ISSUE NO. 164 APRIL–JUNE 2007 RABI AL THANI–JUMADA AL THANI 1428

PUBLISHED SINCE 1991 GLOBAL PERSPECTIVE ON ISLAMIC BANKING & INSURANCE

UK: OPEN DOOR POLICY

HALAL BANKING OR ISLAMIC BANKING?

QARD HASAN MICROFINANCE

PROFILE: LORD EDDIE GEORGE

ISLAMIC BANKING COMES TO KYRGYZSTAN

TAKAFUL: THE ETHICAL WAY TO INSURE

ISLAMIC FUND MANAGEMENT

NEWHORIZON Rabi Al Thani–Jumada Al Thani 1428 CONTENTS

Features 14

14 Kyrgyzstan: moving towards Islamic finance With a Muslim population of over 5.1 million and rising, the Central Asian Republic of Kyrgyzstan is asserting its Muslim identity in finance.

21 Lord Eddie George: The steady hand behind Islamic finance in the UK A profile of the former Governor of the Bank of England, and the initiator of the introduction of Islamic mortgages to the UK’s financial services market.

21 24 Open Door Policy A country focus on the UK’s Islamic finance market, its evolution and current developments, and the roles of the Government, governmental organisations and the industry regulator in making the country the most Islamic finance- friendly economy in the West.

34 Halal banking or Islamic banking? Haider Ala Hamoudi of Columbia Law School and Rehan Jafri of 1st Ethical give their views on whether today’s Islamic banking is Shari’ah perfect.

36 The ethical way to insure Interview with Ajmal Bhatty, global head of takaful at Tokio Marine Europe, Dubai, about the ethical aspects and benefits of Islamic insurance. Regulars

05 NEWS 30 IIBI NEWS 43 APPOINTMENTS A round-up of the important stories from the last quarter around the globe. 32 IIBI LECTURES 44 QUESTIONS & ANSWERS April and June lectures reviewed; 18 ACADEMIC ARTICLE July lecture preview. 46 CALENDAR Qard hasan microfinance. 40 ACADEMIC ARTICLE 49 RATINGS AND INDICES 29 ANALYSIS Investment planning and process in The global Islamic funds market. Islamic fund management. 50 GLOSSARY

www.islamic-banking.com IIBI 3 EDITORIAL NEWHORIZON April–June 2007

Executive Editor’s Note

Another three months have gone by, bringing yet more developments in Shari’ah-compliant finance around the world. This second issue of NewHorizon in 2007 EXECUTIVE EDITOR Mohammad Ali Qayyum, contains a selection of the most interesting, influential Director General, IIBI and significant happenings in the industry across the

EDITOR globe from the last quarter. The words ‘new’ and ‘first’ Tanya Andreasyan are frequently used on the pages of this issue. A new Islamic fund to be hosted in Dubai, a new Islamic CONTRIBUTING EDITORS Tom Alford company launched in Abu Dhabi, a new Islamic bank to Don Brownlow be established in Yemen, a new product introduced by James Ling First Gulf Bank. Creation of the world’s first Shari’ah- Martin Whybrow compliant electronic payment system, launch of the first IIBI EDITOR Islamic bank in Singapore, plans to introduce Islamic Mohammad Shafique banking in the Maldives for the first time. But not all IIBI EDITORIAL PANEL the news is positive with the recent announcement by Mohammed Amin Ajmal Bhatty Southern Sudan requiring Islamic banks to convert to Stella Cox conventional banking or leave, although no date is Dr Humayon Dar specified by when the banks must do so. Iqbal Khan Richard Thomas Dr Imran Ashraf Usmani Nevertheless, the outlook for the future of the industry

DESIGN CONSULTANT is optimistic. Kyrgyzstan, the Central Asian country Becky Ellison (a former Soviet Union republic), is introducing Shari’ah- compliant principles to its finance market. Islamic PUBLISHED BY IBS Publishing Ltd banking has reached new heights in the United Kingdom, 8 Stade Street with the country’s government planning to issue sukuk Hythe, Kent, CT21 6BE United Kingdom (government bonds). Lord Eddie George, the former Tel: +44 (0) 1303 262 636 Governor of the Bank of England, who was at the Fax: +44 (0) 1303 262 646 forefront of the development of the industry in Britain, Email: [email protected] Web: www.ibspublishing.com talks to NewHorizon about the evolution of Islamic finance in the country. CONTACT Advertising IBS Publishing Ltd Also in this issue, NewHorizon continues its analysis of Paul Minister Advertising Manager takaful (Islamic insurance) and once again focuses on the Tel: +44 (0) 1303 263 527 question of ethics in Islamic banking. Shari’ah-compliant Fax: +44 (0) 1303 262 646 microfinance is the subject of scrutiny in the academic Email: [email protected] article written by two specialists from the International SUBSCRIPTION Monetary Fund and The World Bank. And, of course, Institute of Islamic Banking & Insurance (IIBI) amongst other things, the magazine publishes all the 12–14 Barkat House latest information on the Institute’s activities, including 116–118 Finchley Road lectures, collaboration with other educational and London NW3 5HT United Kingdom training organisations, new and ongoing projects, Tel: +44 (0) 207 245 0404 and recent appointments. Fax: +44 (0) 207 245 9769 Email: [email protected] Web: www.islamic-banking.com

©Institute of Islamic Banking and Insurance ISSN 0955-095X

Views expressed in this magazine are not Mohammad Ali Qayyum necessarily those of the Publisher Director General IIBI

4 IIBI www.islamic-banking.com NEWHORIZON Rabi Al Thani–Jumada Al Thani 1428 NEWS

Halal industry gets a boost The first Islamic bank in Singapore Malaysia-based CIMB Islamic Microsoft (Malaysia) to develop Bank is going to participate in and implement an information the development of the country’s and communication technology Singapore’s largest bank, understanding of the cultural halal sector and plans to provide system for the halal industry. DBS, together with a group of nuances in the Middle East, RM1 billion ($294 million) to investors from the Middle the Islamic Bank of Asia finance its corporate customers ‘We must broaden the horizon East, has launched the first will be at the forefront of in this field. of halal to go beyond just food- Islamic bank in Singapore, new market-based ideas related products and services,’ Islamic Bank of Asia (IB Asia). to structure and introduce ‘All our 55 business centres and he stated. ‘There also needs to DBS holds a 60 per cent stake opportunities in Asia that 383 branches nationwide have be a mindset change in order in the newly formed bank, uphold Islamic banking been galvanised to target this to exploit the business and while the rest is distributed principles.’ sector,’ said Badlisyah Abdul commercial potential of halal between 22 individuals and Ghani, the bank’s CEO, in a to maximise the delivery of industrial groups from the Singapore itself has a Muslim statement. He expressed the socioeconomic benefit to Gulf states, including Bahrain, population of nearly 500,000 hope that companies involved the people.’ Kuwait, Oman, Qatar, Saudi and is considered to be ‘a in the halal business would turn Arabia and the UAE. convenient stopover for to the bank to discuss their In its turn, CIMB Islamic has GCC [Gulf financial requirements. identified Shari’ah-compliant According to Cooperation finance as ‘the missing link’ in His Excellency Council] CIMB Islamic has teamed the development of the halal Abdullah Hasan investors and up with the Halal Industry industry as most of the market Saif, head of the capital flows Development Corporation participants use conventional bank’s board bound for Asia’, (HDC) to develop the industry interest-based financial of directors according to together. HDC was established instruments. According and economic Jackson Tai in the spring of 2006 to to Ghani, less that five per affairs advisor (left), CEO spearhead the development cent of the industry players to Bahrain’s at the bank’s of the halal segment of the apply Islamic mechanisms and prime minister, parental group, economy in Malaysia, and is avoid riba (interest). He added ‘IB Asia will DBS, and IB chaired by the country’s prime that, in the future, ‘the halal focus on Asia’s vice minister, Abdullah Ahmad certification might also include commercial chairman. Badawi. The corporation has the requirement for Shari’ah- banking, recently signed a Memorandum compliant funding and financing corporate finance, capital He went on to state that of Understanding (MOU) with of the halal business operation’. market and private banking IB Asia is ‘strategically well services’. With paid-up capital positioned not only at the of $418 million, which is financial crossroads of Asia, expected to rise to $500 but also in Singapore, an New Islamic bank in Yemen million, the bank will Asian capital markets centre develop and provide Shari’ah- renowned for its effective compliant wealth management regulatory and corporate Ten Saudi businessmen are the capital, with the remaining and capital market instruments governance framework’. reported to have agreed to 65 per cent offered for public to customers in Asia and the set up an international Islamic subscription. IIUB will be Middle East. However, in its endeavours bank in Yemen, according established by purchasing and to attract Islamic funds and to Arab News. merging a number of existing ‘Middle Eastern investors become Asia’s leading centre banks in the country. are seeking new markets and for Shari’ah-compliant finance, The bank, called the innovative ways to protect and Singapore has to face rivalry International Islamic Union Its activities will include grow their wealth,’ said Saif. from the neighbouring Bank (IIUB), will have a capital financing various commercial, ‘With our strong Shari’ah countries of Malaysia of $10 billion and its founders industrial and tourism projects credentials and good and Brunei. will subscribe to 35 per cent of and supporting businesswomen. www.islamic-banking.com IIBI 5 NEWS NEWHORIZON April–June 2007

Emirates Group and Dubai Islamic Bank to Bank TuranAlem to promote launch subsidiary in Syria

Islamic banking in Kazakhstan The world’s first fully-fledged country. The new bank Islamic financial institution, will offer Shari’ah-compliant Dubai Islamic Bank, has products and services and is If the co-operation received approval from the expected to be launched after proves successful, pertinent authorities in Syria the relevant licensing procedures Emirates Islamic to establish a subsidiary in the are finalised. Bank and TuranAlem will consider establishing a UK Islamic real estate fund joint financial institution sold for $116.5 million specialising in Shari’ah-compliant Dubai-based Emirates banking in the region. GSH (Global Securities House), Islamic Bank and JSC Bank an international investment TuranAlem, headquartered Abdullah Showaiter, general advisory firm, and ABCIB in Almaty, the capital of manager of the Emirates Islamic Asset Management Kazakhstan, have signed Islamic Bank, regards the Limited (IAM), a wholly owned a Memorandum of CIS countries in general subsidiary of Arab Banking Understanding (MOU) and Kazakhstan in particular Corporation, have announced (above), to ‘take the as ‘a very promising and the successful £58.8 million partnership of the two banks prospective region which ($116.5 million) sale of the to the next level’, as stated in will play a significant role jointly-sponsored Al Bait UK the Emirates Bank Group press in the growth of our Real Estate Fund. The fund was release. Emirates Islamic Bank Group business’. bought by Pan-European Islamic is part of the Group and has Real Estate Fund, sponsored by signed the MOU on its behalf. In his turn, Roman the European Islamic Investment expectations.’ According to Solodchenko, chairman of Bank plc (EIIB). the company, the fund’s annual The banks are going to the board at TuranAlem, internal rate of return on promote Islamic financial stated that ‘taking into This deal is believed to be the distribution is approximately products and services in account the growth of Islamic first Shari’ah-compliant real 15 per cent, which is equivalent Kazakhstan and other banking popularity not only estate transaction involving to a gross return on invested CIS (Commonwealth in Islamic countries but in the several Islamic institutions based equity of around 50 per cent. of Independent States) world, [the bank] could hardly in the UK. Both GSH and IAM countries. ignore such sphere’. He added are located in London, however Jeremy Beswick, head of asset that he believed the project their parental companies are management at EIIB, regards The decision comes after would be in ‘great demand headquartered in Kuwait and this transaction as ‘a milestone an assessment carried out not only in Kazakhstan but Bahrain respectively. not only for the fund but also by both parties of the Central in neighbouring countries for Islamic finance in London’. Asian banking market and its as well’. Al Bait’s portfolio consists According to Beswick, the bank interest in Shari’ah-compliant of five commercial properties expects ‘significant investor banking services. The banks Both parties expressed the located across the UK. In a press interest in this fund, which will concluded that there is ‘an hope that their partnership release statement, Fahed Boodai deliver to investors a diversified increased focus on Islamic ‘will be mutually beneficial’ (above right), CEO of GSH, commercial property portfolio financial institutions in the and result in ‘a positive said: ‘We are thrilled by the including exposure to the region’. outcome’. results of the Al Bait UK Real rapidly developing markets in Estate Fund which exceeds our Central and Eastern Europe’.

6 IIBI www.islamic-banking.com NEWHORIZON Rabi Al Thani–Jumada Al Thani 1428 NEWS

ABN Amro goes to Pakistan Indonesia attracts Middle Eastern banks dedicated branches.’

Drost is ‘optimistic about the Two Middle Eastern banks are Indonesia’s Islamic finance potential’ of the new branch, keen to expand their operations market. it offers Shari’ah-compliant to Indonesia. Qatar-based Qatar services for both retail and International Islamic Bank and ‘These Middle Eastern countries commercial sectors and, Bahrain-based Al Baraka Islamic are very keen on investing in according to Drost, will be Bank have officially submitted Indonesia. They are aware of the joined by ‘two more exclusive proposals to the country’s potential that we have,’ stated Islamic banking branches… regulatory authority, Bank Shihab. However, since the and Islamic windows in six Indonesia. Currently, there is number of investment projects to eight branches by the only one foreign bank in the offered by the country is quite Dutch bank ABN Amro end of 2007’. country with an Islamic banking limited, Shihab urged the (above) has officially opened licence – HSBC Amanah provincial administrators ‘to its first Islamic banking branch ABN Amro also owns two Syariah. prepare concrete investment in Pakistan, with the prospect Shari’ah-compliant banking proposals to attract them’. of setting up similar offices in branches of Prime Bank, It is not yet decided whether According to Shihab, the Dubai, Indonesia, Malaysia which it has recently acquired, the banks will establish branch presence of these banks will and other parts of the Muslim located in Karachi and Lahore. networks or purchase domestic be advantageous for domestic world. This acquisition made ABN financial institutions to carry businesses as it will ‘help [them] Amro the second largest bank out their activity in Indonesia. to break into the Middle Eastern Jeroen Drost, ABN Amro’s in Pakistan with 83 branches ‘They will probably acquire local markets’. CEO for Asia, explained the across the country. commercial banks and convert bank’s decision to delve deeper them into Shari’ah banks,’ said At the moment, Islamic financial into the Islamic finance ABN Amro’s country manager, Alwi Abdurrahman Shihab, the institutions in Indonesia have a market: ‘We are now seeing Naveed A. Khan, said the bank Indonesian minister of people’s market share of 1.5 per cent. demand for [Islamic] financial is looking forward to serving welfare and the country’s The operation of foreign Islamic products and services among customers and providing them special envoy to the region. banks in the country might bring our core mid-market client with a comprehensive suite of this figure up to five per cent base, and we are responding Shari’ah-compliant products Another Bahraini bank, Al by 2008, according to Ramzi to that demand through and services. Salam Bank, is also reported A. Zuhdi, Shari’ah banking to have expressed interest in director at Bank Indonesia.

Islamic banks size up Australia’s finance market

Kuwait Finance House population, amongst the Muslim and Malaysia. Quite possibly, Islamic. CIMB itself is also (Malaysia) Berhad (KFH) and community at least. KFH is Australia will also be added headquartered in Malaysia, CIMB Group are targeting considering structuring some to this list. If successful, KFH while its network of branches Australia as a potentially deals in the country which may is likely to provide its Shari’ah- and offices covers Asia Pacific, emerging Islamic finance involve the property sector and compliant products and Central and South East Asia, market. Both banking groups is reported to be working closely services through Australian the Middle East and the UK. are exploring the possibilities of with several parties in Australia Muslim co-operatives. Although it is believed that introducing Shari’ah-compliant on this issue. Australia is on the CIMB’s financial services to this virtually In its turn, CIMB Group agenda, it is as yet unknown untapped Islamic banking KFH has an international is exploring the Australian whether the Group will market provided there is network of independent market through its Malaysia- establish an office there sufficient interest from the subsidiaries in Turkey, Bahrain based Islamic arm, CIMB in the near future. www.islamic-banking.com IIBI 7 NEWS NEWHORIZON April–June 2007

New product Qatar Islamic Bank goes global from First A Memorandum of a subsidiary in Sudan. incredible opportunities,’ al- Understanding (MOU) has been Jaidah is reported as saying. Gulf Bank signed between Qatar Islamic In an interview to the Gulf QIB has previously financed a Bank (QIB) and the Central Times newspaper, the bank’s series of developments in Sudan, First Gulf Bank, Bank of Sudan to establish a CEO, Salah Mohamed al-Jaidah, including a shopping centre. headquartered in Abu Dhabi, new commercial and investment said that the decision to gain UAE, has launched a new bank in Sudan. a presence in Sudan is part The new bank will focus mainly Shari’ah-compliant product of the bank’s strategy to move on project finance, however it – Makkah Credit Card. Being the first Islamic institution into developing markets and will also provide a range of retail This is the first stand-alone to be launched in its home untapped regions. ‘The banking services. It will be headquartered unsecured Islamic credit card country, QIB will also become infrastructure in Sudan is only in Khartoum, Sudan’s capital, in the region and, according the first Qatari bank to open limited. This presents us with and QIB is going to invest to Ramzi Al Amaary, product $1 billion in it. head, ‘the market response to it has exceeded expectations’. As mentioned above, this is not He stated that the credit The world’s first Islamic the only investment project of card ‘meets the requirements QIB. Together with its strategic of customers who need to electronic payment system partners, the bank has a 70 per keep pace with modern life cent stake in the Asian Finance without compromising their Bank in Malaysia, which has beliefs’. Al Rajhi Bank, one of the recently opened. The bank has oldest and largest Islamic a capital of $100 million and It is issued in conjunction banks, with its headquarters provides Shari’ah-compliant with Visa International, so in Saudi Arabia, has teamed products and services. Abdullatif the bank’s customers are able up with e-Kencana Sdn Bhd, Abdullah Al Mahmmoud, to use it virtually anywhere a Malaysian electronic service chairman of the Asian Finance in the world. It also offers provider, to create the world’s Bank and managing director of card-holders a reward in the first Islamic electronic funds QIB, explained the decision to form of ‘steps’ to travel to transfer system. enter the Malaysian financial Mecca – for every AED1.00 market: ‘Malaysia is one of the (United Arab Emirates Islamic Payment Switch (IPS) estimated 100,000 pilgrims visit pioneers in Islamic banking dirham, equal to $0.27) is expected to be launched in Mecca each year and, once IPS and has the highest number of spent on the card, a July 2007 and will initially is launched, they will be able to sukuks issued worldwide, and customer earns one ‘step’. provide electronic fund transfer access funds at any of Al Rajhi’s Islamic banking in Malaysia is services between Saudi Arabia 400 branches and 1600 ATMs highly supported by the Central In addition, the holders and Malaysia, where Al Rajhi located across Saudi Arabia. Bank and the government’. of Makkah Credit Card Bank has a strong presence. Migrant workers could also are covered by the Islamic The bank will issue pre-paid use this facility to transfer QIB has also participated insurance plan, ‘Takaful and debit cards for its customers funds from Saudi Arabia in establishing an Islamic Income Plan’, in case of to use to transfer funds between to Malaysia, Rehman said. investment bank in Lebanon, unforeseen events, for the two countries. Arab Finance House. There is example, accidental loss In due course, the bank currently work in progress on of life or permanent total According to Ahmed Rehman, plans to expand IPS to other setting up QIB’s London-based disability due to an accident. the bank’s CEO in Malaysia, Islamic financial institutions in subsidiary, European Finance This service comes at no IPS will ‘be fully compliant with Malaysia and abroad, ‘widening House, which is expected to be extra cost and is regarded as the highest Shari’ah standards’ our footprint to Islamic banks in launched by the end of 2007. ‘protection provided in the and will ‘begin from Malaysia the Gulf and regional networks’. And closer to home, the bank’s Islamic spirit of community’ to serve Muslim nations that Malaysia will be the hub for the arm, Qatar Investment, is also by the bank. have pilgrims travelling to system’s operations and the planned to open this year at the Mecca and Medina’. An payment interchange. Qatar Financial Centre in Doha.

