ISSUE NO. 192 January – June 2015 NEWHORIZON Rabi Al Awwal - Shaban 1436 GLOBAL PERSPECTIVE ON ISLAMIC BANKING & INSURANCE PUBLISHED SINCE 1991

In the Spotlight: The Transformation of UK’s Al Rayan Food for Thought: Prophet Muhammad’s Conception of Property as a Bundle of Rights

Point of View: Islamic Finance: Confessions of a Conventional Banker LSE Lecture Report: Risk Sharing and Co-operative Finance Country Focus: Turkey Revisited Legal Matters: Proposal for the Dubai World Islamic Finance Tribunal (DWIFAC) and Jurisprudence Office (DWIFACJO) as the Dispute Resolution Mechanism and Centre for the Islamic Finance Industry IIBI Lectures IIBI Awards

Fresco Wazir Khan Mosque, Lahore, Pakistan

NEWHORIZON January – June 2015 CONTENTS

Features 14 The Transformation Sakirin Mosque, Istanbul of UK’s Al Rayan Bank Regulars As the UK’s Al Rayan Bank, we take 05 NEWS the opportunity to examine the bank’s A round up of the important journey from a modest - stories from around the globe. based start up called Islamic Bank of Britain to the heady environs of 11 SUKUK UPDATE Knightsbridge. Highlighting some of the key developments in the sukuk market during the six months. 16 Prophet Muhammad’s Conception of Property as a 12 TAKAFUL NEWS Bundle of Rights This new section is dedicated to news from the growing takaful Benedikt Koehler argues that waqfs industry. are germane to Islam and that this has ramifications for policies on waqfs in 41 IIBI LECTURES contemporary Islamic societies. Reports of the April 2015 lecture by Mohammad Amin on 31 Turkey Revisited accounting and reporting practices 21 Islamic Finance: for Islamic in the UK and Turkey is one of the rising stars in Islamic overseas; the May 2015 lecture by Confessions of a finance. Islamic banks are growing twice Iqbal Asaria with the title ‘From Conventional Banker as fast as conventional banks; new Islamic Halal to Halal and Tayyib’ argues banks are opening and the country has for greater attention to the need for Indian banker and author, Moin Qazi, issued its first sovereign sukuk. The rosy Islamic finance to have a positive suggests that it is time we moved picture is, however, somewhat clouded social impact and the June 2015 out of the classical paradigm of the by both economic and political problems, lecture by Najib Al Aswad on the interpretation of the Qur’an, infuse which could derail Turkey’s ambitions. external Shari’ah compliance audit fresh vigour and encourage and Islamic Funds’ challenges and multi-dimensional analysis. practicalities. 36 Proposal for the Dubai World Islamic Finance 51 IIBI AWARDS 26 Risk Sharing and Arbitration Tribunal (DWIFAC) Co-operative Finance: A and Jurisprudence Office 53 DIARY OF EVENTS Short Report (DWIFACJO) as the Dispute 54 BOOK REVIEW Resolution Mechanism and Richard de Belder reviews This report of an LSE lecture Centre for the Islamic Finance Derivatives in Islamic Finance: contributed by Professor Nazim Ali, Industry Examining the Market Risk examines the failure of orthodox debt Management Framework by Dr finance and asks whether the Islamic Camille Paldi proposes the establishment Sherif Ayoub. finance industry is really addressing the of a unique and independent legal issues o r simply dressing up interest in framework to effectively adjudicate Islamic other forms. financial disputes.

Cover Image: Interior of the University of Al-Qarawiyyin (established 859) located in Fes, Morocco. It is the oldest university in the world. www.islamic-banking.com IIBI 3 EDITORIAL NEWHORIZON Rabi Al Awwal - Shaban 1436

Deal not unjustly, and Executive Editor’s Note ye shall not be dealt There is a constant tension in the Islamic finance industry debate with unjustly. between the need to be true to the spirit of Shari’ah and the need to compete in the wider global finance market. Nowhere is this more clearly demonstrated than in the debate about riba. Several Surat Al Baqara, Holy Quran of the articles in this issue of NewHorizon touch on the subject of riba and its true meaning. Is riba only impermissible when it falls under the classification of usury where lenders are making excessive and abusive rates of interest or does it apply to all interest? Is the Islamic finance industry merely prevaricating by dressing interest up EXECUTIVE EDITOR Mohammad Ali Qayyum, in other guises and if so, should it simply not be honest about what Director General, IIBI it is doing?

