits and financ• rose by 75.9 per cent to RM6.1 billion ing form interest-free banking system at the end of 1996 from RM3.5 billion their guns. All robbers were carrying (IFBS) operations in the banking sys• at the end of 1995. pistols and revolvers. They held the tem was even smaller - 1 and 1.3 per Bank Negara said 34.2 per cent of entire staff at gunpoint and looted a cent respectively for the year under total financing was channelled to the littie over Rs50,000 in cash from the review. At the end of 1996, a total of property sector comprising construc• counter. 49 financial institutions was partici• tion, real estate and residential hous• Then they forced the staff to pating in the IFBS, comprising 25 ing. Financing extended to individuals open the strong room where two commercial banks, 21 finance compa• for the purchase of residential proper• safes contained over Rs5 million. nies and three merchant banks. ties amounted to RM984 million - a They scooped up the cash from the Bank Islam Malaysia Bhd rise of 117.5 per cent. remained the sole Islamic bank. Bank Financing extended to real estate, vault, stuffed it in a bag and made Negara said Islamic banking construction and other property sub- away with the loot. They also injured resources, however, had expanded by sectors absorbed RMl.l billion, an the private security guard with pistol 63.5 per cent to RM 10.1 billion for the increase of 92.8 per cent. The manu• butts and took away the guards' year under review from RM6.2 billion. facturing sector had the second largest weapons. share of the total financing extended Deposits remain the primary source of Police said the security alarm funds, accounting for 71.7 per cent of accounting for 15 per cent at the end system of the branch was connected the total reserves at the end of 1996. of 1996. During the year, the Central with the private security network. During the year, total deposits bank put into place new measures to There are at least half a dozen push mobilised under Islamic banking reg• sustain the growth of Islamic banking istered a growth of 47.5 per cent to such as the New Financial Disclosures buttons at different desks for raising RM7.3 billion. The central bank said (New GP 8), full-fledged Islamic bank• the alarm, they said, and wondered the Islamic bank accounted for a sig• ing branches and the Shariah why none of the 19 bank staffers nificant portion of total deposits Advisory Council. could raise it.