8 IIBI www.islamic-banking.com NEWHORIZON Rabi Al Thani–Jumada Al Thani 1428 NEWS

New Islamic banking system at Bank of Khartoum

The Sudan-based Bank of implementation process in the required being close to the Khartoum has selected the bank, and is due to go live in vanilla version of the Islamic Islamic finance specific version October. The implementation finance specific product. of Microlink Banking Solutions will be a phased process starting Microlink CEO Edward Phong to implement as its core banking in the head office on a pilot (right) said ‘there is minimal system. In a four month system basis, before spreading to customisation required for selection process the Malaysian its 49 local offices. the system implementation’. banking software provider beat off competition from rival There is no existing legacy Microlink is focusing its efforts bidders from Malaysia, India system that needs replacing in the MENA (Middle East and and the Middle East to secure at the bank and, as such, North Africa) region on the the deal. the implementation is a Islamic finance sector. According comparatively easy process. to Phong, the decision to focus The system is currently This has been made easier by on this sector was ‘due to the conventional banking products, undergoing a six month the specifications that the bank rapid growth of Islamic banking and some institutions that in the MENA region’. He was offer Islamic finance services also keen to stress that, despite alongside conventional banking this focus, there were some products that can use both Standard Chartered banks in the region using versions of the system. Islamic products get a new brand name Canadian home insurers to offer takaful Saadiq, which is translated as offered throughout the ‘truthful’ from Arabic, is the Standard Chartered network. new brand name for the Islamic Takaful is coming to Canada. launching Islamic mortgages, financial products and services StanChart Malaysia’s CEO The country’s third largest which are structured on a of Standard Chartered. The Julian Wynter stated that home insurer, Co-operators ‘rent-to-own’ principle in official launch took place in the bank ‘is aware of the Group Ltd, has announced the order to avoid interest. Kuala Lumpur at the Standard significance and magnitude of development of a Shari’ah- Chartered Bank Malaysia Bhd Islamic funds available globally’ compliant insurance product, Canada’s Muslim population (StanChart Malaysia) with the and that the launch of Saadiq which will be launched in is estimated to be between introduction of the Saadiq and was to support Malaysia’s input summer 2007. The company 750,000 and 1,000,000 people Saadiq Account-i. The latter is in further development and plans to market it through a today, compared to just over a type of savings account with growth of Islamic banking. Muslim housing co-operative 500,000 in 2001. cheque-issuing facilities. It is reported that StanChart in Canada. Malaysia has set targets to Walied Soliman, a lawyer Standard Chartered is a pioneer increase its Shari’ah-compliant According to Pervez Nasim, working for a major Canadian among conventional banks in assets from 5 per cent to 20 chairman of Islamic Co- law firm, Ogilvy Renault LLP, introducing Shari’ah-compliant per cent of the bank’s total operative Housing Corporation expects the Islamic finance finance in Malaysia. It was the assets by 2010. Ltd, in Ontario, Canada, the sector ‘to grow exponentially first to set up an Islamic window demand for Shari’ah-compliant in Canada in the next couple there back in 1993. The bank also plans to introduce mortgages has ‘surged’ in of years’. Soliman describes more Islamic banking products the last three years. Other this rate of growth as Today, the group has a range by the end of 2007, two of domestic companies, such as ‘unbelievable’. Islamic finance of 25 Islamic banking products which are going to be in the McMaster Savings and Credit has already become a ‘priority in its portfolio, including the area of retail finance and two in Union of Hamilton, are also practice area’ for his firm. Saadiq Account-i, which is the field of corporate banking. www.islamic-banking.com IIBI 9 NEWS NEWHORIZON April–June 2007

Dubai hosts a Kuwait Finance House sets up new Islamic a pioneering Islamic research arm fund of Kuwait Finance House (KFH) The bank sees the a strong presence in its home Group has become the first establishment of this team as an country and also in Bahrain, Oasis Group Islamic bank to establish indication of the strong ties and Malaysia and Turkey in an in-house global Islamic economic integration between the form of independent Oasis Group, a South research team. It is called Malaysia and the Middle East. subsidiaries. In addition African investment scheme and KFH Research and is based ‘Our research capabilities to South East Asia and the management company, intends in Kuala Lumpur, where the allow us to... foster the closer Middle East, it also carries to launch Shari’ah-compliant bank has recently set up an integration of Islamic markets,’ out investment activities in funds through its newly independent subsidiary, stated K. Salman Younis, Europe and the US. established subsidiary in Kuwait Finance House managing director of the Dubai. (Malaysia) Berhad. KFH (Malaysia) Berhad’s Dr Zeti Akhtar Aziz, governor Malaysian unit. of Bank Negara Malaysia (the Oasis Crescent Capital The main aim of the team country’s central bank), has Limited is based at the Dubai is to provide ‘insightful and ‘Our commitment is that congratulated KFH for its International Financial Centre objective research’ in order to wherever the KFH Group ‘commitment to contribute to and plans to have 25 staff assist the bank’s customers in is present, we would like the success of Islamic finance members by September 2007. making ‘informed investment to contribute towards the by allocating resources in It is reported that management decisions’, said Baljeet Grewel, development of Islamic banking having a dedicated research of $400 million worth of assets chief economist and head of in the region,’ he added. entity to drive its Islamic has been transferred to Oasis research at KFH. Currently, KFH Group has business forward’. Crescent this year. The company expects to double the value of assets it manages from the Dubai office within a year, according to Adam Esmail Ebrahim, CEO. New Islamic finance company The Group has high hopes for conducting operations in the launched in Abu Dhabi Middle East as nearly a quarter of $900 million of Shari’ah- compliant funds, which are Aseel Finance, a new Islamic finance and mortgages, Aseel, which means ‘authentic’ managed by Oasis, originate finance company, has been however it is also involved in in Arabic, intends ‘to make a from the GCC (Gulf launched in Abu Dhabi, United project finance and corporate real difference to the market Cooperation Council) Arab Emirates. Its shareholders services. and assist in the economic countries. include the UAE-based First diversification programmes Gulf Bank with a 40 per cent According to Abdul Hamid under way throughout UAE, ‘The Shari’ah-compliant market stake, and three local real Saeed, the company’s chairman, particularly in the vibrant is the fastest growing component estate developers, Al Dar ‘Aseel’s overall mission is to Abu Dhabi market’. of fund management,’ Ebrahim Properties, Surouh Real become the UAE’s leading stated. The company will launch Estate and Reem Investments, financial institution and the With ‘the region demonstrating fixed income funds that are ‘in each with a 20 per cent first choice for Shari’ah- an increasing propensity for short supply in Shari’ah practice’ stake. The company has an compliant financial products’. Shari’ah-compliant products and, therefore, ‘there will be a authorised capital of $137 that exclude interest-based big focus on them’. Another area million and is governed by The plans include both assets’ and a number of of the company’s focus will be a Shari’ah board, headed regional and international development projects announced properties, equities and fixed by Dr Hussain Hamid Hassan. expansion as well as broadening in Abu Dhabi and other parts income securities, and equities the company’s range of of the country, the company is specifically in the Middle East Aseel Finance focuses mainly products and services. eyeing a mortgage market of and North Africa. on real estate development $1–1.4 billion per annum.

10 IIBI www.islamic-banking.com NEWHORIZON Rabi Al Thani–Jumada Al Thani 1428 NEWS

Southern Sudan bans Islamic banking

Southern Sudan is banning the latter can have its own Islamic banking and giving conventional banking system, Mosque in Sudan the Islamic banks operating on whilst the predominantly its territory a choice of either Muslim north operates the converting into conventional Islamic banking system in financial institutions or quitting parallel with the southern one. altogether. The affected banks include Omdurman National At the moment, Shari’ah- Bank, Faisal Islamic Bank and compliant banks are still Bank of Khartoum, reported operating in Juba, the capital Reuters news agency. of southern Sudan, and some other towns in the region, as According to Reuters, the the Bank of Southern Sudan position of the government is ‘gave them time to decide and based on its interpretation of the continue to provide services’. peace agreement signed between However, it remains unclear the northern and the southern how much time will be given Bahrain and Egypt sign regions of Sudan in 2005. to them to determine their According to this agreement, future. co-operation agreement

Similar co-operation agreements Fortis and HSBC launch were signed by the Bahraini Central Bank with the new Shari’ah-compliant regulatory authorities of Morocco and Jordan in 2006.

fund in Indonesia The MOU between Bahrain’s and Egypt’s Central Banks facilitates the collaboration PT Fortis Investment, an asset attractive return based on A Memorandum of between the two institutions management arm of the Fortis Shari’ah compliance,’ stated Understanding (MOU) has on a range of issues including group, and HSBC Amanah Eko P. Pratomo, president been signed between the Central supervision, technical expertise Syariah have partnered to director of Fortis, at the Bank of Bahrain (CBB) (above) and training assistance. Islamic launch a Shari’ah-compliant launch ceremony. and the Central Bank of Egypt finance is also high on the mutual fund in Indonesia to (CBE) to build up a stronger agenda with particular attention make the most of the country’s He added that there is an relationship between the two on issuing sukuk (Shari’ah- growing mutual fund market. increased interest in equity countries. The MOU was signed compliant bonds). market investments and, by Anwar Khalifa Al Sadah, Fortis Persona Amanah is therefore, it is ‘a good deputy governor of the CBB, Currently, there are three worth $55 million and the opportunity’ for the fund. and Tarek Hassan Aly Amer, Bahrain-based banks operating majority (over 80 per cent) deputy governor of the CBE. in Egypt. Arab Banking of its portfolio will consist The company’s Shari’ah Corporation (ABC) and of stock investments, with the Oversight Board will supervise According to Al Sadah, the AlBaraka Banking Group have rest put in the money market. Fortis investment managers in signed pact ‘provides continuing independent subsidiaries there. running the fund. The Board’s evidence of CBB’s commitment In 2006 they were joined by ‘We’d like to provide a members are appointed by the to establishing and maintaining Ahli United Bank, which competitive mutual fund Indonesian Ulema Council’s effective exchange relationships acquired a majority product that will offer an National Shari’ah Board. with other regulatory shareholding in Egypt’s authorities, such as the CBE’. Delta Bank. www.islamic-banking.com IIBI 11 NEWS NEWHORIZON April–June 2007

Islamic banking hits the Maldives

Plans have been set out the ICD has entered into a joint Islamic banking practices, such and general businesses’. for the first Islamic bank in venture with the Maldivian as Malaysia, to help with the the Maldives. The Islamic government and people to setting up of the bank. The It is believed that an Islamic Corporation for the establish an Islamic bank in the result of the feasibility testing bank is needed in the 100 per Development of the Private country by the end of the year. will set out which fields the bank cent Muslim republic. It is also Sector (ICD) has signed a will be working in, but Minister hoped that the new bank will be Memorandum of Understanding Planning for the bank was Gasim Ibrahim told Miadhu able to provide financial services (MOU) with the Republic of started a year ago by the News that the initial idea is for to those who at present do not the Maldives with the aim of Maldives Monetary Authority. it to ‘provide loans for fisheries use banks. looking into the feasibility of It hopes to enlist experts from setting up such a bank. Now countries with established Malé, Maldives

Life insurance in KSA takes a new turn

Prudential plc in the UK and Bank Aljazira has a unique, well- Bank Aljazira in the Kingdom established Takaful Ta’awuni life of Saudi Arabia have signed a insurance division. Under new Memorandum of Understanding Saudi Arabian Monetary Agency (MOU) agreeing to Prudential (SAMA) insurance regulations it taking a significant stake, and is now required to separate this becoming the largest individual operation from the bank and shareholder, in a new venture establish a new stock holding Islamic Development Bank that will acquire the existing company. Takaful Ta’awuni life insurance combats poverty business of Bank Aljazira. This has created an opportunity The new Takaful Ta’awuni life for Prudential to leverage its The Islamic Development Senegal, called the launching insurance operation will be listed international presence and Bank Bank (IDB) has launched a ceremony of the Poverty on the Saudi Arabian Stock Aljazira’s platform to take the $10 billion fund to alleviate Alleviation Fund a symbol of Exchange (the Tadawul). development of this business poverty, promote general and ‘revitalisation of the Islamic to the next level. Prudential health education and empower community in a world where The Saudi Arabian insurance will also take a stake in women in the country unmatched wealth is next to market is currently relatively Bank Aljazira’s new funds members of the IDB, reported absolute poverty’. small with an estimated management business. The Reuters news agency. £800 million in annual gross new ventures are expected to Amadou Babacar Cisse, premiums and with more than launch later this year, subject According to the bank, Saudi IDB’s vice president, told 70 per cent of this being related to regulatory approvals. Arabia has already promised to delegates the bank would be to motor, medical and property contribute $1 billion, Kuwait active across the whole of the insurance. The MOU also agrees that a $300 million, Iran $100 African continent, not just successful takaful operation in million and Senegal $10 in the predominantly Muslim However, with GDP per capita KSA will potentially become a million. countries. ‘For us the main now exceeding £6700 and life base for jointly expanding the goal on the African continent insurance penetration of less Takaful Ta’awuni business Hosting IDB’s annual meeting, is the fight against poverty,’ than one per cent, there is throughout the Middle Abdoulaye Wade, President of stated Cisse. significant room for growth. East and North Africa.

12 IIBI www.islamic-banking.com

COUNTRY FOCUS: KYRGYZSTAN NEWHORIZON April–June 2007

Kyrgyzstan: moving towards Islamic finance

With Islamic banking picking up momentum around the world, Kyrgyzstan, one of the most picturesque Central Asian states, is also introducing Shari’ah-compliant principles to its banking market. Ainura Boldzhurova, post-graduate student at Bishkek Humanitarian University, Kyrgyzstan, reflects on the country’s definitive steps towards Islamic finance.

The chances are that when the Republic Arslanbob village, Kyrgyzstan of Kyrgyzstan is mentioned not too many associations will spring to mind, in fact probably next to none. This is understandable – this small landlocked and mountainous state (199,900 square metres, approximately the size of the UK) in Central Asia, situated between such large and influential countries as Kazakhstan, Uzbekistan and China, does not attract a lot of attention on the foreign politics front.

Nevertheless, Kyrgyzstan (or Kirghizia as it is also known) has a history of over 2200 years filled with landmarks of political, social and economical upturns as well as shattering and tragic failures. The state in its modern form acquired independence in 1991 along with other former republics of the Soviet Union. Since then the country has gone through a number of significant changes in political, economic and social spheres.

Historians date the dawn of Islam in Kirghizia as the thirteenth century, developing in the southern part of the country at first, and later spreading to the north. During the Soviet era, manifestations of Islam were few and far between due to state policy and were visible mainly in domestic aspects of life, but after the collapse of the USSR and the acquisition of independence in the early 1990s, a growing desire to assert their Muslim identity became evident in a large sector

14 IIBI www.islamic-banking.com NEWHORIZON Rabi Al Thani–Jumada Al Thani 1428 COUNTRY FOCUS

of the population. However, Kyrgyzstan Mosque in Naryn, Kyrgyzstan ‘The pilot project of introduction of Islamic managed to avoid the tragic events such as principles of financing in the Republic of those that took place in the neighbouring Kyrgyzstan’. The decree states that the countries of Tajikistan and Uzbekistan, implementation of Shari’ah-compliant where internal power struggles escalated finance alongside conventional banking is into armed conflict. regarded as laying the foundations for the competition of the two banking and finance Today, nearly 80 per cent of the Kyrgyz systems and further development of population, which comprises 5.1 million economic relations. ‘It will lead to a more people, is Muslim. The situation of Islam complete guarantee of fulfilment of civil in the republic can be characterised by one rights for economic freedom and will word – renaissance. This word summarises provide free use of one’s judgement and the distinctive traits of the processes taking property in any economic activity not place on a global scale with regards to Islam prohibited by Constitution and legislation, and would include practical attempts to with regard for religion and atheism,’ introduce Shari’ah-compliant banking the document says. and finance in the Kyrgyz Republic. Such activity is, without doubt, the The pilot project is to be carried out in result of integration processes around one of the largest banks of the country, the world and also an indication of new EcoBank. This is a joint stock company models and parameters of international with headquarters in Bishkek, the capital financial relations. It is the first of its kind of Kirghizia. Considering that the project for the post-Soviet states, and is a new bears a high level of risk, it was decided to phenomenon for independent Kyrgyzstan launch the scheme in just one of the bank’s and completely unfamiliar to its population. branches and to give it the status of an The Muslim population in the experimental project. It is expected that, The country’s banking market, especially its country is increasing steadily to start with, it will take the form of an credit sector, can be described as developing Islamic window in the conventional vigorously and is accompanied by high and, therefore, so is the commercial bank. interest rates, short-term lending and rigid number of potential users collateral requirements. Naturally, in this of Islamic financial products EcoBank was chosen by the executive harsh credit environment the main sectors agency of the pilot project stipulated in of economy to use loan facilities are those and services. Allowing Islamic the afore-mentioned decree because of that are able to utilise a loan in a short retail banking will surely attract the bank’s initiative to expand its range period of time and gain high profit. In substantial capital to the of products and services and to attract Kirghizia this is the trade sector. investment resources to the country’s banking sector. economy. EcoBank’s correspondence with In 1993, Kyrgyzstan became a member the President’s administration and IDB of Islamic Development Bank (IDB), which resulted in landing the Islamic window has resulted in a number of investment deal. And in December 2006, after much projects in the country’s economy with deliberation and a series of laborious various success rates. A Memorandum of negotiations and discussions about the Understanding between IDB, the Kyrgyz implementation and legal substantiation Republic and a domestic bank, EcoBank, of use of Islamic finance principles, the signed in May 2006, gave a new incentive National Bank of Kyrgyzstan (the country’s to the development of the bilateral relations supervisory and regulatory authority) issued between the republic and IDB. an authorisation of execution of Islamic principles of finance in the republic The Memorandum includes a co-operation within the confines of the pilot project. agreement relating to the introduction of Shari’ah-compliant banking in the country’s At the moment, all three parties have finance market. Following this agreement, formed a project steering committee. two months later, the President of So, the pilot project is supervised by the Kyrgyzstan signed a decree entitled state; however, this is where the state’s www.islamic-banking.com IIBI 15 COUNTRY FOCUS: KYRGYZSTAN NEWHORIZON April–June 2007

involvement with EcoBank ends. It does feasible. Taking into account the fact that not participate in the bank’s shareholding. EcoBank already has a well-developed network of branches and outlets across Of course, the reservations of the National the country, Islamic banking products Bank and its restriction of Islamic finance and services could be offered through this to one pilot project are justified. This step network in Kyrgyzstan and this might is taken to maximise the protection of even spread to neighbouring countries. the current deposit holders and future customers of EcoBank. Considering the As for other financial institutions operating risks entailed with Islamic banking on the in the country, it is entirely up to them to whole, the National Bank is attempting decide whether they want to base their to minimise and soften the first possible activity on Shari’ah-compliant principles or ‘surprises’ and unexpected effects of the stick to conventional banking. The current process. legislation does not allow any kind of forced distribution of new banking products. The The project of establishing an Islamic experience of Islamic banking development window is expected to be completed in across the globe shows that Shari’ah- one calendar year. But it certainly doesn’t compliant and conventional principles mean everything will be achieved by then. of finance can co-exist successfully as The agreement stipulates the timeframe for two self-sufficient systems. the actual implementation and settlement The steering committee working on the creation of the Islamic window at EcoBank Burana Tower, Tokmok, Kyrgyzstan has so far drawn up around 30 regulatory documents stipulating the project development processes as well as the application of Islamic finance principles in the Kyrgyz Republic.