EDITOR Andrea Wharton Some people, such as Moin Qazi, a Muslim and conventional banker in India , argue that public and development banks, where interest-

IIBI EDITOR bearing debts are shorn of the coercive aspects of usury and where Farida Rahman defaults are treated sensitively, are delivering social benefits, a prime requirement of Maqasid al Shari’ah. On the other hand Farmida Bi, IIBI EDITORIAL ADVISORY PANEL a practising lawyer based in , argues that the prohibition on

Iqbal Khan riba kept the Islamic finance industry shielded from the worst of the M Iqbal Asaria global financial crisis. Mohammed Amin Stella Cox Richard T de Belder Iqbal Asaria in his May 2015 lecture to the IIBI said that he Ajmal Bhatty Mufti Abdul Qadir Barkatullah believed that part of the problem is that scholars do not look at Dr Imran Ashraf Usmani Islamic financial issues in a holistic fashion. They look at individual elements of contracts and if each element is Shari’ah compliant PUBLISHED BY then they give their blessing, even if the ultimate outcome is Institute Of Islamic Banking and Insurance (IIBI) unwholesome. He went on to quote Sayyid Nawab Haider Naqvi, 7 Hampstead Gate the author of Ethics and Economics, who believed that the removal 1A Frognal London NW3 6AL of riba would do nothing for society; other things were more important and he was ridiculed for his views. Mr Asaria, however, Tel: +44 (0) 207 433 0840 Fax: +44 (0) 207 433 0849 suggested that it was a view that needed to be considered in relation Email: [email protected] to Islamic finance.

ADVERTSING & SUBSCRIPTION The tension will continue to exist in a market where Islamic banks Contact: and the like seek to provide the certainty of fixed income returns Tel: +44 (0) 207 433 0840 using LIBOR as a benchmark to determine the rate in any profit Fax: +44 (0) 207 433 0849 Email: [email protected] mark-up, profit sharing and lease rentals. While this debate will run and run it is more important that the industry should strive to implement the true spirit of the Shari’ah without seeking to Design Services: maximise profits and promote a fairer, more decent and more CxO Research Ltd wholesome way of providing to all ranks of Tel: + 0203 143 3021 Email: [email protected] society worldwide. www.cxoresearch.com Mohammad Ali Qayyum Director General IIBI

©Institute of Islamic Banking and Insurance This magazine is published to provide information on developments in Islamic finance, and not to provide professional advice.The views ISSN 0955-095X expressed in the articles are those of the authors alone and should not be attributed to the organisations they are associated with or their management. Any errors and omissions are the sole responsibility of the authors. The Publishers, Editors and Contributors accept no responsibility to any person who acts, or refrains from acting, based upon any material published in the magazine. The Editorial Advisory Panel exists to provide general advice to the editors regarding matters that may be of interest to readers. All decisions regarding the published content of the magazine are the sole responsibility of the Editors, and the Editorial Advisory Panel accepts no responsibility for the content.