New Horizon May 1997 17 PAKISTAN ANZ Grindiays Earns Focusing more on i^usharaka Business Rs1.16 billion Profit n an otherwise beleaguered envi• taken the portfolio of the company he ANZ Grindlays Bank Ltd has Ironment for Mudarabas, the First towards higher levels of assets in Tearned the pre-tax profit of Rsl.l6 Grindlays Mudaraba is continuing to plant and machinery and a more billion for the year ended on maintain its position as one of the diversified sectoral mix as compared 31December, 1996 as against the prof• leading leasing entities in the coun• with the previous year. Although, it of Rs964.88 million recorded in the try. As a result, the First Grindlays the Mudaraba company is seeking to year 1995. The bank's earning Mudaraba is recognised to be explore new avenues of medium and amounted to Rs3.51 billion for the amongst the most financially sound long-term finance at both the local as year 1996 as against Rs2.88 billion in Mudarabas with an after tax profit of well as at the international levels, the 1995, according to the balance sheet for the year 1996. Rs45.75 million in the year ended management thinks that the prevail• Deposits of the bank including June 30,1996. ing environment for Mudarabas fixed deposits, savings bank deposits strictly inhibits the First Grindlays The Mudaraba has also and current accounts, contingency ability to raise such facilities. announced 19 per cent cash dividend accounts etc, during the year rose to or Rsl.9 per certificate. Financial "Whilst the Mudaraba is eminent• Rs26.42 billion from the deposits of analysts at the brokerage houses are ly capable of raising short-term funds Rsl7.58 billion in the year 1995. also of the view that the First we do not see this as an avenue to According to the balance sheet of the Grindlays Mudaraba held its posi• generate growth in leased assets," bank, the fixed deposits recorded the tion of strength and stability through said Azhar Hamid, Chairman of the maximum rise to Rsl0.50 biUion from substantial financial reserves, effi• First Grindlays Mudaraba. Both the the fixed deposits of Rs5.53 billion in cient utilisation of resources and Mudaraba analysts and the company the year 1995. operation practises of a standard, officials are of the opinion that any The ANZ is the only foreign bank which applies the same ANZ net• focussed policy for the growth of the with representation in all four work standard in Pakistan. leased assets will result in imprudent provinces of Pakistan. Grindlays com• menced its operation in 1884 in Due to this the company proudly levels of mismatch in tenor and liq• Karachi. It was the first foreign bank claims that even under the present uidity. in Pakistan to launch a Mudaraba in regulations, it has a capacity to grow As a result, the most viable 1987 - "First Grindlays Mudaraba". its balance sheet footing by approxi• avenue for the growth currently Now it is a leading business entity, mately Rs4.5 billion. During 1995-96 being pursued by the company is which is actively contributing, to the (July-June), an amount of Rs9.2 mil• raising funds from the general public industrial development of Pakistan. lion representing 20 per cent of the through certificate of Musharaka pro• Meanwhile, area manager Shahid after tax profit has also been trans• gramme. During the year under Sheikh said the bank had acquired ferred to statutory reserves in com• review, the company had also licenses for two more branches which pliance with the State Bank of received assessment orders for prior would extend the number of bank's Pakistan's directives for the non- years, disallowing unabsorbed depre• branches to 16 in the country. At pre• banking financial institutions. ciation amounting to Rs449 million sent the ANZ Grindlays bank is oper- ating 14 branches with seven in The First Grindlays Mudaraba brought forward from the tax holiday Karachi and once each in Quetta, has 11,381 shareholders out of period. Peshawar, Islamabad and which the biggest 40.68 per cent is This resulted in aggregating the Rawalpindi. in the hands of individuals. While tax liability to around Rs22 million. Another representative explained around 32 per cent is with ANZ The Mudaraba had filed an appeal that the: "bank has financed a large Grindlays Bank and the Grindlays before the Commissioner of Income number of projects in Pakistan, most Services (Private) Limited. The Tax. Nevertheless, the company, as a of the them under the government of main focus of business continued to matter of prudence had included the Pakistan, besides project financing in be in leasing as disbursements dur• "challenged tax" in its profit and loss the private sector." ing the year amounted to Rs564 accounts. Besides this, the First million and net leased assets as on Grindlays Mudaraba has also chal• Institute o/ Islamic June 30, 1996 stood at Rsl.311 bil• lenged the extended scope of levy of lion as compared with Rsl.287 bil• Central Excise Duty, which has also Banking and Insurance lion a year ago. included leasing and Musharaka Web Site Changes in emphasis reflective finance facilities. - Fakhr Ahmad, The http://www.i9iamic-banking.com of greater financial efficiency have News.