According to these normative documents, the Islamic branch of EcoBank will offer a fairly wide range of products and services and will also provide financing in accordance with Shari’ah principles. EcoBank offerings include money transfers, foreign exchange operations, deposit accounts, securities operations, letters of credit, payment cards and other operations permitted by Shari’ah law.

Since the project is the first of its kind, the Islamic deposit accounts have been made available to juridical entities only by the regulatory authorities. Quite possibly, the of all necessary legal, organisational, National Bank of Kyrgyzstan is wary of administrative, technical (including the potential problems with individuals in required banking systems), human case of bearing losses if involved in PLS resources and other aspects. (profit and loss sharing) contracts, such as musharakah (joint venture) or mudarabah It is probably too early to talk about (profit loss sharing), and therefore had regional network development, as the to apply this restriction. The lack of project is only in its initial stage at the understanding of the necessity of sharing moment. However looking ahead, the and the apprehension of probable losses prospect of such a course of events seems is something that will not be easy for

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the bank’s clients to overcome. Another positive outcome of the the corporate sector, and in the future Nevertheless, this rigid position of the introduction of Islamic finance is that from the retail sector as well. The latter is National Bank does seem a little short- the problem of inappropriate use of loans considered to be a lucrative segment of the sighted as deposit holders, including will be eradicated, since the cash will not market as, at present, a large number of individuals, can sign a deposit contract be handed over to borrowers with the people do not use conventional banks at all, with the bank – amanah. In this case, all exception of salam (advance payment due to their religious beliefs. The absence of the customers’ money will definitely be for goods which are to be delivered later) of a Shari’ah-compliant alternative makes sustained, without bringing either profit or and istisna (contractual agreement for banking virtually impossible for many loss, except for commission that the bank manufacturing goods and commodities) followers of Islam in the country. has a right to charge for operations with the contracts. Instead, it will be invested by the money. One can only hope that in a while bank in material assets, in accordance with Islamic banking and finance has every the severity of such strict measures enforced the Shari’ah principles of financing. Also, chance to grow and develop in Kirghizia. by the National Bank will be replaced the principles of a bank’s participation The support of the republic’s government by understanding of the importance of in the profits and losses of the financed will enable the well-founded and rational adopting a more flexible position and project will encourage the banks to a application of Shari’ah principles in the loosening the regulation. more thorough preliminary analysis and country’s financial sector and facilitate the subsequent monitoring of the efficiency of creation of a significant and competitive Shari’ah-compliant deposit accounts the loan’s utilisation. Hopefully, the banks Islamic finance market in this region for for retail customers are, without doubt, will invest money in the so-called ‘real the future. It is encouraging to know that essential products needed in the Kyrgyz sector’ of the country’s economy, which a new location has been recently added to banking market today, as the country’s is the commercial sector that promotes the geographical map of Islamic finance. Muslim population cannot open accounts at economic growth. Today, this issue is very It is situated right in the heart of Central conventional banks due to the prohibition topical for Kyrgyzstan in general and for Asia. Its address is Kyrgyzstan and its of interest by Shari’ah law. The Muslim its banking sector in particular. capital, Bishkek. population in the country is increasing steadily and, therefore, so is the number of potential users of Islamic financial Issyk Kul lake, products and services. Allowing Islamic Kyrgyzstan retail banking will surely attract substantial capital to the banking sector, even if it is merely for safe-keeping to begin with.

As mentioned above, the number of followers of Islam in the country is growing. Furthermore, the characteristics of the Kyrgyz Muslim community itself are changing. Whilst in the 1990s the majority of people in the community were over 50 years old, the average age of Muslims in the country today is considerably younger. The situation of Islam in the Islam is spreading faster and more intensely republic can be characterised among urban populations of able-bodied age – from teenagers to 45–55 year-olds. by one word – renaissance. This ‘rejuvenation’ becomes obvious when taking a look at the attendees of the The prognosis for a successful introduction mosques across the country on Fridays. of Islamic banking in the country is And this age group is precisely the one optimistic; with the launch of EcoBank’s that makes the largest contribution to the Islamic window the investor will get his country’s budget, as it generally consists share of profits, the state will get a tax of members of the working population contribution into the budget and the and providers for families. It is common population will have Islamic financial knowledge that banking products and products and services to choose from. services mainly target this sector of the Also, the bank plans to strengthen its population as potential clientele. resources by attracting new funds from www.islamic-banking.com IIBI 17 ACADEMIC ARTICLE NEWHORIZON April–June 2007

Qard hasan microfinance (QHMF)

The growth of microfinance institutions in the last two decades has been impressive and the Nobel Prize award to Dr Mohammed Yunis of Bangladesh in October 2006 for his pioneering work with Grameen Bank has increased the prominence of this sector. Microfinance mainly targets the poor or the ‘non-banked’ segment of society. Whereas microfinance institutions (MFIs) have been successful in conventional markets, there are only a few cases of such institutions operating on Islamic finance principles. In an Islamic system, instruments like qard hasan, sadaqah, and zakat can play a vital role in serving the poor and the role each instrument can play needs to be reviewed. Abbas Mirakhor (above left), executive director at the International Monetary Fund (IMF), and Zamir Iqbal (above right), principal financial officer at The World Bank, focus on qard hasan and argue that this instrument can play an effective role, within successful microfinance activities, in empowering the poor in Muslim societies.

Review of conventional microfinance (MF) intermediaries (eg banks), making it collateral was required and only the poor As is well known, the prevailing economic expensive to collect and analyse the could borrow, but each client had to be a system has a number of serious market information necessary to decide whether member of a five-person group that in turn deficiencies that can only be resolved or not to extend a loan; then to monitor belonged to an eight-group ‘centre’ (hence through external intervention. One such the behaviour of the borrower to ensure 40 persons in total), within a village. While deficiency is the inability of the current compliance with the loan’s terms and the loans would be granted to individuals credit system to satisfy the demand for conditions; as well as to assess the within the group for their own independent loans from segments of the population likelihood of the loan’s repayment. If projects, failure to repay the loan would without access to formal credit channels information costs are too high, banks will lead to collective punishment: the entire or who lack sufficient collateral against only extend loans to those clients with good five-member group would lose its which to borrow. These groups, commonly credit records and/or high-value collateral. membership with the bank. While there referred to as the ‘non-banked’ or ‘non- Underlying this is the notion of asymmetric was no explicit requirement for the group bankable’, include both the poor and information, that is, the borrower may to pay off the loan on which a member would-be entrepreneurs with projects or have information regarding the project’s had defaulted, there was implicitly a strong ideas which potentially have high rates purpose and chances of success that is incentive for the group to do so, if it wanted of return. not available to the lender. This, in turn, to regain its membership. MF banks’ leads to problems of ‘adverse selection’ interest rates have tended to be high, One solution to this market deficiency (the lender may decide to extend loans to in the order of 20–30 per cent. came in the form of Grameen Bank which risky borrowers willing to pay high interest has been a phenomenal success since its rates), or to ‘moral hazard’ problems (the This policy of lending to a close-knit origins in the mid-1970s. Professor Joseph borrower may use the proceeds for purposes group of borrowers resolves informational Stiglitz, another Nobel Prize winner, other than those stated or with the intention problems of ‘adverse selection’ and ‘moral explains that informational problems of defaulting). hazard’ by shifting the cost of selecting underlie many of the failures of the market appropriate borrowers (ie those with a low system. In particular, credit market failures MF gets around these problems by focusing probability of default) and responsibility for occur because information collection and on group lending. Within Grameen Bank’s monitoring the borrower’s behaviour to the analysis is a high-cost activity for financial original concept (Grameen Bank I), no group. The track record of high repayment

18 IIBI www.islamic-banking.com NEWHORIZON Rabi Al Thani–Jumada Al Thani 1428 ACADEMIC ARTICLE

rates documents the success of this approach. While Grameen II has modified References to qard hasan in Quran some of the features of Grameen I, the basic structure of the earlier version of (2:245) who is he that will lend Allah a qard hasan so that He will multiply it for MF is retained in that it still relies on him (the lender) many times over...? the reputation of borrowers and group familiarity with each client. Interest rates (5:12) And certainly Allah took a covenant from the children of Israel and we are still as high as 30 per cent and the raised up amongst them twelve captains, and Allah said ‘verily, I am with eventual aim of these institutions is to you if you keep up salat, pay zakat, believe in my messengers and support become successful profit-making banks. them, and lend Allah a qard hasan. I will certainly wipe off your sins and I will certainly cause you to enter the gardens in which rivers flow...’ The Islamic solution to the credit system’s market failure to serve the target groups, (11:57) Who is it that will lend Allah a qard hasan which He will multiply for him qard hasan, differs substantially from (the lender) many times and for him shall be a generous recompense? the prevailing MF approach. (18:57) verily charity-giving men and women who loan Allah a qard hasan, shall Islamic solution: qard hasan (QHMF) have it multiplied for them and they will receive a generous recompense. Qard hasan (QH) is a voluntary loan entered into by the lender without (17:64) If you lend Allah a qard hasan, He will multiply it for you. Allah is the expectation of any return on the principal. most appreciating, the most forbearing. Additionally, while the debtor is obliged to return the principal, the lender is urged, (20:73) ...so recite from it (the Quran) as you can easily, and establish salat and according to a number of the sayings of the pay zakat and loan Allah a qard hasan. What so ever good you send for prophet not to press the debtor if he or she yourself beforehand, you will find it with Allah. This is the best and the is unable to repay by the specified deadline. greatest reward.

At least six verses of the Quran address The difference between QH and sadaqah and 20:73 indicate that QH is also the subject but, before dealing with these (charity), another Islamic act of parting different from zakat. These verses also verses it would be useful to consider the with one’s wealth to help the needy, is that reveal the extraordinary importance etymology of the two words: qard and QH has to be repaid, although the borrower Allah s.w.t. attaches to QH since He hasan. The first is a verbal noun signifying specifies the time of repayment, while places it at the same level as the the act of tearing something apart with one’s sadaqah is pure charity. It is reported from mandatory salat and zakat. teeth, suggesting perhaps the act of tearing the prophet that the reward by Allah s.w.t. iii) There is no indication in any of the away a part of one’s wealth in the form of for sadaqah is ten times and that of QH is above verses that the rewards promised a loan (suggesting a painful process). Hasan 18 times, thus underlining the importance by Allah s.w.t. are limited to the means splendid or beautiful. The two words of QH by placing its rewards higher than hereafter only. together mean a ‘beautiful loan’ perhaps sadaqah, even if the principal of QH has to iv) There is no interest payment involved. because, as the Quran asserts, these loans be repaid, which is not the case for charity. v) The Quran creates a strong incentive are made to Allah s.w.t. rather than to the structure for the funding of QH. borrower and this eases the pain of ‘tearing In the Quran, the fact that Allah s.w.t. away’ part of one’s wealth and lending it to places great emphasis on QH can be gleaned Comparison of MF and QHMF someone in need. Hasan and ihsan belong from many verses (see Box), which indicate The conventional microfinance industry to the constellation of the same root. There that: has been growing at 13 per cent per annum is a famous saying of the prophet that when i) When a person grants a QH to someone since 1999 and today there are more than asked what ihsan means, he replied that it in need without expecting any return 320 sustainable institutions operating under means ‘to adore Allah s.w.t. as if you see over and above the principal, which the this banner. This phenomenal success has Him and know that (even) if you do not, borrower is obliged to repay, Allah s.w.t. even forced the private investors to regard it He sees you’. Perhaps the word hasan, promises to multiply that amount for as a potential and viable asset class. Unlike understood in the context of ihsan, is meant him many times over. Additionally, Allah conventional MFIs, only very limited to imply that the transaction is possible only s.w.t. adds that the person (the lender) information is available on MFIs operating when a person is fully aware that he or will receive ‘ajr-un-kareem’, a generous under Islamic finance. A relatively small she is making a loan to someone in need recompense, beyond imagination. number of interest-free loans are operating without expecting anything in return from ii) Verse 18:57 indicates that QH is other in Pakistan (www.akhuwat.org.pk) and him, but only in order to please Allah s.w.t. than sadaqah (charity) and verses 5:12 there are some small-scale micro-/rural www.islamic-banking.com IIBI 19 ACADEMIC ARTICLE NEWHORIZON April–June 2007

banks in Indonesia. However, no organised groups and they have both devised effective ❐ Instrumentalisation of QH institutions are known to be operating ways of avoiding informational problems by In many well-to-do Muslim countries, in on the basis of QH except in the Islamic relying on peer monitoring, in the case of addition to weak institutions, there may Republic of Iran where QH has been MF, as well as familiarity with the borrower be concern about the safety and security of utilised effectively to provide finance for and his or her reputation. Moreover, neither the principal contribution associated with the needy and where these institutions requires collateral as a prerequisite for a QH. This concern could be alleviated by are widespread throughout the country. loan. developing a formal financial instrument based on QH which addresses the questions While QH funds have been operating There are two crucial differences, however. of exposure to capital. For example, a in Iran for a long time, since the Islamic The first is that, unlike QHMF, MF charges credible existing Islamic financial institution Revolution they have enjoyed phenomenal interest, an abomination from an Islamic could issue a financial instrument that growth and a successful track record. In perspective. The second is that, whereas would provide a safe, secure option for the case of Iran, QH funds, by and large, in the case of MF there is a collective a QH capital contributor. The Islamic provide small consumer and producer loans and, in some cases, engage in profit-sharing punishment for the group if one of its financial institution could also activities with small producers and firms, members defaults on a loan, in the case ‘instrumentalise’ the asset side of its balance thus supplementing the fund’s capital. These of QHMF there is no such penalty. In the sheet and provide additional resource to a funds are usually associated with local case of a QHMF, a capital contributor has QH, or safety and liquidity to its capital mosques or other religious organisations to introduce the borrower and, at times, contributors. Furthermore, it could provide and sometimes with guilds or professional co-sign for the loan. However, if there is QH resources to existing MFIs to reduce associations. The capital is contributed by a default, there is no requirement that the the burden of interest rate charges on their the more well-to-do who are at liberty to co-signer has to withdraw from the fund. borrowers. But, how would such an Islamic withdraw their funds at any time. These financial institution cover its administrative funds operate with reasonably low The future of QHMF costs? There are two possibilities, the first administrative costs since most are managed on a voluntary basis by As important as QH is, it is difficult to through investing a fraction of the mobilised the people within the group. explain why it is ignored as a means of resources, and/or by undertaking profit- helping the needy in Muslim countries. sharing arrangements through investment in A QH fund has the following characteristics: Sociologists and economists must investigate successful projects of young entrepreneurs ❐ It is flexible with respect to collateral. the causes of the under-utilisation of this who have no access to formal credit No physical collateral is normally very important redistribution mechanism. markets. required but a co-signature for the loan The following offers suggestions as to how by capital contributors is, more often QH could be exploited to its full potential. ❐ Distribution channels than not, a substitute for physical Any trusted local establishments such as the collateral. ❐ Building institutions post offices or mosques and madras which The Islamic economics system is a rules- exist in each and every corner of an Islamic ❐ Documentary procedures are usually based system which comprises a network country could serve as distribution channels very simple. of institutions, each focused on achieving and banking agents. Use of these channels ❐ Loans are usually small in size, approval a specific objective. The system operates would reduce overhead operating costs of procedures rapid, and disbursement efficiently in the presence of an effective the QHMF and could maximise its quick. enforcement mechanism. Institution utilisation. building is generally a cumulative process, ❐ There are no interest charges involved, with changes in different areas building up ❐ QHMF and empowerment although some funds charge as much to complement and support one another. Both public and private sector financial as one per cent to cover administrative institutions could benefit from QHMF. costs. A growing body of research links By working together, QHMF could focus institutional success (and failure) to on the provision of training, education, ❐ The fund has easy access to capital development over time and across countries. knowledge sharing and skills building to contributors, borrowers, and co-signers For example, the success of access to the non-banked segment of society. This because of its local base. financial services and the sophistication empowerment would help them to move ❐ The fund managers, who are drawn of the financial markets reflect the ways from the ‘non-banked’ to the ‘bankable’ from the capital contributors, are fully in which institutions protect the property segment of the society. Islamic financial accountable. rights of borrowers and lenders. The institutions can make initial investment in successful implementation of QHMF training and skills building so that the poor MF and QHMF have both similarities and will require institutions and markets segment of the society can become their differences. They both target the same to be present and support the process. future clients.