4 IIBI www.islamic-banking.com NEWHORIZON January – June 2015 NEWS

Expanding Islamic Finance in Africa

The Islamic Corporation in funds. They will also energy, manufacturing and for the Development of the cooperate in structuring leasing sectors in African Private Sector (ICD), the sukuk/debt capital market countries. private sector arm of the transaction opportunities, Islamic Development Bank co-invest in Islamic leasing Mr. Khaled Al Aboodi, the Group (IDB), has signed an companies and support CEO of ICD commented, agreement with the African local financial institutions in ‘Africa and the Islamic Export-Import Bank Africa through the raising finance industry are key (Afreximbank) to cooperate of capital via lines of strategic directions for in the development of finances. ICD and we hope, via private sector, Shari’ah- this partnership, we will compliant investment In addition, they will increase our presence in the Jean-Louis Ekra opportunities in ICD exchange information aimed continent.’ member countries in Africa at upgrading knowledge private enterprises complements . and expertise about Islamic ‘We are greatly encouraged Afreximbank’s longstanding Under the terms of finance, environmental at this opportunity to commitment to using the private the agreement the two assessment, project finance collaborate with ICD in sector as the growth engine institutions will collaborate and advisory services. The growing the African private in achieving its mandate of in joint operations, expand agreement also covers sector. ICD’s leadership and promoting and financing intra- financial products and exploration of opportunities experience in promoting the and extra- African trade,’ said exchange information for cooperation in financing establishment, expansion, Jean-Louis Ekra, President of on the opportunities and projects in the construction, and modernisation of Afreximbank. approaches for private sector development in ICD countries.

Khaled Al Aboodi, CEO and General Manager of ICD, and Jean-Louis Ekra, President and Chairman of the Board of Directors of Afreximbank, signed the agreement on behalf of their respective institutions.

According to the agreement, ICD and Afreximbank will share information on projects and business opportunities in Africa and on participation in the arrangement of syndications or investment ICD and Afreximbank Signing Ceremony’

www.islamic-banking.com IIBI 5 NEWS NEWHORIZON Rabi Al Awwal - Shaban 1436

Islamic Financial Services Board 2015 Stability Report The Islamic Financial based on mudarabah and The Middle East and North sector of the Islamic finance Services Board (IFSB) musharakah has continued, Africa (MENA) excluding industry. This is in the main has recently published with less than 7% of 2014 the GCC remains the largest due to sovereign issues, their 2015 Stability issuance based on this type market in terms of banking particularly from jurisdictions Report. It confirms that of contract. The slack was assets, while Asia, largely due that have entered the market the all segments of the taken up by fixed-income to the activities of Malaysia, is for the first time, which have Islamic finance industry and debt-creating contracts the largest sukuk market and generated publicity and raised have continued to grow, and this is very much at the GCC records the highest investor confidence, even although that growth is odds with the view that level of taakful contributions, though some of these issues somewhat slower than risk sharing should be a followed closely by MENA. such as the UK’s 2014 foray in the past. In particular distinctive feature of Islamic Excluding Iran and Sudan, into the market, have been bank profitability has not finance. which operate fully Shari’ah- relatively modest. Corporate returned to the levels seen compliant banking systems, issues have been more volatile before the 2008 world The report identifies two Islamic banking has achieved and have been particularly financial crisis. The IFSB major trends in global systemic importance in affected by the US’s signalled confirm that liquidity regulation. Firstly, there is seven jurisdictions – Brunei, intention of tapering continues to be a concern, an increased emphasis on Kuwait, Malaysia, Qatar, quantitative easing. as does compliance with consumer protection as a Saudi Arabia, the UAE and Basel III requirements. regulatory objective. This Yemen. It also reports that The Cinderella in growth terms emphasis is coming from Bahrain, Bangladesh, Jordan, is Islamic funds with 74% of It notes that the sukuk both governments and Pakistan and Turkey were the assets under management market was resilient international institutions. seeing rapid Islamic banking (AUM) being domiciled in in 2014, with Malaysia Secondly there is a drive growth. just three jurisdictions – Saudi dominating the sector, towards the provision of Arabia, Malaysia and Jersey. accounting for one-third better financial soundness While banking growth has Institutional investors and of all issuance in 2014. It indicators. (See the later item in been good, the star is sukuk. high-net-worth individuals are also notes the trend away this section of the IFSB’s launch This sector has overtaken seen as two of the main targets from risk-sharing sukuk of finance industry indicators.) banking as the fastest growing for fund managers to pursue. Is Iran Preparing to Come in from the Cold? Iran seems confident that Islamic Trade Finance (At the end of 2013 Iran The lifting of sanctions the current talks to lift Corporation (ITFC), held shares worth just could, however, see stronger economic sanctions on which has approved the $1.92 million.) Iran will economic growth than the country in exchange increase. The move pay for the shares in three would otherwise by the case. for a guarantee that the will make Iran the third equal instalments, the first An increase in oil exports to development of nuclear largest stakeholder in the due by the end of the year. pre-sanction levels, renewed weapons will be halted IIFC behind the Islamic foreign investment and the will be successful. A Development Bank ($266 Iran’s economy has already freeing of $80 billion worth sign of this confidence million) and Saudi Arabia made progress under the of frozen assets are factors is evidenced in Iran’s ($120 million). Iran is to leadership of President that would play a part in kick decision to increase its receive 8,500 new shares Rouhani, with a reduction starting economic growth stake in the Jeddah- worth $85 million under in the rate of inflation and the need for a good based International the new arrangement. and a stable exchange rate. source of trade finance.

