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Current Issues in Islamic Banking and Finance : Resilience and Stability in the Present System / Edited by Angelo M Current Issues in Islami Banking and Finance Resilience and Stability in the Present System 6979 tp.indd 1 3/10/10 4:19:57 PM This page intentionally left blank Current Issues in Islami Banking and Finance Resilience and Stability in the Present System Editor Angelo M Venardos Heritage Trust Group, Singapore World Scientific N E W J E R S E Y • LONDON • SINGAPORE • BEIJING • SHANGHAI • H O N G K O N G • TAIPEI • CHENNAI 6979 tp.indd 2 3/10/10 4:20:00 PM Published by World Scientific Publishing Co. Pte. Ltd. 5 Toh Tuck Link, Singapore 596224 USA office: 27 Warren Street, Suite 401-402, Hackensack, NJ 07601 UK office: 57 Shelton Street, Covent Garden, London WC2H 9HE Library of Congress Cataloging-in-Publication Data Current issues in Islamic banking and finance : resilience and stability in the present system / edited by Angelo M. Venardos. p. cm. ISBN-13: 978-981-283-392-1 ISBN-10: 981-283-392-7 1. Banks and banking--Islamic countries. 2. Banks and banking--Religious aspects--Islam. 3. Banking law (Islamic law) 4. Finance--Islamic countries. 5. Finance--Religious aspects--Islam. 6. Finance (Islamic law) I. Venardos, Angelo M. HG3368.A6C87 2010 332.10917'67--dc22 2009052120 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. Copyright © 2010 by World Scientific Publishing Co. Pte. Ltd. All rights reserved. This book, or parts thereof, may not be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording or any information storage and retrieval system now known or to be invented, without written permission from the Publisher. For photocopying of material in this volume, please pay a copying fee through the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA. In this case permission to photocopy is not required from the publisher. Editor: Juliet Lee Ley Chin Typeset by Stallion Press Email: [email protected] Printed in Singapore. Juliet - Current issues in Islamic Banking.pmd 1 4/9/2010, 5:02 PM b839_FM.qxd 2/1/2010 10:15 AM Page v DISCLAIMER The views and opinions expressed in this whole book are the authors’ and do not necessarily represent those of their affiliations. b839_FM.qxd 2/1/2010 10:15 AM Page vi This page intentionally left blank b839_FM.qxd 2/1/2010 10:15 AM Page vii FOREWORD Southeast Asia is the powerhouse of skills and innovation in Islamic finance as the GCC is the pool of liquidity. Recently, there have been many issues of concern in the sector, with some recalled certifica- tions and Shariah incompatibility concerns. The sector is young and growing rapidly, thereby demanding close monitoring to enable the establishment of a robust and sustainable alternative to conven- tional finance. This is a timely book as it addresses the issues facing the momen- tum that Islamic finance has taken in the world. The sub-prime crisis and the credit crunch have focused considerable attention on the sector: its viability and sustainability. The challenges are many and not insurmountable. The market place is constantly evolving and expand- ing beyond the Muslim clientele and regions. The expected growth of the Islamic finance sector worldwide is estimated at about 15% by the year 2020, but if it exceeds that it should come as no surprise. Standardisation and harmonisation are issues raised consistently at many fora and being addressed and dealt with by many of the active members and institutions involved in the Islamic finance sector. It takes time but the start has been made and many intelli- gent minds have committed to establishing this means of finance. vii b839_FM.qxd 2/1/2010 10:15 AM Page viii viii Foreword Dr. Angelo Venardos has provided a valuable service in the pub- lication of this book with contributions from some of the legends in the Islamic finance industry who have considerable knowledge of their subject and are active practitioners. The leading lawyers, bankers, regulators, and accountants in the sector are among the contributors and some of them are personal friends. They are talk- ing the talk and walking the walk on a daily basis and are at the cutting edge of development in the industry. There is not much available in the form of literature on the current issues in the sector and this is a fine addition that will prove useful to academics, practitioners, students, and others who would be interested in this sector — where it has been, where it is, and where it is going. All extremely relevant. Majid Dawood CEO, Yasaar Limited Dubai, UAE b839_FM.qxd 2/1/2010 10:15 AM Page ix CONTENTS Foreword vii Majid Dawood (CEO, Yasaar Limited, Dubai) 1. Resilience and Stability: Socioeconomic Response 1 in Southeast Asia Angelo M. Venardos (Heritage Trust Group, Singapore) 2. Legal and Regulatory Changes to Promote the 17 Development of Islamic Banking and Finance in Singapore Arfat Selvam (Managing Director, Arfat Selvam Alliance LLC, Singapore) 3. Brunei: A Niche Money Market for Offshore 45 Islamic Finance Khairul A. Khairuddin (Director, HMR Trust Ltd, Brunei) and Sukor Ashak (Business Development Manager, HMR Trust Ltd, Brunei) ix b839_FM.qxd 2/1/2010 10:15 AM Page x x Contents 4. The Risk Profile of Mudaraba and Its Accounting 61 Treatment Hajah Salma Latiff (Senior Lecturer, Universiti Brunei Darussalam, Brunei) 5. Legal and Regulatory Issues Concerning Islamic 81 Finance’s Development in Malaysia Dato Dr Nik Norzrul Thani Nik Hassan Thani (Chairman/Senior Partner, Zaid Ibrahim & Co, Malaysia) and Madzlan Hussain (Associate, Zaid Ibrahim & Co, Malaysia) 6. Recent Legal and Regulatory 99 Developments for Islamic Banking and Finance in Indonesia Hanim Hamzah (Partner, Zaid Ibrahim & Co; and Senior Foreign Counsel, Roosdiono & Partners) 7. Making Sense of the Fast-Growing Islamic 115 Finance Market Tadashi Maeda (Director-General, Japan Bank for International Cooperation) 8. The Growth of Islamic Finance in Southeast Asia: 125 Regulatory Challenges and Opportunities for the United States Mercy A. Kuo (Director, Strategic Asia Program, The National Bureau of Asian Research, The Financial Center, USA) 9. An Introduction to the Laws and Practices of Islamic 145 Trusts and the Distribution of a Trust upon Maturity Angelo M. Venardos (Heritage Trust Group, Singapore) and Aimi Zulhazmi Abdul Rashid (BIMB Trust Ltd, Labuan) b839_FM.qxd 2/1/2010 10:15 AM Page xi Contents xi 10. Lessons From Pakistan’s Model 167 Bilal Rasul (Registrar, Securities and Exchange Commission of Pakistan) 11. Islamic Structured Products: Issues and Challenges 189 Aznan Hasan (Professor, International Islamic University, Malaysia) 12. Islamic Banks: Resilience and Stability — Not Immune 229 from Crisis Shamshad Akhtar (Former Governer of the Reserve Bank of Pakistan and currently with Asian Development Bank) 13. Islamic Capital Markets: A Growing Area 255 for Investments Michael Mahlknecht (Delta Hedge) 14. Short-Selling Replication in Islamic Finance: 277 Innovation and Debate in Malaysia and Beyond Ryan Calder (Department of Sociology, University of California-Berkeley, USA) b839_FM.qxd 2/1/2010 10:15 AM Page xii This page intentionally left blank b839_Chapter-01.qxd 2/1/2010 10:09 AM Page 1 RESILIENCE AND STABILITY: SOCIOECONOMIC RESPONSE IN SOUTHEAST1 ASIA Angelo M. Venardos Islamic Banking and Finance (IB&F) is recognised by both Muslims and non-Muslims as an ethical alternative, protecting against the worst excesses of leverage whilst reinstating values, such as trust, which have been lost in conventional finance. Figures cited show that Islamic finance is growing in popularity as a result of the current crisis and there is scope for it to move into the financial mainstream with the sector estimated to reach US$4,000 billion in the next 5 years. However, the first defaults of Sukuk are set to expose the vul- nerabilities of Islamic finance, with most investors expected to have no better legal redress than conventional bondholders as underly- ing assets have not been truly transferred to them. Dr. Zeti Akhtar Aziz, the Governor of Bank Negara Malaysia, has drawn attention to the issue of the resilience of IB&F in confronting the financial crisis. The resilience of IB&F can be tested only if it is exposed to the current turmoil in the financial markets. Dr. Zeti has 1 b839_Chapter-01.qxd 2/1/2010 10:09 AM Page 2 2 Angelo M. Venardos stated that IB&F had proven to be resilient during the Asian finan- cial crisis. These statements drew attention to the issue that whilst IB&F was able to withstand the Asian crisis, the Asian crisis was only confined to a certain region and, hence, the resilience of IB&F remained to be tested in the light of the present crisis, which is of a greater magnitude and wider geographical scope.1 Undoubtedly, compared to the Asian crisis, the magnitude and scope of the cur- rent financial crisis is substantially greater owing to the processes of financial globalisation and liberalisation which have reinforced the global inter-linkages across the financial markets. Given that the Islamic financial system has evolved to become part of the global financial system, it is therefore timely and appropriate to deliberate the issues relating to the question: Is the Islamic financial system truly strong enough to weather the current economic and financial crisis? The current financial crisis essentially emanated from the oper- ations of the originate-to-distribute business model, in which large international banks originated loans (or underwrote loans origi- nated by brokers) in the US sub-prime mortgage market, and then securitised the loans thus taking the credit exposure off their balance sheets. In contrast to conventional finance, in Islamic finance, lending on the basis of interest is prohibited by the Shariah.
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