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Lord Eddie George: The steady hand behind Islamic finance in the UK

NewHorizon met with Lord Eddie George, former Governor of the Bank of England last month. Amidst many achievements, there is no doubt that paving the way for the introduction of Islamic mortgages is something that he looks back on with pleasure and pride. Over an hour and a half, he talked to NewHorizon editor, Tanya Andreasyan, IBS’s founding editor, Martin Whybrow, and former founding CEO of HSBC Amanah and chairman of the executive committee of Jadwa Investment Bank, Iqbal Khan, about the original drivers, the hurdles and the influences for this important element of Shari’ah banking. Where the UK led, others have now followed.

A pivotal individual in terms of laying conventional mortgage and they explained the foundations for Islamic mortgages in their issues and sadness. ‘I couldn’t think the UK (and beyond) is Lord Eddie George. of any rational reason for this,’ says During his time as Governor of the Bank Lord George. The country has a terrific of England, he helped pave the way for reputation for innovation, so surely it this important cornerstone of Shari’ah- could find a way to meet this need, he felt. compliant banking. Looking back on these efforts, he is quick to emphasise the Lord George looked into the matter at team effort behind the development but, that stage and identified one issue to be nevertheless, the senior backing that he the lack of standardisation. Many of the provided was clearly vital to the success existing financial products seemed to of the initiative. Under his steadying hand have at least some of the characteristics and guiding influence, all of the necessary consistent with the teachings of the Quran elements to turn the dream into reality and it did not seem too difficult to fit were put in place. Shari’ah-compliant products into the UK’s legal framework. However, a better and Having retired in June 2003 after ten years more precise understanding of Islamic as Governor and 40 years at the Bank, Lord banking products was needed, as well as, George is now in an ideal position to look in the immature area of mortgages, a more back on the evolution of Shari’ah banking consistent and standardised specification Lord Eddie George in the UK during that time, and to put this of the products required by the Islamic into context in terms of other major changes community. ‘There were no really standard within the country’s banking sector over products, so we couldn’t identify a Shari’ah that period. The tale that Lord George mortgage. It was hard to fit this into the recounts of his initial interest in Islamic regulatory and legal framework because banking goes back to before his time as the definition of a Shari’ah mortgage Governor. He met what he describes as a differed from one place to the next.’ delightful Muslim couple who had just bought their first house. They told him of The next milestone came out of the Bank of their happiness with their new home but England’s ‘Heart of the City’ charity which there was one problem which was preying was set up in 2000. The overall aim was to on their conscience. This was the fact that encourage City companies to work with they had had no option but to take out a surrounding boroughs, many of which are www.islamic-banking.com IIBI 21 PROFILE NEWHORIZON April–June 2007

relatively poor. In parallel, Dr Pasha, The working group included representatives General Secretary of the Union of Muslim from the Treasury and the FSA (Financial Organisations of the UK and Ireland, had Services Authority, the industry regulator), raised the subject once more of Islamic as well as the Council of Mortgage Lenders mortgages with Lord George. Out of this and a number of banks, including Ahli came the idea to set up a working group United Bank, HSBC and Barclays, plus dedicated to this subject within the Heart lawyers and representatives from the of the City initiative. Having discussed the Muslim community. There was a fairly subject with Gordon Brown, at that time the long list of obstacles, says Lord George. Chancellor of the Exchequer, Lord George Particularly thorny was the issue of stamp invited Andrew Buxton, who had an interest duty, with the need to ensure that Shari’ah in Islamic finance, to convene the group. mortgages did not incur this twice because Buxton was Chairman of the Heart of the of the nature of the transaction, involving City campaign and a former Chairman of initial ownership by a financier. ‘We Barclays. couldn’t unhinge the stamp duty process as a whole,’ but a workable solution was ultimately hammered out with the Treasury. Bank of England There was also a need to ensure that disadvantages were removed within the ‘Right to Buy’ or ‘Right to Rent’ public home ownership schemes, so that the role of a financier did not mean that Muslim buyers were excluded from the benefits offered by such schemes. There were many ambiguities and a large part of the effort was tracking down and resolving these. ‘No one had really done this before,’ says Lord George.

There was a lot of enthusiasm which was extremely encouraging, says Lord George. It was felt that this was the right thing to do, with the UK having a tradition of being receptive and supportive of different religions and societies, and with the Shari’ah mortgage project another demonstration of this. The effort was helped by the fact that it was clear that Shari’ah banking as a whole was growing quickly. It was also felt that with mortgages, as with other Islamic products, demand might not come purely from the Muslim community. The first working group was hosted by the Bank of England, and While Lord George is quick and fulsome Lord George did not miss a single meeting... The efforts were in his praise of other individuals involved deeply appreciated within the Muslim community... The work in the work, there is no doubt that his own would allow UK Muslims to be both more Muslim and yet at role was vital. Iqbal Khan points out the importance of Lord George’s patronage and the same time more British in their country. involvement. The first working group was hosted by the Bank of England, and Lord George did not miss a single meeting, he recalls. The efforts were deeply appreciated within the Muslim community, he points out, with the project attracting a lot of

22 IIBI www.islamic-banking.com NEWHORIZON Rabi Al Thani–Jumada Al Thani 1428 PROFILE

focus. He recalls the Imam of his own local evolution of areas such as Shari’ah- the change, with Lord George pushing mosque making a telling point: the work compliant pensions, sukuk trading and through the publishing of the minutes of would allow UK Muslims to be both more private equity, but the pioneering work in the Bank’s meetings. Muslim and yet at the same time more mortgages laid the foundations for further British in their country. It was a similar progress at home and abroad. In the UK Fifteen years ago, the UK was one of the theme in mosques around the country, itself, Shari’ah banking as a whole has worst performers of the industrial countries; with prayers for the success of the been helped by the favourable environment, today it is one of the best. There was no scheme, he says. as reflected in Gordon Brown’s vision of one particular factor, rather a combination. Britain as a centre for Islamic finance. The transformation was not overnight but It is also worth pointing out that the efforts was still relatively swift in economic terms. were not solely of importance to the UK. In terms of the bigger picture, it is unlikely Now, Lord George pronounces himself Indeed, far from it. Khan cites the press that the Bank of England would have taken ‘very optimistic’ about the UK economy. coverage that the initiative generated such a lead in the past. When Lord George Although clearly keeping busy and across the Muslim world. Many countries first joined the institution, it had a purely ‘interested in all sorts of things’, he made were lagging behind and did not have the administrative role, implementing direct a definite decision to ‘pull right back’ regulatory framework themselves. In fact, control of the economy on behalf of the from the Bank of England when he retired, the UK work led to changes elsewhere, government. It is easy to forget, even for confident that the Bank was in excellent influencing regulations in Malaysia and those who were around at the time, that hands under his successor, Mervyn King Brunei, among other countries. the UK’s economy was extremely cyclical, (‘a first rate economist’). He laughingly lurching from ‘boom to bust’ with interest says he misses the ‘molly-coddling’ of his The Bank of England traditionally has rates that Lord George calls ‘extraordinary’ staff at the Bank but other than that he is very good relationships with other central and with a trade-off between growth and obviously enjoying life and still keeping banks, says Lord George. This is partly inflation. Inflation was rampant and interest a keen watching brief on the ongoing historical and partly through proactive rates could move two per cent on one day. evolution of Shari’ah finance. means. For instance, Bank of England staff are encouraged to spend time outside the UK (Lord George himself spent a formative The efforts were not solely of importance to the UK... In fact, year in Moscow in the mid-1960s, where he saw at first hand what he describes as the UK work led to changes elsewhere, influencing regulations the Soviet ‘disconnect’ between the banks in Malaysia and Brunei, among other countries. and industry). The Bank of England also introduced an annual conference for Commonwealth central banks, with this subsequently having been broadened to The cycles were more pronounced than in developing countries as a whole. And it set other developed economies and, over time, up the Institute of Central Banking Studies the troughs were becoming deeper and the which, says Lord George, has played a very peaks higher. ‘We were looking over a important role in Islamic finance as well. precipice; there was a gradual realisation that this was not the way forward.’ Although Ahli United Bank, formerly United Bank of Kuwait, has been offering The need for change opened the way to Islamic mortgages in the UK since the a clear shift in the role and position of the late 1990s, it was the Finance Act 2003 UK’s central bank, with a loosening of the that really opened the door to Shari’ah- political constraints that it was working compliant mortgages providing impetus in under. Independence for the Bank was this niche of financial markets by levelling something that happened much faster the playing field for Islamic mortgages than Lord George expected. He had regarding stamp duty. As a result, other discussed it with Gordon Brown and players like HSBC Amanah, Alburaq, there was agreement on the matter but Islamic Bank of Britain and Lloyds TSB he expected it to take two or three years; entered the arena providing competition in fact, it was set in motion four days and increasing awareness to customers on after the new Labour government came a wider level. The work did not stop with into office. Transparency and public mortgages, of course, with the ongoing accountability were notable parts of www.islamic-banking.com IIBI 23 COUNTRY FOCUS: UNITED KINGDOM NEWHORIZON April–June 2007

Open door policy

With its ‘no obstacles, no special favours’ approach, the UK’s attitude to Islamic banking has seen it become the foremost centre in the western world for Shari’ah-compliant financial products and services. NewHorizon charts its growth and potential as a market leader.

Although the history of modern Islamic UK’s Muslim community, including top level banking dates back to the 1960s, it was managers from the Islamic financial services a few decades later when western banks divisions of Arab Banking Corporation started to add Shari’ah-compliant finance (ABC), Barclays and HSBC; representatives to their portfolios and fully-fledged Islamic of the Muslim Council of Britain and financial institutions started to appear Muslim British Forum; and a number in western countries. Today, dedicated of other financial institutions and Shari’ah-compliant financial institutions organisations. This was the first summit and Islamic subsidiaries of large multi- on Shari’ah-compliant finance to be held at national banking conglomerates are dealing 11 Downing Street, the official residence of on a worldwide market of over 1.6 billion the country’s Chancellor of the Exchequer, Muslims and successfully competing with responsible for all of the UK’s financial their conventional counterparts. The current and economic matters. market size of this industry is estimated at $250–300 billion; however, the total size The meeting discussed the measures taken could be substantially higher aggregating by the country’s government to facilitate the retail and wholesale sectors, with a the development of Islamic finance in presence in more than 75 countries. Great Britain and, according to Balls, how to enable further increase in ‘the choice At the moment, there is The UK and its capital, London, has become of, and access to, financial products for certainly no European centre the European hub for Islamic finance, and Muslims and non-Muslims in the UK’. there are several factors that make the as strong as us. country in general and its capital in Furthermore, he stated that the Government Neil D Miller, particular a logical choice. is looking at promoting the City of London, Norton Rose the heart of the country’s financial activity, Firstly, there is London’s long tradition in abroad as a centre for Islamic finance. Such finance. Neil D Miller, partner and global far-reaching plans are justified. ‘At the head of Islamic finance at the UK-based moment, there is certainly no European law firm, Norton Rose, regards London centre as strong as us,’ asserts Miller. as ‘one of, if not the leading international financial centre that can offer support and Creating a level playing field between services for all those interested in all types conventional and Shari’ah-compliant of finance’. He goes on to state that London providers is seen as a priority. In carrying ‘has been involved in Islamic banking since out this task, the Government has enlisted its very early days,’ and so has Norton support from a number of its organisations, Rose. It was the only law firm to be invited each making its own contribution to turning to participate in an Islamic finance summit the UK into the most Islamic finance- hosted by the London City Minister and friendly economy in the West. Economic Secretary to the Treasury, Ed Balls, in April this year. The meeting The Financial Services Authority (FSA), an gathered together a range of industry independent non-departmental public body specialists and leading members of the that regulates the financial services industry

24 IIBI www.islamic-banking.com NEWHORIZON Rabi Al Thani–Jumada Al Thani 1428 COUNTRY FOCUS

in the United Kingdom, started the as ‘no obstacles, no special favours’. And Issuing sukuk (government bonds) is ball rolling with creating a favourable being solely a financial regulator, it leaves high on the agenda of the UK Government environment for Islamic mortgages. This the religious aspects of financial products and the introduction of new measures for initiative belonged to Lord Eddie George, at and services to be addressed by the sukuk in the 2007 Budget proves it. They that time Governor of the country’s central Shari’ah boards of the banks. enable sukuk, or ‘alternative bonds’ as the bank, the Bank of England. A relevant Government calls them, to be issued, held working group consisting of representatives Big Ben, and traded in the same way as corporate from the FSA and the Treasury, as well as London bonds. Sukuk is already listed on the lawyers, bankers and representatives from London Stock Exchange and London’s the Muslim community, was formed. secondary sukuk market is experiencing (More information on Lord Eddie George growth. ‘Deals are already structured out and the working group can be found in the of London,’ says Miller. ‘Hopefully, this ‘Profile’ section of this issue, p21–23). will develop more capital market, so we can issue out of London as well.’ As a result of the group’s efforts, in 2003 the FSA abolished what it described as ‘the UK Trade and Investment (UKTI) is main hurdle in the UK’ – the double stamp another state organisation contributing to duty payable when purchasing property in promoting Islamic financial services and, accordance with Shari’ah law. The market in particular, the City of London’s position grew swiftly, with Islamic financial services as a leading global player in this field. divisions of ABC, HSBC and Lloyds TSB, Recently, it has set up an Islamic Financial Britain’s first fully-fledged Islamic bank, Services (IFS) sub-group as part of the Islamic Bank of Britain, and a number of Financial Services Sector Advisory Board domestic building societies launching their (FSSAB). Richard Thomas (managing Shari’ah-compliant mortgage offerings. director, GSH (UK) Ltd), who chairs the IFS Today, the country’s home financing market sub-group explains: ‘The UK Government is estimated at £500 million ($1 billion). has two initiatives running for industry consultation on Islamic financial services. This was followed by addressing the issue One is directly through the Treasury, which of Islamic deposits – another stumbling is policy related to tax and fiscal matters block for Islamic banks trying to operate and legislation, and the other initiative is in a conventional banking environment. through the UKTI, which is focused more In the case of savings accounts, UK law on development and promotion of the entire requires capital certainty whilst Shari’ah A number of major Government market platform.’ According to Thomas, law requires the customer to accept the organisations have set up working groups the UKTI ‘looks at a very wide range of risk of a loss in order to have a possibility to advise on Islamic finance policy and activities, such as education and training of return. According to the FSA, ‘Islamic relevant activities at the highest level. HM aspects, and works on the promotional banks resolve the problem by offering full Treasury has established the HM Treasury policies on a global basis’. The Islamic repayment of the investment but informing Islamic Experts Group, and HM Revenue financial services sub-committee held the customer how much should be and Customs (HMRC) has created the its first meeting at the end of April and repayable to comply with the risk-sharing HM Revenue and Customs Islamic Finance a second meeting in June this year. It formulation. This allows customers not Group. Both committees are currently very focused on the development of world- to accept full repayment if their religious active in the light of the Chancellor of the class education, training and qualifications convictions dictate otherwise.’ One of the Exchequer Gordon Brown’s Budget 2007 (ETQ) in the UK, their standardisation and most recent developments introduced by announcements. HMRC has drawn up promotion. The committee is planning to the FSA in April 2007 is new protection and issued guidance on the treatment of provide ‘a clearing house of ideas’ for in the housing market for consumers who diminishing musharakah (joint venture), the educational organisations (including the wish to buy their homes in compliance most commonly used structure for Islamic IIBI) and to ‘improve upon the UK’s with Shari’ah through a Home Purchase mortgages in the UK, and takaful (Islamic offering to the professional market’. Plan (HPP). insurance). HM Treasury is carrying out ‘a feasibility study into opportunities for ‘For the UK to lay any claim to being a The FSA sums up its policy towards Islamic the Government issuing Islamic financial major global centre, it has to provide the banks (and, for that matter, any other new instruments in the wholesale sterling highest quality of staffing at least at the or innovative financial services company) market,’ according to Balls. level that it does in other areas of services,’ www.islamic-banking.com IIBI 25 The Swiss Re Tower, COUNTRY FOCUS: UNITED KINGDOM City of London

states Thomas. There is great support from finance, which includes ‘buy to let’ various educational organisations across property mortgages, residential mortgages the country, which Thomas characterises and mortgages for non-residents (mainly as ‘one of the UK’s biggest unsung successes the bank’s Arab customers), however it in Islamic finance’, however at the moment plans to introduce a new savings product the whole process is ‘a bit ad hoc’, so the and commercial property finance during standards need to be created and ideas the course of this year. Alburaq is shared. headquartered in the City of London, but its products are offered throughout the Thomas thinks that there is also a need UK. ‘We know how to structure Shari’ah- for an industry body (such as the IIBI) compliant products and we know how to to represent the Islamic financial services, market them to the Muslim community,’ ‘something that will have similar says Leach. In order to distribute Alburaq’s characteristics to the British Bankers’ offerings ‘in the mass market and in an Association’. However, the role of the IFS in economically viable way’, in addition to this sphere is purely promotional, it merely selling directly, the bank has partnered with ‘brings the representatives from the industry a number of independent financial advisers, together’, but it is up to them to decide Lloyds TSB and the Islamic Bank of Britain. whether to form such an institution. Although the majority of British Muslims live in London and the South East, there There are indeed currently many is a significant population in other regions initiatives regarding the development of the country, such as the cities of of Islamic finance in the UK. In addition Birmingham and Leicester in the central to the work of the afore-mentioned part of England, and Bradford, Leeds and organisations, the Government has also Manchester in the north. Alburaq’s business commissioned a review by National Savings ‘mirrors the demographic spread of the and Investments, a state-owned savings Muslim population in the UK’. bank and executive agency of HM Treasury. The bank is set to examine the possibility Alburaq is not alone in its quest to of the Government issuing retail Islamic capture the UK’s regional market. The products, for example, Shari’ah-compliant afore-mentioned Islamic Bank of Britain post office accounts. (IBB), the first stand-alone retail Islamic bank in the country, has set up its The retail side of Islamic finance is a vital headquarters in Birmingham. In addition component of the Government’s strategy. to access to Shari’ah-compliant banking The Muslim population of the UK is products and services regionally, there is estimated to be 2.1 million people, which also ‘the spread of an opportunity to work accounts for three per cent of the country’s in Islamic financial services in areas outside total population, with a contribution to the of London’, says Thomas. IBB was set up UK’s annual GDP (gross domestic product) by a group of Middle Eastern investors of £51 billion ($101 billion). Another half and commenced its operations in 2004. million Muslims are regular visitors to Today, the bank has a presence in London the country and there are large Muslim and the surrounding area, Manchester and communities residing in the European also central England – the Midlands and Union (EU), principally in Germany East Midlands regions. And recently, IBB and France. has announced its expansion to Wales by launching Shari’ah-compliant financial ‘There are many opportunities on the services through a network of financial retail level here,’ says Keith Leach, head advisers and mortgage brokers in Cardiff, of Alburaq, the Islamic financial services the Welsh capital, and its surrounding division of ABC International Bank plc (a areas. Currently there are around 600,000 wholly-owned subsidiary of Bahrain-based Muslims living in Wales, with Islam being ABC). Alburaq was launched three years the most popular non-Christian religion ago. At the moment, it specialises in home in this constituent country of the UK.