6 IIBI www.islamic-banking.com NEWHORIZON January – June 2015 NEWS

Exploring Financial Inclusion According to the World Bank keynote address highlighted of financial exclusion. He imbalances on a global 2.5 billion people around the the importance of added that a study is needed scale.’ world have no formal account providing greater financial on whether consumers with a financial institution. access to the underserved make choices based on Earlier, in his opening Digging below the headline segments of the population proximity and convenience remarks, Mr. Jaseem figures, 75% of the world’s in order to offer equitable or based on religion. Ahmed, Secretary-General poor are unbanked; 59% of opportunities in the society Quoting various studies, of the IFSB explained adults in developing economies and fostering sustained he noted that voluntary various initiatives being have no bank account and economic development. exclusion due to religious undertaken at the global 55% of people in developing He commented, ’Islamic reasons is particularly high level to enhance financial economies only borrow from finance with a wider in certain Muslim countries. inclusion. Citing some informal sources. All too application of equity-based He expressed the view recent developments by often the finance industry financing and micro- that ‘fundamentally, Islam the G-20 and various is seen as self-serving, finance products can approaches inclusivity with standards-setting bodies, targeting those individuals and facilitate greater outreach to either the principles of risk he outlined the milieu in organisations that are likely to medium, small and micro sharing or the principles of which financial inclusion be most profitable for financial enterprises to promote redistribution.’ In order to increasingly comes into institutions and where the risks entrepreneurship and better apply the risk sharing discussions on the evolution of default are low. This is value-creating activities.’ principle and deploy a of the international financial true for both the conventional Similarly, he suggested more accurate risk pricing system. He noted that finance sector and for Islamic that other steps could mechanism, he highlighted religious-based voluntary finance. be formulated such as the need of proper alternative exclusion is a common integrating the commercial benchmarks. On the feature in many OIC Recognising that this is a sector with the Islamic redistribution side, he asked countries, which makes major issue and a significant social sector to come up for a comprehensive review ‘financial inclusion a key opportunity, the Islamic with financial services that of the way in which zakat and challenge in the Middle Financial Services Board are reachable by the micro sadaqah operate in order to East and North Africa (IFSB) organised a seminar on entrepreneurs and low ensure a sustainable approach (MENA), South Asia and ‘Enhancing Financial Inclusion income society in general. that requires an infrastructure Sub-Saharan Africa (SSA).’ through Islamic Finance’ in to identify the needy and He updated the participants Jakarta, Indonesia. The one- H.E. Dr. Muliaman a more tailored solution, on various IFSB initiatives day seminar aimed to explore D. Hadad, Chairman, rather than the traditional to provide guidance the role of Islamic finance in Indonesia Financial bullet payment. He also on financial inclusion, supporting financial inclusion, Services Authority (OJK), proposed the establishment which include an ongoing the building unbanked in his keynote address, of dedicated qard al-hasan joint project with the population and key success outlined the importance of funds to address finance International Association factors and challenges in financial inclusion and the needs of specific target of Insurance Supervisors promoting financial inclusion role of policy makers in groups and as a means to (IAIS) on microtakaful; for greater shared prosperity, escalating this as a matter support social infrastructure policy guidance in the financial stability and economic of national importance. He financing. He noted that IFSB publications and growth. explained that the first step ‘without prioritisation and Islamic Financial Services in achieving this objective dedicated commitments from Industry Stability Reports H.E. Agus D.W. Martowardojo, is to study the voluntary all stakeholders, we run the and participating in global Governor, Bank Indonesia, in his or involuntary nature risk of perpetuating these dialogue with key partners