New Horizon May 1997 18 NEWS MONrrOR

SAUDI ARABIA TRINIDAD & TOBAGO Saudia Arabia Opens IDB Representatives Stocic i\/iarket to Foreigners Visit ollowing a request by the Minister is no doubt this will reflect positively audi Arabia has opened its stock Fof Housing and Settlement, John Smarket to foreign investors in a on the market by boosting turnover Humphrey, to the Islamic move that will bring in more liquidity and share prices, bringing in more liq• Development Bank (IDB) to set up an and increase share turnover in its uidity and enabling Saudi Arabia to Islamic bank in Trinidad & Tobago already busy market. attract the attention of international (T&T), Dr Ahmed Abisourour and Dr Saudi authorities have given the investors," he added. Osman Babikir Ahmed spent a week green light for the Saudi American Bankers said SAMBA received in T&T on a fact finding mission. Bank(SAMBA) to set up the Gulf approval on Monday from the Saudi In 1991 IDB gave a grant of kingdom's first investment fund Arabian Monetary Agency (SAMA), US$286,000 to the Anjuman Sunnatul Jamaat Association of T&T, to con• allowing foreign subscription. More the kingdom's central bank, for set• vert the defunct Haji Ruknudeen banks are expected to follow suit. ting up the Saudi Arabian Investment Girls' College in Tunapuna, to the Fund (SAIF Ltd.). "Most banks have presented Haji Ruknudeen Institute of Islamic applications for setting up similar It will be listed on the London Studies. The Institute was formally funds. They are expected to get stock exchange and invest mainly in opened on 28th October, 1995, and approval," said Henry Azzam, chief shares of Saudi firms. It was the first classes began on 11th September, economist and deputy manager of the time that the conservative Gulf nation, 1995. National Commercial Bank, the which controls more than a quarter of During their visit, Dr Abisourour biggest bank in Saudi Arabia. the world's oil wealth, has permitted and Dr Ahmed met several govern• "You can say the Samba move is a foreigners to trade in its shares, which mental and non-govenmental bodies including the Muslim Credit Union prelude for expanded foreign invest• have largely been restricted to Saudis. Cooperative Society Limited (MCU). ment in the Saudi stock market. There Established in 1983, the MCU has done pioneering work in the field of IDB's Support Sought for Research Projects Islamic Economics, Banking & Finance in T&T and is expected to he OIC Standing Committee on Khan Laboratories, KRL Medical continue playing an important role in TScientific and Technological Co• Centre, Biomedical and Genetic Eng the development of Islamic Financial operation (COMSTECH) has submit• Division, Islamabad, while Intermediation in the Caribbean ted four research projects to the International Centre for Agricultural region. - The Caribbean Muslim Islamic Development Bank (IDB) for Research in Dry Areas, Syria, has also Standard, T&T financial support. prepared two project proposals for UAE Sources in the committee said training of scientists. that projects from active Muslims sci• Sources said that research pro• Investors Race to entists in selected areas were invited jects related to Bio-fertiliser for World's Biggest and then forwarded to IDB, Jeddah to increasing sustainable crop produc• Islamic Bank which the bank gave positive tion were also received at COM• nited Arab Emirates (UAE) response. These recommended pro• investors are racing to subscribe STECH from Egypt and Bangladesh U jects included: "bio-fertilisers for in the world's biggest Islamic bank and were being reviewed. Projects in that is to be set up by the oil-rich increasing sustainable crop produc• this area are also expected from Gulf states, dealers have revealed. tion," prepared by National Institute Senegal and Uzbekistan. Many of them have sold shares of Biotechnology and Genetic Engg, in other institutions to secure cash for Faisalabad, "computerised textile Meanwhile, COMSTECH has also their stake in the Emirates Islamic designing technology", prepared by approached various international Bank (EISB), which will be based in Abu Dhabi and partly owned by the Karachi School of Art, Karachi. organisations for financial support UAE government, they said. regarding its fellowship, which per• It was further learnt that a project "I have been flooded with on "strengthening of centres of excel• tained to training of young scientists queries about the date of the sub• lence" had been prepared by Dr A Q from the Muslim world. scription, which I expect to begin