26 IIBI COUNTRY FOCUS

Interestingly, Cardiff was home to the first mosque in the British Isles, established back in 1860.

Scotland, another constituent country of the United Kingdom, is also a potential market for Islamic finance. ‘There is quite a lot of demand for it in Scotland,’ says Thomas. However due to the difference in laws between England and Scotland, at the moment, ‘there is a fair amount of work that needs to be done to open up home finance, takaful and other products to the Scottish market’.

Introduction of takaful and its development is a topical issue, not just for the UK but for any country with an Islamic financial market, as it is a new and rapidly growing part of the industry. In the UK, according to Thomas, ‘a lot of new pieces of the jigsaw have to come into place’ to ensure success. As well as the legislation, there is also the need for market players to produce the products ‘which will underpin the market and meet international standards’. So it is very important to create awareness that the market needs to be developed.

A call for more awareness is not confined only to the market players, but is just as relevant to consumers. Specialists agree that general public awareness about the availability of Islamic banking products in the UK has to be raised as well as, according to Leach, ‘a better understanding from customers how the products work and why they are Shari’ah-compliant’. He explains: ‘Once people have become comfortable with the concept, they are more likely to see it as a right thing to do.’

Shari’ah-compliant finance is offered to both Muslims and non-Muslims, and the Islamic banks operating in the UK are witnessing an increasing demand for Islamic products and services regardless of customers’ faith. ‘There are several reasons for that,’ says John Weguelin, managing director of UK-based European Islamic Investment Bank (EIIB). ‘Firstly, it is diversification for non-Muslim investors. Secondly, it is the nature of Islamic products – there are conventional investors who look

IIBI 27 COUNTRY FOCUS: UNITED KINGDOM NEWHORIZON April–June 2007

to invest in an ethical and environmental operate,’ he says. ‘The City of London has way. And thirdly, there is a yield factor.’ very good links with Bahrain, Dubai, Abu Dhabi, Japan and other places, and we EIIB was the first Islamic investment bank base our success on co-operation, not to be licensed by the FSA in Britain, and it competition.’ has been operating in the UK market for just over a year. However, the bank has Overall, the specialists agree that, already made considerable progress and at the moment, the Government together even tapped into the Middle Eastern market with the FSA and other participating by setting up a representative office in organisations have done all they can to Bahrain. Furthermore, it is a member of facilitate the growth of Islamic finance in the Islamic Financial Experts Group, set the country. ‘They need to be congratulated up by the FSA and the Treasury to advice for everything they’ve done,’ says Weguelin. on Islamic finance matters. ‘In the last three or four years the Government has made changes in the So why did the bank choose to be Finance Bill each year to accommodate headquartered in London? ‘London is Islamic finance. The most recent, the current the engine that develops and produces 2007 Bill, for example, has made changes to the products that meet the needs of the tax regime.’ He thinks it is ‘down to the clients either here or in the GCC [Gulf practitioners now to communicate with the Cooperation Council],’ says Weguelin. In Government’ and to let it know what other his opinion, although there are ‘considerable issues of the industry they feel should be London is the engine that opportunities’ in other European countries, addressed. develops and produces the at present, the UK is ‘the most advanced in terms of recognising the needs of Muslim ‘It is very important that the Government’s products that meet the needs investors’. support continues,’ says Leach. There are of clients either here or in no signs pointing otherwise. ‘There is a door the GCC. Being one the world’s major financial that you can push on if you want something John Weguelin, centres, London has enough competence done, and it is open,’ he continues. ‘So if EIIB and capability to accommodate both types there are any particular issues that arise, of financial institution, conventional and there is a mechanism for asking the Islamic. On one hand, they are competing, Government to address them.’ but on the other they are supplementing each other. ‘What the conventional banks However, although the Islamic finance are bringing is depth of resource and market in London is growing at a speed structuring capability. What the Islamic that Thomas describes as ‘tremendously, banks are bringing is their ideology, their shockingly quick’, and the current distribution capabilities in the region,’ environment is already ‘considered to says Miller. A lot of banks, including ABC be most attractive for Islamic banks in a International Bank with its Alburaq division non-Muslim country’, the challenges still and EIIB use specialists in conventional remain. The specialists agree that more banking to assist them in structuring education is needed. Shari’ah-compliant products. There is no shortage of specialists with ‘conventional Education is the key to success, says banking background’ in London, states Mohammad Qayyum, director general Weguelin. ‘This is the beauty of being based of the Institute of Islamic Banking and in the major financial centre – there is a Insurance, London. Unbiased education and good supply of intellectual capital.’ training from independent organisations supported by professionals, the industry, The collaboration and co-operation goes regulators and government is the formula to beyond just product structuring. London successful promotion and implementation of is a leading centre for Islamic finance, and Islamic finance in the UK and, according to that is how the UK Government promotes Weguelin, ‘to help cement London’s position it, emphasises Thomas. ‘We want to co- as a global leader in Islamic finance’.

28 IIBI www.islamic-banking.com NEWHORIZON Rabi Al Thani–Jumada Al Thani 1428 ANALYSIS

A mixed year for the Islamic funds market across the globe

Mark Smyth, managing director at Chicago-based Failaka Advisors LLC, analyses the 2006 performance of Islamic funds around the world.

Failaka Advisors has re-launched its According to the Failaka Islamic Fund returns for fund managers, however these quarterly Islamic Fund Report with the Report, this gave a return of 29.2 per cent. were still down by a few per cent. The worst year-end edition looking at the state of This is just over double that of the Dow performing market in the region was Saudi the global Islamic fund market. The key Jones Islamic Market Global Index, Arabia. According to Failaka, the average findings of the report are that the field of which gave a return of 14.5 per cent. fund in this market fell by over 50 per cent. Islamic-compliant funds is growing despite a poor performance in GCC equities. As a result of the falls Failaka hopes that Failaka believe that there are currently BEST PERFORMING GCCGLOBAL EQUITY EQUITY FUNDS these results will give rise to a more prudent 218 Islamic equity funds around the Name* 2006 Return retail investment culture that focuses on world, managing cumulative assets Crescent Global Equity Fund 29.2% long-term strategy rather than short-term of an estimated $16 billion. profits. Al-Dar World Equities Fund 19.7% 2006 was a strong year for most global ANB Crescent Fund 17.6% On a more positive note, it seems to have equity markets, with the exception of DJIM Global Index (World) 14.5% been a better year for Asian equity funds. the Arabian Gulf, a market where a large Roughly half of all Shari’ah-compliant * Funds having at least 12 months’ history number of Islamic-compliant funds invest. funds are invested in this region, with the The returns from Islamic funds mirrored the majority being in the Malaysian market. global success of the market, however they The GCC region is an important one for In this region Islamic funds outperformed did trail the returns of conventional funds Islamic investment funds; there are 28 funds their conventional rivals; the Kuala Lumpur and indexes. Failaka sees two key reasons that deal strictly in GCC equities. According Stock Exchange returned 21.9 per cent to its for this. to Failaka, this accounts for twelve per cent investors, whereas the equivalent Shari’ah of the Shari’ah-compliant funds market. The Index achieved 23.8 per cent. Firstly, there was a strong performance market did not perform well in 2006 and as from the banking sector. This is a sector a result the returns were poor. Of the GCC not invested in by Islamic funds due to its funds even the best performing one had a BestBEST Performing PERFORMING ASIAN GCC EQUITY FUNDS reliance on interest, so whilst conventional return which fell by over ten per cent. Name* 2006 Return funds benefited from the strong Prudential Dana Al-Ilham 29.5% performance, Islamic funds could BEST PERFORMING GCC EQUITY FUNDS Prudential Dana Dinamik 26.9% not ethically do this. Name* 2006 Return Public Islamic Opportunities Fund 25.7% The second reason for trailing conventional Al-Bashaer GCC Equity Fund –10.2% KLSE Shari’ah Index 23.8% funds was a slow-down in the technology Al-Tawfeek Gulf Equity Fund –17.0% * Funds having at least 12 months’ history sector. This is an area which features prominently in the portfolio of many Al Rajhi GCC Equity –35.0% Islamic funds. Failaka believes that the Al Madar GCC Islamic Index –44.6% The report predicts a good 2007 for the technology sector was in a low part of * Funds having at least 12 months’ history market. It cites new regulatory transparency its cyclical pattern and, as a result, in Dubai and rule changes in Malaysia as its performance was lacklustre. important factors in its optimism. It also The results for the GCC funds did however predicts a boost to the IT sector as On a global scale the best performing fund depend on the country the funds were something that will help Islamic was the Crescent Global Equity Fund. invested in. Kuwait provided the best portfolios have a better 2007. www.islamic-banking.com IIBI 29 IIBI NEWS NEWHORIZON April–June 2007

DIFC IIBI and ABE collaboration Course

Education The IIBI has agreed to develop across the globe and over 500 Development two optional units in Islamic affiliated colleges, where these Head visits banking for The Association of optional modules will be at IIBI Business Executives (ABE) – a offered. The work on the IIBI in London UK-based organisation – for development of these units their Business Management has already started and it The continuing expansion of Diploma and Advance is expected that they will be the Islamic finance industry has Diploma levels. ABE has available to ABE students in led to an increased demand for approximately 39,000 students the September 2007 intake. qualified manpower to promote and manage business in a Shari’ah-compliant manner.

IIBI appoints new director The IIBI has been serving the industry by offering its Post- Muhammad Ayub has joined Shari’ah compliance/audit Graduate Diploma course in the IIBI as director training, division as senior joint director Islamic Banking and Insurance, development and Shari’ah in the research and Islamic through publications and by Ms Faten Hani, head of aspects from May 2007. He banking departments. He running training courses. education at the Dubai brings with him a wealth of also served as head of Islamic Although the number of International Financial Centre experience in Islamic banking banking at NIBAF, the training applications for the PGD has (DIFC) (above), met with Iqbal and finance and in training. wing of the central bank in risen steadily in recent months, Khan, chairman of Tayeb Pakistan. most of the applicants find they Holding Company (in Brunei) Ayub was formerly with State cannot enrol due to lack of the and member of the IIBI’s Board Bank of Pakistan (central He has presented a number of qualifications necessary for of Governors and Mohammad bank) heading the Islamic papers and published books on taking up the PGD; the IIBI Qayyum, IIBI director general, economics division and Shari’ah-compliant finance. is therefore preparing a new on Thursday 17th May during Graduate Diploma course her short visit to London. that will lead on to the PGD.

The meeting was very positive Newcastle & Kentucky Work on the development of and she observed that both the this course is in progress, along IIBI and DIFC shared common universities call on IIBI with updating the existing PGD objectives and values. course contents; the material managing director GSH, UK, will be designed so as to enable Khan highlighted the and member of the IIBI’s Board independent self-study. contribution of the late of Governors, and Mohammad Muazzam Ali as one person’s Qayyum, IIBI director general, The IIBI is working with vision to the promotion of on 6th June. They are currently London-based professional Islamic finance globally with working on a British Academy- bodies in order to accredit the the IIBI embodying the past funded project that explores new and updated PGD course. and DIFC embodying the the challenges facing the potential of the future. He also development of Islamic finance The course will offer a highlighted the value of the IIBI’s in the UK. The focus of the high-quality qualification position in London with the Dr Jane Pollard (above), meeting, in particular, was how in Islamic finance from a cross-current of professionals senior lecturer at Newcastle different financial institutions London-based global Institute; converging at one place. It was University researching Islamic establish trust and credibility will assist employers to have accepted that the DIFC and IIBI finance, and Dr Michael Samers with consumers in different knowledgeable and skilled could co-operate in developing (University of Kentucky) met regulatory and cultural persons; and will offer a courses and in the areas of with Richard Thomas, contexts. progression route to students publications and research. for UK university degrees.

30 IIBI www.islamic-banking.com NEWHORIZON Rabi Al Thani–Jumada Al Thani 1428 IIBI NEWS

Training for National Bank of Dubai

The IIBI is offering training to banking in utilising the resources National Bank of Dubai staff and equitable distribution of (right), as part of its distance- wealth in society. He also based Post-Graduate Diploma discussed the structure of the course and conducted the first IIBI’s Post-Gradate Diploma session for 15 employees of course and answered questions National Bank of Dubai on from participants about the 27th and 28th May 2007 at the differences between current bank’s training centre in Dubai. interest rate and riba, This is to be followed by a permissibility of a certain level second training session later of interest rate as an inflation- in the year. The IIBI was buster, Shari’ah-compliant represented by James Hume, products offered by Islamic member of the Institute’s banks in Dubai and their advisory group and senior discussed the growth and organisation in Islamic finance comparison with conventional executive officer at Volaw challenges for Islamic banking; education, training and research. products, Shari’ah compliance Trust, DIFC branch, Shari’ah compliance of and competitiveness. Mohammad Shafique, IIBI transactions; shortage of Qayum then took over the programme development Shari’ah scholars; legal and session; he defined the basic At the close, Hume advised co-ordinator in London and regulatory issues. He then principles underpinning Islamic students to work hard, and to Khaled Qayum, IIBI tutor. provided a brief overview of banking: prohibition of riba clarify any questions they have, the history and role of the IIBI (interest), gharar (uncertainty) wishing them all the best in the In the welcome address, Hume as a London-based pioneering etc; and the benefits of Islamic course.

Promoting Islamic Finance IIBI visits Pakistan in the United Kingdom Mohammad Qayyum, of Bankers, Pakistan; Dr Imran IIBI director general, and Usmai, Shari’ah scholar and Mohammad Qayyum, IIBI and to enable London to remain Mohammad Shafique, IIBI head of product development director general, attended at the forefront of developments programme development co- team at Meezan Bank – the meetings of the UK Trade and in global financial markets. ordinator, visited Pakistan in leading Islamic bank in Investment (UKTI) Financial May as part of a consultation Pakistan. Services Sector Advisory Board London has a successful record to offer international certified sub-group on Islamic financial of developing and delivering qualifications in Islamic Qayyum and Shafique also services held on 30th April and Islamic financial services and banking, finance and paid a visit to Kazi Abdul 6th June. The sub-group was products supported by a pool of insurance. Muktadir, managing director established to develop a strategy expertise, a strong but pragmatic at National Institute of to promote the UK as a global regulatory framework, and a During the visit, calls were Banking and Finance (NIBAF), centre for Islamic financial government willing to address made on Justice (Retd) the training arm of State services including Islamic issues to create a level playing Taqi Usmani, senior Shari’ah Bank of Pakistan; Hassaan finance education. field on which Islamic financial scholar and highly respected Kaleem, Shari’ah advisor; and products and services can figure internationally; Pervez Muhammad Khaleequzzaman, The UK Government’s objective compete. The UK is already the Said, head of Islamic banking who is the head of Islamic for Islamic finance is two-fold: preferred legal jurisdiction for at State Bank of Pakistan banking and finance at the to ensure that British Muslims as Islamic finance transactions, due (central bank); Saleem International Islamic well as non-Muslims have access to English Law’s flexibility in Umer, CEO of the Institute University, Islamabad. to competitive financial services; implementing Islamic Shari’ah. www.islamic-banking.com IIBI 31 IIBI LECTURES NEWHORIZON April–June 2007

Education in Islamic finance

April: key roles in Islamic finance deals globally; There are disadvantages too: the significant and, finally, the UK government has investment required; the lack of awareness Successful strategies by committed to combating financial exclusion about the brand and high marketing costs Islamic banks for attracting and strengthening London’s position as the to promote it; extensive regulations (it leading financial centre in Islamic finance. took IBB nearly two years to finalise licence Muslim customers This will lead to an inflow of capital and approval from the FSA because there was assistance in developing trade ties with no precedent); the need to avoid copying Sultan Choudhury, director of sales at the Islamic countries. conventional banking products and Islamic Bank of Britain (IBB), discussed the techniques for fear of diminishing the value various strategies available. There are currently two fully Shari’ah- of the brand; time to become profitable; compliant Islamic banks in the UK: IBB and risk of failure of the business model. Choudhury has over 13 years experience in and the European Islamic Investment professional and financial services. In 2004, he Bank, covering the retail and the wholesale IBB’s potential market was culturally set up the head office operations department markets respectively. There are a number of diverse, there was a lack of market at the IBB and he is currently responsible for other players too – HSBC Amanah, Lloyds intelligence data and there was competition the bank's distribution channels for sales and TSB, Alburaq (Arab Banking Corporation’s from mainstream players. It was therefore services (both branch and direct) in addition subsidiary), Ahli United Bank, and United not easy to have a single marketing strategy. to the business development function. National Bank. Further applications for Indeed, word of mouth proved to be the licences are with the FSA. There are a most powerful means of attracting new The lecture was chaired by Mansur Mannan, relatively small number of major players customers. vice president for global Islamic finance at in UK retail banking and Shari’ah-compliant Credit Suisse, London and formerly also banking occupies a niche within this. Product innovation, good relationship with IBB. management, effective segmentation and Choudhury pointed to four key factors well-trained personnel were important to which influence a banking customer: the bank’s success. To ensure the Shari’ah Sultan Choudhury, service quality, brand, cost and the compliance of products, both local and IBB products/services on offer. While each international Shari’ah scholars were on is important, banks should focus on one board and IBB maintained a dialogue or two. IBB has chosen to focus on brand with the community at different levels. and products/services. It has expanded its portfolio of products considerably and has Choudhury concluded by saying that put a lot of effort into promoting the IBB the IBB brand is based on full Shari’ah brand through direct and indirect marketing compliance while being a British bank channels. It is trying to differentiate itself regulated by the FSA. Its corporate identity from other players. is promoted though all marketing channels and there are plans for EU expansion in IBB is a new bank (two and half years old) the future too. The modern Islamic banking movement and is fairly small compared with other has grown significantly over the last 40 UK retail banks. This brings advantages: April lecture years and is particularly well established a simpler organisational structure; an in the UK, especially in London, for several opportunity to make huge rewards in reasons. Since the early 1880s the London the long run by exploiting the pioneering Metal Exchange has been used by Middle role; flexibility; it is easier to implement Eastern Islamic financial institutions to staff reward schemes and to focus on the utilise their excess liquidity; there are customers in building products and services; some two million Muslims in the UK with and it offers competitive pricing and simple a genuine desire among them to use banking terms and conditions for customers. Early facilities which are in accordance with their proof of the success of this business model faith; UK law and accountancy firms play can be seen.