www.islamic-banking.com IIBI 7 NEWS NEWHORIZON Rabi Al Awwal - Shaban 1436

and stakeholders. He During the seminars it The issues facing solutions to drive down the mentioned that the IFSB’s became clear that one of microfinance and cost of offering products to new Strategic Performance the major issues facing microtakaful institutions the underserved segments Plan 2016-2018 will include various jurisdictions is the were identified as law of the population. It was work on financial inclusion absence of clear policies and of critical mass in the also noted that concerted as one of its objectives to be strategies toward financial industry, the absence of efforts are needed to tap achieved through enhancing inclusion. It was noted regulatory support, lack alternative sources of funds existing partnerships with that a top-down strategy of financial education and for microfinance providers, various international bodies could be more effective product limitations. It was in Muslim majority and and providing guidance on whereby national financial observed that efforts to minority jurisdictions, which the approach to balance inclusion programmes are promote financial inclusion can be facilitated by creating the regulatory perimeter in synchronised with global have succeeded in those a flagship product. Such a Islamic finance with financial and regional initiatives. jurisdictions where policies product should focus on innovation. Among other major have included a well- reducing time to market, challenges identified by the coordinated framework that enhancing cost efficiency and Jaseem Ahmed speakers were developing ensured active participation promoting standardisation, the regulatory environment, by governments, policy while following Shari’ah- product development and makers, regulatory compliant principles. It was education. It was further authorities, market players also proposed that there noted that, by providing and the local community. should be standardisation of low-income individuals with governance and operating access to finance, social There was agreement that principles for Islamic instability will be reduced. there is a need for alternative microfinance institutions.

QIB Signs MoU with Korea’s Woori Bank

Qatar Islamic Bank (QIB) engaged in business to $26 billion in 2013, a 15% importer of Qatar-supplied has signed a memorandum activities in Qatar and/ increase. Key Qatari exports LNG (liquid natural of understanding (MoU) or South Korea and to South Korea are oil and gas). Electronics and with South Korea’s Woori companies that are gas products accounting for automobiles are Qatar’s Bank. The agreement was intending to set up 30% of the energy sector’s main imports from signed by Mr. Bassel such business arrangements demand in Korea, a leading Korea. Gamal, QIB’s Group CEO in the and Mr. Lee Dong-gun, future. Deputy CEO of Woori Bank. Trade exchange The MoU calls for between enhancing the cooperation Qatar and between the two institutions South in facilitating bilateral trade Korea hit finance and corporate the $30 business. This partnership billion is aimed at servicing both mark Qatari and South Korean in 2014 entities that are currently compared QIB and Woori Bank Signing Ceremony