New Horizon May 1997 19 NEWS MONITOR within a few weeks," said Bassam al- after the Dubai Islamic Bank, at pre• Ramahi, deputy manager of the sent the second biggest in the world, ADCB Profit Emirates Commercial Centre, a lead• with a capital of 135.6 million dollars. Soars 20.6pc ing brokerage house. "Many dealers Al-Bayan did not specify the size are selling their shares to get cash to of the government's shareholding in bu Dhabi Commercial Bank contribute to the bank. I am sure that EISB but bankers expect it to be less A(ADCB) has reported a 20.6 per the bank's capital will be far oversub• than 50 percent. They said investors cent rise in profit for 1996. Its profit scribed because the government par• from other Gulf Arab states would be went up to Dh362 million in 1996 as ticipation gives confidence to given a limited access to the project. compared to Dh300 million in the investors," he said. "This project it highly feasible and I previous year. Bankers said the central bank had am certain there will be a rush by The 1996 results of the bank were already approved the project and it investors," said Zuhair Kaswani, announced at the 12th annual ordi• would be launched once its statute is another UAE stockbroker. nary general meeting in Abu Dhabi. finalised. The state-owned Abu Dhabi "The UAE has a large number of Among those who attended the Investment Authority and other offi• banks but the market here and in meeting were Khalifa Mohammad cial institutions are among the key other regional states can accommo• Hassan, managing director and chief shareholders. The project had initially date more given the expanding busi• executive officer, and Fadhel Saeed been called the Abu Dhabi Islamic ness opportunities. As you see, most Al Darmaki, acting chairman and Bank and was confined to investors banks are making high profits every executive member. from the emirate. But it was changed year." The UAE, a major OPEC oil- Net income from banking opera• to cover the whole UAE following producer, has 19 national banks and applications by other emirates to set 28 foreign units, with assets of tions rose to Dh475 million compared up similar banks. around $46 billion. It has suspended to Dh407 million in '95 while operat• ing profit before changes in operating The official daily Al-Bayan said permits for new foreign commercial the bank would have a paid-up capi• banks but allowed opening of repre• assets and liabilities was Dh442 mil• tal of 1.2 billion dirhams ($326 mil• sentative offices. lion compared to Dh367 million in lion) and an authorised capital of EISB was planned after several '95. three billion dirhams ($817 million). other Middle East banks opened ADCB changed its name from "Our expectations are that subscrip• Islamic banking units to take advan• Khalij Commercial Bank after the tion would reach double the autho• tage of the growing demand for such merger of Emirates Commercial Bank rised capital in a short period of time operations. "There are two main fac• and Federal Commercial Bank on 1 given the large liquidity in the mar• tors for the expected success of the July, 1985. ket. This could prompt shareholders EISB project. The first is that there is a to raise the paid-up capital," Ramahi growing tendency by the public to said. invest in Islamic banks for religious NBAD profits The venture will be the biggest reasons," Ramahi said. "The second soar 46pc Islamic bank in the world in terms of factor is purely economic. Most he National Bank of Abu Dhabi, capital. The Cairo-based Faisal Bank Islamic banks here are now ensuring T(NBAD) yesterday announced net is currently the top Islamic bank. EISB higher returns for investors compared profits of Dh313.8 million for the year is the second Islamic bank in the UAE with commercial banks." - AFP 1996, registering an increase of 46 per UK cent over its Dh215 million profits of 1995. GoWal Mohammed bin Habroush Al Abbas Convicted in BCCI Case Suweidi, chairman of the bank told bbas Gokal has been found guilty of defrauding the Bank of Credit and shareholders at the annual general ACommerce International (BCCI) of 750 million pounds. In Britain's body meeting that it was the highest biggest ever fraud trial, Gokal was convicted of borrowing the money without level of profitability achieved in the intending to pay it back. 28-year history of the bank. Abbas Gokal, with his brothers Mustafa and Murtaza, ran the Gulf Group, The general body meeting also an international conglomerate of shipping and commodities companies. At the approved the payment of a 20 per cent dividend to shareholders with time of BCCI's collapse it was said to be the bank's biggest borrower, owing the remaining 40 per cent of net prof• more than one billion dollars. its to be retained in special and gen• Gokal fled to Pakistan, but was arrested in Frankfurt in 1994. Gokal eral reserve accounts or carried for• claimed his right to silence when brought to London by the Serious Fraud ward as retained profits. Office representatives and did not make a preliminary statement to the police. Operating profit before provision He pleaded not guilty to the charges made against him by the Serious for doubtful debts, securities and taxes rose to Dh385.9 million in 1996 Fraud Office when he first appeared in court in December 1994, but was not representing an increase of 18 per granted bail and consequently spent more than two years in jail before the cent above the 1995 figure of Dh327.6 trial started in September last year. million.

New Horizon IVlay 1997 20 DIVERSITY IS OUR STRENGTH our growth speaks for itself

Beximco's 18 Companies employing over 6,500 persons having total turnover of Taka 2.5 billion and total assets exceeding Taka one billion are engaged In industrial manufacturing, construction activities and international trading.

We are involved in marine food export, shrimp farming, pharmaceutical, agro-chemical, garments, computers, soil investigation, foundation and piling works, deep tubewell drilling, bridges, superstructures and road buildings, hydraulic structure and general construction, besides being the world's largest jute yarn manufacturer. We also handle over 3.5% of Bangladesh's total export.

We welcome co-operation with others technological joint ventures and for investment in new activities.

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