32 IIBI www.islamic-banking.com NEWHORIZON Rabi Al Thani–Jumada Al Thani 1428 IIBI LECTURES

and also meet the needs of investors. Dr Humayon Dar, June: Al-Dar Islamic Future of Islamic The development of Islamic futures and options is a fine addition to the Futures and Options sophistication of Islamic financial products; however, the increasing acceptance of these Dr Humayon Dar, chairman of the newly- contracts among the Islamic intelligentsia is established London company, Al-Dar Islamic, a cause for concern for many purists who delivered a lecture organised by the IIBI on advocate that Islamic financial contracts be the future of Islamic futures and options at distinctly different from their conventional the British Bankers’ Association, London. counterparts.

Dr Dar is a leading Islamic banking and finance Dr Dar explained in this lecture how expert, a pioneering advocate of Shari’ah Islamic options, futures and forward structuring and has had wide-ranging contracts have become recognised and professional experience including a leading acceptable as Shari’ah transactions; the role in Islamic financial innovation. necessary framework where these are applied; and the resulting benefits to the The lecture was chaired by Clive Lang from Islamic finance industry. Dr Dar, who has Amiri Capital, a London-based Shari’ah- played a central role in the development compliant global investment management of such contracts and getting Shari’ah and experience with the attendees of the group. recognition for them, shared his thoughts IIBI’s June lecture.

Futures and options, also known as July lecture preview: derivatives, are financial instruments whose price movements are derived from price The new UK tax law on sukuk movements of an underlying security or asset. Understanding the questions of This is the subject of the IIBI’s July lecture, risk and speculation are central to the which will be presented by Mohammed development of derivatives. Amin, partner, PricewaterhouseCoopers LLP. Amin specialises in the taxation of Advances in information technology have Islamic finance and is a member of the turned the world into a global village and Islamic Finance Experts Group formed companies are increasingly trading across by Ed Balls, Economic Secretary to the borders. This has exposed them to many Treasury, to advise the UK government risks such as foreign exchange; in order to on Islamic finance strategy. manage these risks, companies use hedging instruments such as futures and options, Sukuk is one of the most rapidly growing leading to phenomenal growth in these Islamic financial instruments. The UK conventional instruments in the last Government has recently changed tax decade or so. law to facilitate the issue of sukuk by UK companies and trading of sukuk by UK Modern Islamic finance is still in the age investors, and is currently carrying out of infancy with a history of just over four a study to determine whether it should Mohammed Amin, decades as compared to conventional itself issue sukuk. Mohammed Amin, PricewaterhouseCoopers finance, which has over 400 years of who along with others has provided input experience. Further growth in Islamic into the tax law changes, will explain their The lecture will take place on banking and finance will require more significance, and share his thoughts on 16th July 2007 at 5.30pm at: innovation in product development. how the sukuk marketplace may develop. British Bankers’ Association Pinners Hall Recently, some derivative contracts have There is no charge to attend the lecture 105–108 Old Broad Street been developed using salam, wa’ad etc but you must register. To register, please London structures which are acceptable in Shari’ah visit: www.islamic-banking.com EC2N 1EX www.islamic-banking.com IIBI 33 POINT OF VIEW NEWHORIZON April–June 2007

Halal banking or Islamic banking?

From its tentative beginnings Islamic banking has mushroomed to the point that the huge multi-national banks are rushing to offer Shari’ah-compliant versions of their products. Don Brownlow looks at whether growth is driving this form of finance away from its Islamic principles.

Almost every month brings an to move forward quickly, Islamic banking is announcement from one or other of the leveraging conventional banking products. large international or regional conventional Abdulrahman Abdullah Al-Sayed from banks about their launch of a Shari’ah- the Central Bank of Bahrain noted in the compliant product. The last issue of last issue of NewHorizon that ‘conventional NewHorizon mentioned, among several banking specialists use conventional similar announcements, that Lloyds TSB, banking products and modify them in a UK-based high street bank, had launched order to make them Shari’ah-compliant’. a product aimed at commercial business While this enables many Muslims to enjoy clients that ‘would make it possible… banking products without contravening for entrepreneurs to bank according Shari’ah, some discussion is taking place as to their principles’. to whether traditional Islamic transactions are being ignored in the rush to bring to But there is debate within the Muslim market acceptable conventional products. community as to the aptness of this type of statement. The central issue is that although Rehan Jafri, of UK-based 1st Ethical these products allow banking to take place thinks that within the Muslim community without offending Shari’ah compliance – ‘most business people would like their haram conventional banking products business to be viewed on the strength of There is... ‘expectation within sanitised to become halal – do the the business case rather than the strength the... Muslim community that entrepreneurs referred to above really feel of the collateral that they bring to the social justice, mutuality and they are being offered products according bank and as a result [getting] the bank to the principles of Islamic finance? forwarding them a loan. So if the business fairness are supposed to case is strong then they would like to be centre-pieces’ of Islamic Haider Ala Hamoudi, Associate in Law, have an investment based on [the mutual financing institutions but ‘that Columbia Law School in New York, partnership of] musharakah’. This would believes that there is ‘a certain level of be in keeping with the Islamic principle of expectation is not being met’. expectation within the contemporary shared profit or loss, rather than a purely Haider Ala Hamoudi, Muslim community that social justice, commercial interest based lending approach. Columbia Law School mutuality and fairness are supposed to be centre-pieces’ of Islamic financing He feels that the Islamic banking that institutions but ‘that expectation is exists at the moment is ‘Shari’ah friendly not being met by the current means of but not Shari’ah perfect. We have had big approaching Islamic finance’. He thinks banks come in and say this is a product that some of the products have been created that we offer on a non-Shari’ah basis and through ‘artifice’; constructing products if I make XYZ tweak to it then I have a that follow the letter of the law so that Shari’ah-compliant product. It is compliant they are not illegal per se. with the letter of the law but not the spirit of the law.’ There is no doubt that many ‘Shari’ah compliant’ products are modified Hamoudi points out an analogy with conventional banking products. In order ‘bacon’. He says that, generally speaking,

34 IIBI www.islamic-banking.com NEWHORIZON Rabi Al Thani–Jumada Al Thani 1428 POINT OF VIEW

‘people don’t have a problem following is too high, it’s too big a leap. The scholars One possibility is that the Islamic banking to the letter the rules of worship, but not realise this but they would still like to see market may evolve into different tiers. In worrying about the spirit, as opposed to the banks improve the model.’ the conventional market different types of rules, of behaviour. The rules prevent eating organisation provide different types of pork – but it is acceptable to eat ‘turkey One way in which some scholars and services – large banks offer retail services, bacon’ which is a product [predominantly writers think the model could be improved specialist investment banking provides available in the US] where turkey meat is is the acceptance of smaller community- international capital and small venture cured to look, feel and taste exactly the based institutions adopting a mutual form. capital, and private equity groups offer same as bacon.’ Hamoudi points out that this thinking is boutique financing to start-up enterprises. based partly on the fact that in a mutual It may be that there is space in the Islamic He feels that this is what financial institution the shareholders are themselves banking market for the widespread retail institutions do: ‘they say we are not going owners of the deposits and the profit products to be provided by the larger to take interest but we will do everything we incentive is less pronounced. This alleviates, halal institutions while finance for local can to make it look as much as possible like to some extent, the need for the Islamic entrepreneurs may be provided by smaller interest’. The larger conventional banks and banks to mimic the profitability and risk mutual organisations operating in the local the smaller Islamic banks operate in much profile of conventional banks. community according to Islamic principles. the same way, he feels, and in his view both types of institution attempt, more or less, to figure out ways to mimic interest rates without explicitly doing so, although the We have had big banks come in and say this is a product that smaller banks may not be so comfortable we offer on a non-Shari’ah basis and if I make XYZ tweak to it with all of the products that are offered then I have a Shari’ah-compliant product. It is compliant with to the market. By way of an example, he says that ‘almost all banks will offer a the letter of the law but not the spirit of the law. murabaha, where the mark-up often reflects Rehan Jafri, LIBOR [London Interbank Offered Rate, 1st Ethical an internationally recognised interest rate], but some of the larger institutions will also permit a tawaruq – which involves In some countries such as the UK there an immediate sale of the commodity back has been an attempt to force the few into the broader market for its cash value remaining co-operative institutions away so, in effect, you have an entire interest from having mutuality status and become transaction but you have hidden it behind profit based organisations. This has mostly an asset. Some of the smaller banks been directed at the larger building societies would blanch at that.’ (savings and loans institutions). This move has been prompted by society members The scholars and Islamic boards that wanting to ‘unlock’ the intrinsic value held approve products as being Shari’ah- within these societies to create a windfall compliant are often subject to conflicting profit. It is the retained value within a pressures – on the one hand the need to mutual society that would enable finance enable products that the community needs to be provided to entrepreneurs in an so that they can have home ownership and Islamic manner. other modern financial products but on the other hand maintaining Shari’ah principles. The move to mutuality would likely provide Some scholars explain their dilemma by a more local institution that would be part pointing out that many of these structures of the local community and would ‘know are temporary structures that will lead on its customers’ more closely than the larger, to better things. more impersonal banking organisations. On the other hand, the smaller number of Jafri agrees with this pragmatic approach customers would mean that running costs by pointing out that, realistically, if ‘you would be spread across a smaller number want to make a change then you can’t do it of people so it may not be practicable to all overnight… we need a stepping stone to offer some products that need a ‘critical get to where we want to, or else the climb mass’ such as credit cards, for example. www.islamic-banking.com IIBI 35 INTERVIEW NEWHORIZON April–June 2007

The ethical way to insure

Ajmal Bhatty has been at the forefront of the takaful industry for over 15 years. He spoke to James Ling about his opinions on Islamic insurance, and where it is going.

Ajmal Bhatty, The use of money should be for the social the pace of development since the late 90s Tokio Marine good of the community’. has been such that now you have almost Europe one new takaful company being formed Generally speaking, in commerce and every three to six months somewhere in trade a lot of focus is given to making the world,’ he explains. The potential that profits, something that the shareholders Bhatty is talking about is mainly due to normally expect. This is not the case with the low penetration rates in life insurance Islamic finance and takaful. In a takaful in many Muslim countries, even though company what matters is the stakeholders many of these countries have higher wealth rather than the shareholders, and profits indicators such as high GDP per capita than from the business are shared not just by countries where the penetration is higher the shareholders but by the policy holders at comparatively lower GDP per capita. In as well. recent times the tangible proof of realisation of potential in Islamic finance, Islamic Takaful is based around co-operative banking and now Islamic insurance as principles. This means that people who Bhatty puts it, ‘is really the way forward When it comes to takaful, one man who want to insure or protect each other are in many of the countries, especially in the really knows what he is talking about is provided with a common platform by Middle East and for bringing ethical Ajmal Bhatty. He describes himself as ‘an the Islamic insurance company where business solutions to the masses’. actuary by profession’ and has been in the they can jointly protect each other through takaful industry for the last 15 years. Whilst a takaful fund managed by the company. The ethical benefits of Islamic finance his insurance career started in the UK with Under this structure, according to Bhatty, and takaful ought to be something that his actuarial apprenticeship in the 1970s, ‘policy holders or participants are the should move to the forefront of the public he started out doing research at Arab insured and insurers at the same time. consciousness. According to Bhatty, ‘a lot Insurance Group in the 1990s before In a way they share business risk with of entrepreneurs are investing in new moving on to manage a takaful company shareholders, thereby becoming partners takaful companies and in time this should in Bahrain. After this, Bhatty became the in risk and reward of the business of raise the general awareness of benefits of the global head of takaful at HSBC Amanah, managing the takaful fund’. system.’ This raised entrepreneurial interest and he recently moved on and now holds in investing in Islamic finance and takaful the same role at the eighth largest insurance There are parallels that can be drawn is resulting in the formation of more company in the world, Tokio Marine between takaful and conventional mutual new companies. Bhatty recalls, ‘at HSBC Europe, located in Dubai. insurance: both are insurances for the Amanah we responded to this need by customer, by the customer. There is, setting up two takaful companies in major Takaful is essentially a form of insurance however, one key difference: conventional markets of Saudi Arabia and Malaysia as that has its acceptance within the Islamic mutual insurance does not have corporate well as opening a takaful window in the jurisprudence. It is a form of protection shareholders. A takaful company has UK’. In his new role at Tokio Marine, that is based on certain criteria acceptable shareholders who provide capital to Bhatty is planning a similar approach under Shari’ah. According to Bhatty, the business. as he finds ‘the Japanese are very much ‘the concept of insurance as such has no committed to ethical forms of consumer problems in the Islamic psyche, it is only ‘Since the early 80s the debate about solutions and therefore to the takaful the way you operate it and manage it that is takaful has been about how huge the market. Tokio Marine recognises that there an issue’. The way he sees it, ‘any financial potential is in Islamic insurance,’ says is potential and there is a need to develop activity driven by interest is not acceptable. Bhatty. ‘This potential is being realised and takaful in order to respond to the needs

36 IIBI www.islamic-banking.com NEWHORIZON Rabi Al Thani–Jumada Al Thani 1428 INTERVIEW

of their customers. It has already invested Jumeirah Mosque, in direct takaful operations in Malaysia Dubai and Saudi Arabia and has established a retakaful company based in Singapore.

‘Takaful is a fair and ethical system,’ says Bhatty. ‘Fair because it is a transparent system recognising the rights of all the stakeholders: customers, shareholders and staff alike, allocating income according to the underlying risks of each to the business,’ he explains. ‘It is ethical because of the need to invest in socially responsible and environment friendly economic and business activities, prohibiting investment in wholly interest-based businesses, in armaments, tobacco, alcohol, drugs, and adult entertainment. That is the peace of mind that takaful offers people in addition to the normal insurance protection,’ he says. ‘The conventional business mantra coined by Milton Friedman many years ago that the business of business is business, is chanted in the boardrooms of today focusing on maximising shareholder returns. But this is not the case with takaful companies,’ says Bhatty. ‘Takaful and Islamic finance is about maximising stakeholder returns not just the shareholders’, and hence it is driven by its very constitution and not by any management policies about improving the quality and not just the quantity of profits of its business.’

Bhatty believes it is this ethical nature and quality of business that drives the takaful industry forward. ‘You have to have a socially responsible and environmentally friendly approach to your business,’ he says. ‘Takaful is about addressing the issue of protection in a fair and ethical manner, and should appeal to everyone, not just Muslims.’ This is a key issue for the success The ethical benefits of Islamic finance and takaful ought to be of a takaful company. Although it has its roots in Shari’ah principles, takaful something that should move to the forefront of the public companies need to promote the fact that consciousness. Islamic insurance is an ethical way of protection that is good for everybody. This is something that has been achieved in one of the world’s largest takaful markets, Malaysia. According to Bhatty, ‘in Malaysia, for some companies, up to 60 per cent of takaful sales have been to www.islamic-banking.com IIBI 37 INTERVIEW NEWHORIZON April–June 2007

non-Muslim customers’. This is a good ‘In Malaysia the government has been what will the future hold for them? Bhatty thing for the industry in general, and shows very responsible in allowing first only two expects the growth to continue, ‘we have that if the proposition is properly presented companies to conduct takaful [in the 80s] to seen some numbers that show this is and is understood by the customer then the ensure that it got a secure and stable footing tangible in terms of what the growth can customer knows that it is a superior before opening up the market to more be’. Overall Bhatty expects to see growth proposition. players in 2006,’ says Bhatty. New co- in the region of ‘ten to 15 per cent over operative insurance regulations introduced the coming five to ten years’. With this The global market for takaful has certainly in Saudi Arabia in 2005 require takaful growth in mind, Bhatty expects the size taken time to develop. The first companies companies to be licensed. So far, 13 of the market to be ‘between $7 billion were set up in Sudan and Saudi Arabia in companies have been awarded a licence that [as quoted by S&P] and $14 billion 1979. According to Bhatty, ‘the initial will become operational after going through [according to his own estimates] by 2015’. activity was slow as the parent companies the process of IPOs. Only three companies There is, however, one caveat with this of these takaful companies were Islamic have gone through the IPO process so far prediction – that this will only be the case banks who were themselves going through and, according to Bhatty, ‘as the market if the big economies around the world such as India, China and the US open up to the takaful market.

The pace of development since the late 90s has been such that With all this good news around the market now you have almost one new takaful company being formed there have to be some words of caution. every three to six months. Looking at the global market Bhatty says, ‘it seems like there is almost a race to set Ajmal Bhatty, up takaful companies, this is leading to Tokio Marine Europe too much cluttering and scramble in some markets where the true essence of takaful could be getting compromised’. This type an evolutionary process. A second problem expects eventually to be made up of around of cluttering is most undesirable both for that the industry faced was the lack of 35 to 40 new companies, the Saudi market regional markets and globally. It flags up suitable funds that takaful companies could will pick up nicely. A fitting response to the some warning lights for Bhatty: ‘companies invest in. This meant that takaful companies large gap that has been there for years are forgetting the social, ethical and could not give customers the sort of returns waiting to be filled.’ Shari’ah-compliant principles they must they were used to receiving on conventional adhere to,’ he says. ‘If they do not apply savings products. The real take-off for The global scene of takaful has changed a them, they will lose the confidence of takaful came from the relatively recent great deal in the last five years. The early the customer. In business, once you lose growth in the sukuk and Islamic banking movement to develop takaful was in the consumer confidence, you have had it.’ markets. According to Bhatty, ‘until three Gulf Cooperation Council (GCC) region These are strong words of warning from or four years ago there wasn’t a good range and Malaysia. This has now spread and a man who has a great deal of experience of investments that the funds could be recently there has been a lot of activity in this industry. invested in. That’s rapidly changing, now in many markets. It is now estimated that we do have a good range of products on the there are between 100 and 250 companies With all things considered, it would seem investment side where insurance liabilities around the world selling takaful. As there that the takaful industry is on the up. As can be invested and reasonably matched, are more companies in the marketplace, the potential markets open up to its concepts, at least at the shorter end of the market.’ competition is also growing. It is not only and companies keep the Shari’ah principles internally within the takaful market that at the forefront of their operations, there is The market today is still evolving. It is more competition is growing, Islamic insurance a bright future for this form of insurance. established on the non-life side of insurance, companies are also competing directly with Factors such as raised public awareness, with life insurance still finding its way conventional insurers. Customers like to see increase in Shari’ah-compliant investment around. According to Bhatty, ‘takaful has the ethical benefits of takaful, but according solutions, and the resolution and sheer potential in many markets to grow, this to Bhatty, ‘not all will buy just because of commitment of industry leaders such as covers the Middle East, Asia, Africa and this, they also need to see a return that Bhatty and others like him all mean that many countries in Europe. Some of the compares favourably with conventional the takaful market will continue to grow markets with huge potential are China, returns’. and become secure and stable. The takaful India, Pakistan, Indonesia and North industry no doubt looks set to challenge the America.’ Currently, the two big markets It would seem then that the immediate conventional insurance markets across the for takaful are Saudi Arabia and Malaysia. outlook for takaful companies is good, but globe.