8 IIBI www.islamic-banking.com NEWHORIZON January – June 2015 NEWS

IFSB Launch Islamic Finance Industry Indicators The Islamic Financial macroprudential condition by characteristics of Islamic of conventional banks in Services Board (IFSB) has looking at measures of their banking. As such, they will jurisdictions where available. launched a set of indicators capital, earnings, liquidity and serve to highlight the role on the financial soundness exposure to various types of of Islamic banking within The PSIFIs will be collected and growth of the Islamic risks. They also cover the national economies and on a quarterly basis from the banking systems in 15 indicators on capital adequacy permit comparisons between participating countries. member countries. The and liquidity based on newly the conventional and Islamic These countries are: IFSB claim the indicators, issued IFSB Standards to banking systems. Afghanistan, Bahrain, called Prudential and complement international Bangladesh, Brunei, Egypt, Structural Islamic Financial regulatory reforms under the PSIFIs cover aggregated Indonesia, Jordan, Kuwait, Indicators (PSIFIs), are the Basel III regime. data of Islamic banking Malaysia, Nigeria, Oman, first set of internationally institutions at the country Pakistan, Saudi Arabia, Sudan, comparable measures of Many of the PSIFIs are level, compiled by the and Turkey. The IFSB has the soundness of Islamic parallel to the widely used regulatory and supervisory received technical assistance banking systems. The IMF Financial Soundness authorities (RSAs) of the from both the Islamic PSIFIs capture information Indicators (FSIs) on the participating countries. The Development Bank and Asian on the size, growth and strength or vulnerabilities data are separately provided Development Bank (ADB) structural features of Islamic of financial systems, but are on standalone Islamic over the years in setting up banking systems and their customised to the specific banks and Islamic windows the PSIFI project. A Strong Entrepreneurial Culture Exists within British Muslim Communities Al Rayan Bank, formerly where at least one third less than one third of He added, ‘This is the first known as Islamic Bank of (33%) of directors are directors are believed to time that research of this Britain (IBB), has revealed believed to be Muslim. be Muslim). kind has been conducted findings from the UK’s Of these companies, into the British Muslim first ever survey into the 230,877 are considered Commenting on the report’s business market and it British Muslim business ‘live and trading’. findings, Tim Sinclair, Senior helps demonstrate the market. The study, entitled • 6.8% of the companies Head of Marketing & Retail enormous opportunity ‘Understanding the UK in the UK are believed Sales at Al Rayan Bank, which exists for Shari’ah Business Landscape’, to have at least one said, ‘The findings from this compliant business banking provides a fascinating third Muslim directors; research indicate that the products, such as business insight into the British with 5.8% having at UK is home to a thriving current and savings Muslim business market, a least two thirds (67%) Muslim business community, accounts, commercial previously under researched Muslim directors. particularly in the small property and development area of UK business. The • 96.8% of companies business sector. Whilst Muslim finance as well as Shari’ah- results of the study, which where Muslims account adults account for 3.1% of compliant auto-enrolment were attained through a for two thirds of the adult British population, pension schemes. The combination of public, directors have three or Muslim-influenced businesses information obtained from modelled and research data, less directors in total. account for almost 7% of all this study will help inform estimate that: This compares with UK businesses; this indicates our plans for 2015, as 93.0% of companies that a strong entrepreneurial we develop our product • The UK is home to which are not Muslim culture exists within British range for this extremely 297,715 companies, influenced (i.e. where Muslim communities.’ important market sector.’ www.islamic-banking.com IIBI 9 NEWS NEWHORIZON Rabi Al Awwal - Shaban 1436