38 IIBI www.islamic-banking.com

ACADEMIC ARTICLE NEWHORIZON April–June 2007

Investment planning and process in Islamic fund management

Investment management has become a highly specialised activity with increasingly sophisticated instruments, a need to accommodate clients with different risk–return profiles and a need also to be able to handle the commensurate diversification requirements. New investment frameworks like ‘multi-manager funds’; ‘fund of funds’; or ‘manager of managers’ are increasingly in vogue to ensure that ‘best-in-class’ investment decisions are taken by fund managers. These have been introduced into the Islamic financial market too in recent years. Muhammad Ayub, director of training, course development and Shari’ah aspects, IIBI, discusses the various aspects of Islamic fund management and considers the investment options open to the funds and the portfolio managers, together with the process that must be undertaken to meet the needs of investors in faith-based financial investment.

Fund management within an Islamic irrespective of the size of the fund. i) Regular income funds, which, as the framework refers to a joint pool, managed Certificates in the fund can be bought name implies, provide a regular income by a professional investment manager, and or sold at either the issue counter of the stream by way of dividends from the in which investors contribute their surplus fund or in the capital markets. Closed-end investee companies to their investors, money to earn a return, in accordance funds are issued for specified amounts, and who are mostly risk-averse and tend with the principles of Islamic Shari’ah. sometimes also for specified projects, and to be elderly and retired people. Investment planning and management can only be sold in the capital markets. requires the identification and selection ii) Capital gain funds, which provide a of the best avenues of investments, Islamic funds can be managed on either a better return for investors prepared taking account of the risk and return mudarabah or wakala (investment agency) to accept a moderate amount of risk, probabilities of each. basis. In the case of mudarabah, the fund through the capital gain resulting manager receives a pre-agreed percentage from the frequent sale and purchase of Historically, fund management was of the profits made, while in the case of Shari’ah-compliant stocks, and by proper the domain of mainly investment banks. an agency arrangement, the manager management and risk diversification. Over the last decade, however, commercial gets a fee based on agreed terms. banks have become increasingly involved iii)Aggressive funds, where investments in managing funds that carry returns linked The different categories of Islamic are made in high risk securities and their with activities in the capital markets or investment funds ‘high risk profile’ investors stand to make other sectors of the economy, for example, high profits, but equally, potential losses real estate. As a result of the asset-based ❐ Equity funds too. nature of Islamic finance, this type of Equity fund is the most common type of business is more suitable for Islamic Islamic fund. The proceeds are invested iv) Balanced/growth funds, which invest financial institutions (IFIs) than in the shares of companies and returns in high quality securities with lesser short-term commercial banking. in the form of capital gains and dividends risk and which provide investors with are distributed among the investors. Equity a regular income stream, based on Investment funds can be broadly categorised funds can be divided into four categories, dividends and capital gain. as open-end or closed-end mutual funds. on the basis of investor risk profiles and the Open-end funds remain open for investment investment strategy of the fund managers:

40 IIBI www.islamic-banking.com NEWHORIZON Rabi Al Thani–Jumada Al Thani 1428 ACADEMIC ARTICLE

❐ Ijara funds Salam of certain goods, that do not exist delivery of the contracted item, and the The amounts subscribed under ijara funds and are not in the possession of the seller, respective rights and liabilities have been are used to purchase assets for the purpose is allowed but this is subject to a number fulfilled, we could see hedge funds dealing of leasing. Rental income received from of conditions relating to quality, quantity, in commodities, in a way that would be the user is distributed among subscribers availability of the wares in the market and quite different from conventional hedge to the fund. Anyone who purchases ijara pre-payment of the full price and delivery funds. certificates inherits the seller’s pro rata of the salam commodity on a stipulated ownership of the assets, and all related date, irrespective of any price movement The investment management process rights and obligations are passed on to him. in the market. The investment management process consists of the following: ❐ Commodity funds Unlike the modern futures market, the The subscription amounts in commodity reselling of a salam commodity before ❐ The identification and definition of funds are used to purchase different it is received is not permitted by Shari’ah objectives commodities, such as metals, oil and experts. Parallel salam is allowed, but it The first job that fund managers must do is cotton. These can be sold on at a profit. has to be independent of the original find out the target return that the investors salam contract. are looking for, in the shape of dividends ❐ Murabaha funds or as capital gains, and then guide them. The proceeds of these funds are used to A further difference is that the modern In doing this, they must bear in mind the make purchases for onward sale through futures market neither requires any investor’s age, flow of other incomes, murabaha. Any fund created for murabaha advance payment to the seller nor if any, and appetite for risk. sales should be a closed-end fund. Its units giving/taking delivery as implied in salam are not negotiable in the secondary market transactions as per Shari’ah rules. Finally, Liquidity, returns and the related risks are unless the fund maintains an inventory of as per the AAOIFI (Accounting and the core criteria which a portfolio manager tangible assets. Auditing Organisation for Islamic Financial would use to decide between investment in Institutions) Shari’ah Standard, salam is stocks, private equity funds, a variety of ❐ Mixed funds not valid for the shares of joint stock sukuk, open- or closed-end mutual funds The subscription amounts of mixed funds companies. or, alternatively, in real estate or some other are used in different types of investments, investments, as well as the extent of each including equities, leasing and commodities. Some product developers have tried to investment. The financial manager would If the certificates in a mixed fund are to be legalise ‘selling short’, based on an analogy also consider the horizon of the investment traded, tangible assets should make up with arbun or istijrar, but both of these – its term, along with the implications of more than 51 per cent of it. concepts differ substantially from the ‘getting out’ before maturity; regulatory and process involved in hedging through selling taxation policies in place; and the overall ❐ Real estate funds or buying short. In arbun, a practice that is economic activity, investment and returns These use proceeds to invest in buildings allowed by only a minority of scholars, time scenario in a specific jurisdiction. and real estate. The income is distributed has to be stipulated for the option and the among the certificate holders of the funds. amount paid is adjusted in the sale price ❐ The decision on an investment policy when the contract is completed. Once the objective has been identified, ❐ Hedge funds the fund manager has to decide on an A hedge fund is generally a private Istijrar is a modus operandi by which a appropriate investment policy for the investment vehicle for high net worth and master agreement is signed for financing investors’ groups, taking into account the institutional investors who want to earn on an ongoing basis, under any suitable, period of intended investment, investment a certain amount of profit, irrespective of normal mode. As it is part of normal day- size, risk absorption capacity, diversification whether the market goes up or down. As to-day business, Shari’ah scholars give some opportunities, and the performance and Shari’ah-compliant finance provides for risk leeway in the matter of the fixing of the future prospects of the various classes of mitigation and not for risk elimination, a price and payment, if the arrangement assets available, along with the stage or ‘hedge fund’ is not generally an acceptable does not involve gharar. Normally, the time at which each would deliver the best mode of investment management because seller would continue to deliver the specified result. The expected time of return from selling or buying short, wherein a seller or goods at the price known to the buyer, an investment must match the need of the buyer backs out simply because the market and the buyer would make payment on a investor – an asset giving a return after moves against his expectations, is monthly basis or as agreed between them. two years, for example, would not suit an prohibited. This process in no way allows for selling investor who wanted an immediate return short in the conventional sense. However, or may be thinking about exiting before if some funds provide for giving or taking maturity. www.islamic-banking.com IIBI 41 ACADEMIC ARTICLE NEWHORIZON April–June 2007

❐ Asset selection – sector/class and v) The price of shares of the investee ❐ Instruments representing a pool of the asset itself company should not be less than the mixed assets are subject to the rules The next step is to select the sector, asset value of the net liquid assets of the relating to the dominant category. If cash class and assets while applying various company. and receivables predominate, the rule ratios allowing the investment prospects of bai al-sarf applies. If real or physical to be analysed. Post investment monitoring of the portfolio assets and usufructs make up the is an integral part of the application of the greater part, trading will be based The nature of the investee company or screening criteria. For example, an investee on the market price. business and the age of the investor have to company with non-operating interest be kept in view when deciding on the class income at less than five per cent for the Fund management could be a useful of assets. The younger a person, the greater last year may have earnings as high as method for meeting the needs of public may be his inclination to invest in stocks, 20 per cent for the current year. and private sector corporations. Public and property or real estate funds and other high private sector corporations may establish risk/return avenues compared with an older Purification mutual funds with the dual objective of investor whose risk-averse approach would Islamic fund managers have to purify their developing Islamic financial markets, and be likely to result in a lower rate of return. incomes by deducting from the returns on mobilising financial resources for meeting investments the earnings emanating from financing requirements of public and private The application of screening criteria any non-Shari’ah-compliant sources, and sectors. The mutual funds may replace the Applying screening criteria, when selecting a distribute the net pure income among interest based national savings scheme, portfolio, to ensure the Shari’ah compliance the investors. They have to calculate the treasury bills, other government bonds and of the investment is a crucial element in the percentage of non-compliant income to the the corporate debt instruments. In order to investment process in Islamic fund gross revenue (net sales plus other income) facilitate trading of units/certificates, each management. for each investee company. This percentage fund should be so structured that the debt is known as the ‘charity rate’. The charity part of its assets constitutes less than 50 The criteria cover the nature of the business rate for each investee company is multiplied per cent. and certain financial ratios which have been by the dividend income from each company agreed by the Shari’ah Boards, on the basis to arrive at the charitable amount. Islamic banks need to become more of a tolerance level for compliance that involved in fund management by might vary across the different financial Trading in the secondary market establishing fund or asset management markets, depending on the nature of the Fund managers are frequently involved in companies so as to change their investment financing and the level of development trading in financial instruments. The way in composition to partnership-based of capital markets in each area. which this is done depends upon the nature investment activities. of the investment certificate or securities. Generally, these criteria require that: Stocks, certificates and sukuk can be traded Presently, Islamic bank investments are in the market, depending on market signals, of a short-term/commercial nature and are i) Prohibited activities such as gambling, subject to compliance with the following based on murabaha and other fixed return interest-based financial institutions, Shari’ah rules: modes. If through fund management their alcohol production etc are excluded; investments were to become increasingly ❐ Instruments representing real physical partnership based, this would help them ii) The investee company’s capital structure assets and usufructs are negotiable at with liquidity management and would also is predominantly equity based (with debt market price. Stocks, units, certificates improve their assets portfolio by making less than 33 per cent); or sukuk, issued on the basis of it more oriented towards profit and loss musharakah, mudarabah and sharing (PLS), with longer-term investments. iii)The illiquid assets should be more than ijara, fall within this category. 50 per cent (some scholars relax this With the goal of mitigating risk through ratio, but it should not be less than ❐ Instruments representing debts and portfolio diversification, Islamic fund 20 per cent) of the total assets of the cash are subject to the rules of hawala managers might consider turning to markets investee company; (assignment of debt) and bai al sarf. The other than the stock market, or targeting latter refers to the exchange of monetary other asset classes like commodities and real iv) Only a negligible portion of non- units: ‘hand to hand’ where different estate. They could then take advantage of operative income of the investee currencies are involved or ‘equal for the different categories of funds to offer company (not more than 5 per cent equal’ with simultaneous delivery by quasi-fixed return (trade and lease based) of total income) should be derived both parties if the monetary unit is and variable return (PLS based) modes, to from interest; the same on both sides. fit in with the risk profile of the investors.

42 IIBI www.islamic-banking.com NEWHORIZON Rabi Al Thani–Jumada Al Thani 1428 APPOINTMENTS

On the move

has carried out a board reshuffle for the first HR, operations and IT, and corporate Bahrain-based time since the company’s launch in 2004. communication departments. Al Salam Bank Arif Alharmi has been appointed CEO. has appointed He joins Amlak Finance from HSBC Bank Mrs Kubra ME, where he headed Amanah commercial Dr Humayon Dar has been appointed Ghuloom Jassim banking and played a vital role in launching chairman and Dr Adnan Aziz CEO at Shehabi (left) Islamic corporate banking at HSBC. London-based Al-Dar Islamic Ltd. Prior as senior vice to this, both specialists worked at Dar Al president and Hisham Qassimi has joined the board of Istithmar, Deutsche Bank’s subsidiary, where head of credit. directors. Presently, he serves on a number Dr Dar was managing director and Dr Aziz Prior to this, she was vice president and of boards and holds the position of general was research analyst. The newly-established head of credit at JPMorgan Chase Bank manager, commercial banking, at National Al-Dar Islamic provides holistic Shari’ah in Bahrain, responsible for the bank’s Bank of Dubai. advisory services to Islamic financial credit portfolio in the Middle East. institutions.

Gulf African Bank Ltd, the first fully- Singapore’s newly established Islamic Bank fledged Islamic financial institution in of Asia (IB Asia) has appointed Vince Cook Hassan Kamil, executive director at the Kenya, has appointed Mazhar Ali Bokhari as CEO. Cook has over 20 years’ experience Malaysia-based BIMB Holdings, has been as head of the bank’s international of working in the Middle Eastern banking named as group managing director of operations and strategic planning division. sector as Gulf managing director at Barclays Syarikat Takaful Malaysia, one of BIMB’s He will be responsible for launching in Dubai and general manager at Qatar subsidiaries. Hassan’s responsibility covers Shari’ah-compliant operations in Kenya National Bank in Doha. management of Takaful Malaysia and its and Tanzania. Until recently, Bokhari major subsidiaries. His experience includes headed the Islamic banking division of The nine-member board of directors of IB working as deputy general manager at Prime Commercial Bank in Pakistan. Asia is chaired by His Excellency Abdullah Malaysia National Insurance, senior Hasan Saif, advisor for economic affairs vice president and chief actuary at ING to the prime minister of Bahrain. Jackson Insurance Bhd and deputy general manager ABC Bank International (ABCIB), London- Tai, vice chairman and CEO of the bank’s at PT AIA Indonesia. According to Takaful based subsidiary of the Arab Banking parental group DBS Holdings, is the Malaysia, Kamil ‘will be the first qualified Corporation (headquartered in Bahrain), board’s vice chairman. actuary to head a takaful operator’. has announced three new appointments. Terence J Stone OBE, the bank’s non- I-flex Solutions, executive director and chairman of the Trowers & Hamlins, the international a core systems audit committee, has taken the post law firm, has made a number of new provider to the of deputy chairman of ABCIB. appointments in its UK and Middle financial services Eastern offices. Among them is Abdul-Haq industry, has Nofal S Barbar has taken responsibility as Mohammed, who has taken a position as appointed the bank’s managing director in addition a new partner in the firm’s Bahrain office. Jamil bin Hassan to his current position as CEO. He specialises in commercial property and (left) as principal Islamic finance. consultant for And finally, David Carse OBE is a Islamic banking practice. He already new addition to the team – he has been holds the position of Islamic banking appointed non-executive director. Carse Ithmaar Bank, a Bahrain-based investment technology expert and thought leader has a profound experience in banking bank providing Islamic products and at I-flex. In his new role, Hassan will and regulatory supervision. services through its subsidiaries across the consult the company’s customers on globe, has appointed Ahmed A. Rahim core banking technology and administer managing director of Ithmaar group further development of I-flex’s Islamic Amlak Finance PJSC, the largest publicly support. He will be overseeing banking solutions. listed Islamic finance company in the UAE, administration, financial control, www.islamic-banking.com IIBI 43 Q&A NEWHORIZON April–June 2007

Questions & Answers

In this new section, Muhammad Ayub, IIBI’s director of training, development and Shari’ah aspects, answers readers’ questions on various issues of Islamic finance. If you have any questions you would like answered, please contact the IIBI; details can be found on p4.

How may one avail oneself of an milestone in establishing a general adjustable against the rent when it becomes Islamic home finance facility in a consensus on the philosophy and products due. Rental of an asset is mutually agreed locality where banks do not offer for business, with large-scale acceptance of on the basis of the value of the asset that the mainstream theory and practice, slight is determined by a number of factors a Shari’ah-compliant version of differences in concepts are no longer issues including, inter alia, its cost to the lessor, home financing? of concern. Development of any ethical related facilities available, etc. The lessor In localities where an Islamic home finance and belief-based discipline depends can genuinely keep in view the total cost it facility is not available, the local Muslim on the acceptability of its conceptual had to incur in making available the asset community may set up a ‘co-operative fund’ underpinnings and their implementation for use. Hence, a bank, as lessor, can keep that may issue mutual investment units procedures. The mainstream theory of in view the disbursement period for (MIUs) to be subscribed by the members Islamic finance has got this acceptance determining the rental, but the rental would and general investors who are willing to and the industry has to be developed on become due only after delivery of the asset invest their funds on a mudarabah basis. the basis of the acceptable concepts. Some to the lessee. If the deal is cancelled in- dubious concepts that served as the basis between, i.e. the client does not take the A fund manager may use the proceeds of for application in a few products stemming asset on lease as per his requisition, the MIUs to provide housing finance on the from particular parts of the Muslim world bank will not be allowed to charge any basis of murabaha (in economies where could not obtain general acceptance and ‘cost of funds’. At most, it can claim the inflation is not a problem) and diminishing many scholars have at times argued against actual loss that it incurred due to breach musharakah (with arrangement of them. For example, products that involve of ‘promise to lease’ by the customer and shirkatulmilk – partnership by ownership, bai al-dayn (sale of debts/receivables), and it cannot include the financial loss. and lease of financier’s part to the client) bai al-ina (buy-back arrangements) are not in economies with an obvious inflationary indisputably acceptable to all Shari’ah How does an Islamic credit card trend. Diminishing musharakah is the best scholars. differ from a conventional one? mode both from a Shari’ah as well as an operational point of view. The members In ijara, is calculation of a mark-up An Islamic credit card certainly does not can be facilitated for: involve interest. The basic elements of a rate between the disbursement Shari’ah-compliant credit card are the i)ii purchase of houses; period and the commencement ii)i construction of a house on a plot of following: land owned by the client; of the rental period halal? Is it a) Interest free revolving credit line; iii) renovations/additions/amendments not charging mark-up to oneself b) Cardholder to repay certain amount of in houses; (as ijara assets are considered principal every month and the remaining amount to be deferred to the next month iv) balance transfer from interest-based to be the institution’s assets as to Shari’ah-compliant finance. with no interest charged; opposed to the lessee’s assets)? c) Cardholder not permitted to use the card Are there different interpretations In ijara, the lessor is exposed to both for purposes prohibited by the Shari’ah; the risk (of damage to the assets without d) Some cards provide a cash limit for of Shari’ah in different parts of negligence of the lessee) and reward (rental) emergency cases; the Muslim world? relating to the leased asset. e) Most credit card providers charge an Yes, there have been some differences in annual fee for issuing the card in order interpretation of some Shari’ah principles The lessor is entitled to the rental only after to cover expenses related to card issuance within the context of structuring Islamic the asset is handed over to the lessee in a and usage; financial products. However, as the Islamic useable form. Any amount received prior f) Any penalty levied as a deterrent against finance movement has achieved a significant to this would be treated as advance income defaults must go to a charity account.

44 IIBI www.islamic-banking.com

CALENDAR NEWHORIZON April–June 2007

Diary of Events

4: Sukuk Investment Summit 2007, July London Zurich Summit for European investors to address 2–3: International Islamic Banking various aspects of sukuk, including key & Finance Forum 2007, Singapore performance characteristics and forecast, Conference to address the trends, deal flow and issuance trends, and criteria opportunities and challenges facing Islamic for incorporating sukuk into an investment financial sector and strategic framework portfolio. for enhancing its growth. Contact: Alberto Anido Contact: Bernardine Michael Tel: +44 (0) 207 779 8673 Tel: +60 327 236 604 Email: [email protected] Email: [email protected] www.euromoneyplc.com www.marcusevans.com 9–12: Structuring Islamic Financial 1–6: Islamic Markets Programme, Products, Zurich Kuala Lumpur Course designed to give an all round Organised by Securities Commission, understanding of the most important and Malaysia, the course is to focus on the widely offered Islamic financial products. theories, principles and current thinking Tel: +60 321 438 100 of Islamic finance. www.islamicfinancetraining.com Tel: +60 362 048 665/667 Email: [email protected] 16–18: Legal & Documentary Issues in 24–25: International Conference on Gold www.sc.com.my Islamic Financial Products, Kuala Lumpur Dinar Economy 2007, Kuala Lumpur Course to address the characteristics and Conference to focus on legal and practical 4: Islamic Finance Conference, London parameters underlying Islamic financing aspects of implementing the gold dinar A one-day introduction to Islamic finance. structures. system seen as the next essential component Tel: +44 (0) 1354 695 599 Tel: +60 321 438 100 in Islamic finance and economics. Email: [email protected] www.islamicfinancetraining.com Tel: +60 377 415 895 www.marchpublishing.co.uk Email: [email protected] 17–18: Trade Finance (Conventional www.dinareconomy.com Kuala Lumpur & Islamic) Workshop, Kuala Lumpur Workshop to focus on both conventional 25–26: The War on Terrorist and Islamic trade finance instruments, Financing: Forging an Effective including documentary credits, settlements International Architecture, London and letters of credit, and also risks and Conference to focus on actions taken fraud prevention measures. to combat terrorist financing and the Tel: +60 321 636 990/994 implications of the latest initiatives for Email: [email protected] the financial services sector and the www.globalpro.com.my City of London. Contact: Rachel Bowden 17–19: Islamic Economics Conference Tel: +44 (0) 20 7747 2648 iECONS 2007, Kuala Lumpur Email: [email protected] Conference to discuss the cooperation, www.rusi.org opportunities and challenges of reaching a comprehensive balance in economic development among Islamic countries. Contact: Nuradli Ridzwan Shah Mohd Dali Tel: +60 679 887 22 Email: [email protected] www.usim.edu.my

46 IIBI www.islamic-banking.com NEWHORIZON Rabi Al Thani–Jumada Al Thani 1428 CALENDAR

August 27–28: Shari’ah-Compliant Asset September Management, Brunei Course covers legal and regulatory issues 10–12: Structuring Innovative of Islamic asset management and latest Dubai Islamic Financial Products developments in this field. Workshop, Cambridge Tel: +852 2520 1481 A three-day residential workshop to focus Email: [email protected] on new developments in Islamic structured www.euromoneytraining.com products, funds, capital market structures and retail, corporate and investment 27–29: Undertaking Effective Shari’ah banking products. Control for Islamic Banking, Kuala Lumpur Contact: Mohammad Shafique Course to focus on composition, Tel: +44 (0) 207 245 0404 responsibilities, functions and tasks Email: [email protected] of the Shari’ah control committee. Tel: +60 321 438 100 13–14: MIF (Malaysian Islamic Finance) www.islamicfinancetraining.com Forum 2007, Kuala Lumpur Issuers and investors forum to focus on 28–29: Global Islamic Banking, Investment Malaysia’s role in Islamic finance today. and Takaful Summit 2007, Karachi Contact: Chitra Constantine Summit to address a range of Shari’ah- Tel: +60 321 438 100 compliant banking, investment and Email: [email protected] takaful issues. www.malaysianislamicfinance.com Tel: +60 321 636 990 Email: [email protected] 2–4: Legal & Documentary Issues 20–23: Structuring Islamic Financial www.globalpro.com.my in Islamic Financial Products, Dubai Products, Johannesburg Course to focus on the characteristics Course designed to give an all round 29–31: Islamic Banking & Finance: Legal, and parameters underlying Islamic understanding of the most important and Regulatory & Risk Management Issues, financing structures. widely offered Islamic financial products. Brunei Tel: +60 321 438 100 Tel: +60 321 438 100 Practical course on the afore-mentioned www.islamicfinancetraining.com www.islamicfinancetraining.com aspects of Islamic finance, including legal and regulatory issues in non-Muslim 4–5: Inaugural Islamic Finance Summit Brunei countries. Indonesia, Jakarta Tel: +852 2520 1481 Summit to focus on the country’s Islamic Email: [email protected] finance market and regulatory changes www.euromoneytraining.com planned by the Indonesian authorities to enable its fast growth. Contact: Jason Coles Tel: +44 (0) 20 7779 8999 Email: [email protected] www.euromoneyseminars.com

5–6: Islamic Financial Planning & Investment Conference, Kuala Lumpur Conference covering Islamic investment and insurance, tax, estate and retirement planning, zakat, wills and other aspects. Tel: +60 321 636 990 Email: [email protected] www.globalpro.com.my

Events endorsed by the IIBI www.islamic-banking.com IIBI 47 CALENDAR NEWHORIZON April–June 2007

October November December

21–22: Managing Islamic Funds, Dubai 12–13: Structuring Islamic Financial 5–6: Islamic Financial Services Forum: Course to focus on structure and Products, Singapore The European Challenge, Frankfurt management of Islamic funds. Course to focus on Shari’ah-compliant Forum to focus on recent developments and Tel: +60 321 438 100 financial products and their structuring. future challenges facing the Islamic finance www.islamicfinancetraining.com Tel: +852 2520 1481 industry in Europe and across the world. Email: [email protected] Contact: Ms Puteri Noorlela 21–23: Managing the Shari’ah Advisory www.euromoneytraining.com Tel: +60 326 984 248 ext 114 Process, Dubai Email: [email protected] Course to focus on management and 12–14: Islamic Funds World 2007, Dubai www.ifsb.org understanding of the Shari’ah advisory Conference to focus on Shari’ah-compliant process. funds, capitalisation on the growing Islamic 10–12: Legal & Documentary Issues Tel: +60 321 438 100 sukuk market and the prospects of further in Islamic Financial Products, Bahrain www.islamicfinancetraining.com development of the industry. Course to address the characteristics and Contact: Esther Wan parameters underlying Islamic financing Tel: +65 632 223 00 structures. Singapore Email: [email protected] Tel: +60 321 438 100 www.terrapinn.com www.islamicfinancetraining.com

14–16: Islamic Investment Banking & Bahrain Shari’ah-compliant Capital Markets, Singapore Tel: +852 2520 1481 Email: [email protected] www.euromoneytraining.com

26–29: Sukuk & Islamic Capital Markets: Product & Documentation, Kuala Lumpur Course to focus on legal, documentary and technical aspects of structuring sukuk. Tel: +60 321 438 100 www.islamicfinancetraining.com

27–28: 3rd Seminar on the Regulation of Takaful, Cairo Seminar hosted by the Egyptian Insurance Supervisory Authority to focus on legal and regulatory challenges of the industry, corporate governance, retakaful and other issues. Contact: Ms Farrah Aris Tel: +60 326 984 248 ext 116 Email: [email protected] www.ifsb.org

Events endorsed by the IIBI

48 IIBI www.islamic-banking.com NEWHORIZON Rabi Al Thani–Jumada Al Thani 1428 RATINGS AND INDICES

Middle East credit ratings: How is your bank doing?

Below is a list of the current credit ratings for financial institutions monitored by Moody’s Investors Service, an international credit rating agency. Detailed information on rating processes and definitions can be found on the Moody’s website www.moodys.com

FINANCIAL BANKS LONG TERM SHORT TERM DATE OUTLOOK COUNTRY STRENGTH

Arab Banking Corporation BSC A3 P-2 C- 24 Apr 2007 Stable Bahrain BankMuscat International BSC Baa2 P-2 D+ 29 Dec 2005 Stable Bahrain BBK BSC A3 P-2 C- 19 Oct 2006 Stable Bahrain Gulf International Bank BSC A2 P-1 C- 24 Apr 2007 Stable Bahrain Investcorp Bank BSC Baa2 P-2 C- 10 Jun 1998 Stable Bahrain National Bank of Bahrain BSC A3 P-2 C- 19 Oct 2006 Stable Bahrain United Gulf Bank BSC Baa3 P-3 D+ 14 Jun 2006 Stable Bahrain Al Ahli Bank of Kuwait A1 P-1 C- 6 Nov 2006 Stable Kuwait Bank of Kuwait and the Middle East A1 P-1 C- 6 Nov 2006 Stable Kuwait Burgan Bank A1 P-1 C- 6 Nov 2006 Stable Kuwait Commercial Bank of Kuwait Aa3 P-1 C 6 Nov 2006 Stable Kuwait Gulf Bank Aa3 P-1 C 6 Nov 2006 Stable Kuwait Gulf Investment Corporation A2 P-1 D+ 30 Jun 2005 Stable Kuwait Kuwait Finance House Aa3 P-1 C- 6 Nov 2006 Stable Kuwait National Bank of Kuwait Aa3 P-1 B- 6 Nov 2006 Stable Kuwait Alliance Housing Bank Baa1 P-2 D 6 Nov 2006 Stable Oman Bank Dhofar SAOG A3 P-2 D+ 10 May 2007 Stable Oman BankMuscat SAOG A3 P-2 C- 6 Nov 2006 Stable Oman National Bank of Oman Limited SAOG A3 P-2 D+ 6 Nov 2006 Stable Oman Oman Arab Bank SAOC A3 P-2 C- 6 Nov 2006 Stable Oman Oman International Bank SAOG A3 P-2 D+ 6 Nov 2006 Stable Oman Commercial Bank of Qatar A1 P-1 C- 11 Oct 2005 Stable Qatar Doha Bank QSC A2 P-1 D+ 30 Aug 2006 Stable Qatar Qatar National Bank Aa3 P-1 C- 9 Oct 2006 Stable Qatar Arab National Bank A2 P-1 C 20 Nov 2006 Stable Saudi Arabia Bank Al-Jazira A3 P-2 D+ 16 Nov 2005 Stable Saudi Arabia Banque Saudi Fransi A2 P-1 C 20 Nov 2006 Positive Saudi Arabia Riyad Bank A2 P-1 C 20 Nov 2006 Stable Saudi Arabia Samba Financial Group A2 P-1 C+ 20 Nov 2006 Stable Saudi Arabia Saudi British Bank A2 P-1 C 20 Nov 2006 Stable Saudi Arabia Saudi Hollandi Bank A2 P-1 C- 20 Nov 2006 Stable Saudi Arabia Saudi Investment Bank A2 P-1 C- 20 Nov 2006 Stable Saudi Arabia Abu Dhabi Commercial Bank Aa3 P-1 C- 11 Oct 2006 Stable UAE Abu Dhabi Islamic Bank A2* P-1 D 10 Oct 2006 Stable UAE Arab Bank Plc (Dubai Branch) A3 P-2 – 4 Dec 2006 Stable UAE Dubai Islamic Bank PJSC A1* P-1 D+ 16 Nov 2006 Stable UAE Emirates Bank International PJSC A1 P-1 C- 23 Dec 2004 Stable UAE MashreqBank psc A2 P-1 C- 23 Dec 2004 Stable UAE National Bank of Abu Dhabi Aa3 P-1 C 11 Oct 2006 Stable UAE National Bank of Dubai PJSC A1 P-1 C- 7 Nov 2005 Stable UAE National Bank of Ras-Al-Khaimah Baa1 P-2 D+ 18 Dec 2003 Stable UAE Union National Bank PJSC A1 P-1 D+ 10 May 2005 Stable UAE

* issuer rating www.islamic-banking.com IIBI 49 GLOSSARY NEWHORIZON April–June 2007

amanah istisna salam Lit: trustworthiness. Technically, it describes a business A contract of acquisition of goods by specification Salam means a contract in which advance payment is deal where one party keeps another's funds or property or order, where the price is fixed in advance, but the made for goods to be delivered later on. in trust. goods are manufactured and delivered at a later date. Normally, the price is paid progressively in accordance Shari’ah arboun with the progress of the job. Refers to the laws contained in or derived from the An Islamic version of option, a deposit for the delivery of Quran and the Sunnah (practice and traditions of a specified quantity of a commodity on a pre-determined mudarabah the Prophet Muhammad (PBUH). date. A form of business contract in which one party brings capital and the other personal effort. The proportionate Shari’ah board bai al-dayn share in profit is determined by mutual agreement at the An authority appointed by an Islamic financial Sale of debt or debt instruments; as per the mainstream start. But the loss, if any, is borne only by the owner of institution, which supervises and ensures the Shari’ah theory of Islamic finance, it would be valid only if the the capital, in which case the entrepreneur gets nothing compliance of new product development as well as debt/debt instrument is sold at the face value and the for his labour. existing operations. buyer has recourse to the seller in case the original debtor does not pay. murabaha shirkatulmilk A contract of sale between the bank and its client for Partnership by ownership, which could be automatic as bai al-ina the sale of goods at a price plus an agreed profit margin in the case of inheritance by eg two brothers, or optional It refers to the selling of an asset by the bank to the for the bank. The contract involves the purchase of such as two persons purchasing a property jointly (not customer through deferred payments basis, then buying goods by the bank which then sells them to the client for a commercial purpose). back the asset at lower price, and paying the customer at an agreed mark-up. Repayment is usually in in cash terms. instalments. sukuk Similar characteristics to that of a conventional bond bai al-sarf musharakah with the key difference being that they are asset backed; Exchange of currencies/monetary units either ‘hand to An agreement under which the Islamic bank provides a sukuk represents proportionate beneficial ownership hand/simultaneous on the basis of spot rate’ (if different funds which are mingled with the funds of the business in the underlying asset. The asset will be leased to the currencies are involved) or ‘equal for equal as well as enterprise and others. All providers of capital are entitled client to yield the return on the sukuk. hand to hand’ (if the monetary unit is the same on to participate in the management but not necessarily both sides). required to do so. The profit is distributed among the takaful partners in predetermined ratios, while the loss is borne A form of Islamic insurance based on the Quranic gharar by each partner in proportion to his contribution. principle of mutual assistance (ta’awuni). It provides Lit: uncertainty, hazard, chance or risk. Technically, mutual protection of assets and property and offers joint sale of a thing which is not present at hand; or the sale musharakah, diminishing risk sharing in the event of a loss by one of its members. of a thing whose consequence or outcome is not known; An agreement which allows equity participation and or a sale involving risk or hazard in which one does not sharing of profit on a pro rata basis, but also provides tawaruq know whether it will come to be or not. a method through which the bank keeps on reducing A sale of a commodity to the customer by a bank on its equity in the project and ultimately transfers the deferred payment at cost plus profit. The customer then gold dinar ownership of the asset to the participants. sells the commodities to a third party on spot basis and Currency in the form of gold coins that was prevalent in gets instant cash. the past. qard hasan An interest-free loan given for either welfare purposes wa’ad halal or for fulfilling short-term funding requirements. The A promise to buy or sell certain goods in a certain Activities, which are permissible according to Shari’ah. borrower is only obligated to pay back the principal quantity at a certain time in future at a certain price. amount of the loan. It is not a legally binding agreement. haram Activities, which are prohibited according to Shari’ah. retakaful wakala Reinsurance based on Islamic principles. It is a A contract of agency in which one person appoints hawala mechanism used by direct insurance companies to someone else to perform a certain task on his behalf, Lit: bill of exchange, promissory note, cheque or draft. protect their retained business by achieving geographic usually against a certain fee. Technically, a debtor passes on the responsibility of spread and obtaining protection, above certain threshold payment of his debt to a third party who owes the values, from larger, specialist reinsurance companies and zakat former a debt. It is a mechanism for settling pools. An obligation on Muslims to pay a prescribed percentage international accounts, by book transfers. of their wealth to specified categories in the society, riba when their wealth exceeds a certain limit. Zakat purifies ijara Lit: increase or addition. Technically it denotes any wealth. The objective is to take away a part of the A leasing contract under which a bank purchases and increase or addition to capital obtained by the lender wealth of the well-to-do and to distribute it among leases out a building or equipment or any other facility as a condition of the loan. Any risk-free or ‘guaranteed’ the poor and the needy. required by its client for a rental fee. The duration of the rate of return on a loan or investment is riba. Riba, in lease and rental fees are agreed in advance. Ownership all forms, is prohibited in Islam. Usually, riba and of the equipment remains in the hands of the bank. interest are used interchangeably. istijrar sadaqah Repeat sale or a continuous purchase or supply contract. Charitable giving. It is an agreement between the buyer and the supplier, whereby the latter agrees to supply a particular product salat on an ongoing basis, for example monthly, at an agreed The five daily prayers, practised by Muslims in price and on the basis of an agreed mode of payment. supplication to Allah s.w.t.

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