Board will be instrumental launch coincides with the In Brief in harmonising the commemoration of its 35th Shari’ah-related business, Anniversary. The change Qatar National Bank Japanese FSA’s supervisory operations and structure to a single, unifying global and Qatar International guideline and the first ever case of the instruments of the brand name and corporate Islamic Bank have signed of a Japanese bank obtaining Islamic capital market, identity will took effect on 15 an MoU (Memorandum approval of an Islamic Finance in keeping with the June 2015 across the Bank’s of Understanding) with Business from regulators international norms and global network spanning 18 Chinese brokerage Southwest outside Japan. The Dubai practices. countries in the Middle East Securities to help the two Branch will be the Bank’s and North Africa (MENA), Qatari banks to access central hub of Islamic finance CIMB Group, RHB Europe, the Americas and China’s market for finance services in the Europe, Middle Capital and Malaysia Asia (with the exception of and investment. The quid East and Africa region Building Society (MBSB) its subsidiary in Brazil, which pro quo is to help Southwest . have announced that they will keep its own identity as Securities access markets in The Central Bank of Oman have received approval Banco ABC Brasil). The Qatar and other parts of the has announced the formation from Bank Negara Legal names of the Arab Middle East. Few details of of a new department to deal Malaysia to commence Banking Corporation and its exactly how this joint venture exclusively with all matters discussions with the aim of subsidiaries will not change. will operate have been concerning Islamic banking merging the businesses of announced so far. operations in the country. both RHB and CIMB as Kuwait Finance House well as creating an enlarged - Bahrain has launched Kuveyt Turk opened the The Securities and Islamic Banking franchise a Wealth Management first fully-operational Islamic Exchange Commission of with MBSB. Following Department offering new Bank in Germany at the Pakistan has approved the this, the three parties premium investment and beginning of July. The appointment of a Shari’ah have entered into a 90- asset management services. wholly-owned subsidiary Advisory Board, which will day exclusivity agreement of the Turkish lender is comprise three Shari’ah to negotiate and finalise Meezan Bank in Pakistan called KT Bank AG and is scholars and one technical pricing, structure, and is to acquire the Pakistani headquartered in Frankfurt member. The Board will other relevant terms and operations of HBON (HSBC with branches in Cologne provide guidance to the conditions for a proposed Bank Oman). Subject to all and Berlin. Commission and Shari’ah merger of the three the appropriate approvals and opinion on the laws, rules, entities and the creation agreements the acquisition Bank of Tokyo-Mitsubishi regulations, agreements and of a mega Islamic bank. is expected to be complete UFJ, Ltd. (BTMU) has documents submitted to it. The exclusivity agreement in the second half of 2015. announced that it has The board will also advise on comes with an automatic HBON currently have one obtained an Islamic Financial the products, instruments, extension provision upon branch in Pakistan and assets Business endorsement to Shari’ah auditing and reporting submission to Bank Negara of 4.1 billion Pakistani operate an Islamic Window standards and business Malaysia on the proposal. rupees. from the Dubai Financial operations of the Islamic Services Agency. This financial institutions, which Arab Banking Abu Dhabi Islamic Bank approval has enabled its include Islamic mutual funds, Corporation (ABC) has applied to invest in Dubai Branch to offer Islamic pension funds, takaful recently announced it has Islamic banking in Morocco, both conventional and operators and other financial revamped its corporate according to a report in Islamic financial services to institutions, to ensure their identity and changed its Le Matin, a Moroccan customers. This is reflective compatibility with the Shari’ah. brand name to Bank ABC. newspaper. The bank aims to of the recent change in the It is expected that the new The Bank’s new identity start operations in 2016.

10 IIBI www.islamic-banking.com NEWHORIZON January – June 2015 SUKUK UPDATE

Sukuk Update IFSB Put the Emphasis on that they were not fulfilling this objective through a private placement. Sukuk as effectively as they wished. They have, In April Malaysia raised $1.5 In April the IFSB published its guidance therefore, switched to other instruments billion, $1 billion in a 10-year sukuk (GN6) for Islamic financial institutions (IFIs) restricted to banks. and $500 million in the first ever 30- on liquidity management. The guidance is year sukuk. The order book for the the result of a fairly lengthy consultation and The fall in oil prices has also affected two sukuk reached $9 billion. discussion process, which had its roots in the the sukuk market, so that even when 2008 financial crisis and the need to comply the BNM effect is excluded, the In July the Arab Petroleum with Basel III, which has strengthened the market still fell more than 10% year on Investments Corporation regulatory regime in relation to liquidity year. There are reports, however, of (APICORP) announced the management risk for financial institutions. various sovereigns and multinational establishment of a $3 billion sukuk development banks preparing to issue programme rated Aa3 by Moody’s. The guidance sets out the types of Shari’ah- sukuk during the second half of 2015. APICORP could issue its first sukuk compliant, high-quality liquid assets (HQLA) These include: later this year, subject to prevailing that meet the requirements of Basel III. market conditions. Most obviously HQLA must be highly liquid. The International Finance They also need to have a low correlation with Corporation, part of the World Bank, In July the Central Bank of risky assets, an active and sizeable market are, according to Reuters, preparing Bahrain (CBB) successfully sold and low volatility, even in stress situations. to issue sukuk in the GCC, providing a long-term Islamic leasing, 10- Supervisory authorities need to consider underlying assets and market conditions year sukuk al-ijara, raising BD 200 various risks – operational, foreign exchange, permit. This would be their third sukuk. million. The expected return on legal, credit, market, liquidity and of course The first, worth $134 million was in the issue, maturing on 09 July 2025, Shari’ah non-compliance. Malaysia in 2004 and the second, worth is 5.00%. The sukuk al-ijara are $100 million, was listed in Dubai and issued by the CBB on behalf of the Sukuk issued or guaranteed by sovereigns, Bahrain in 2009. Government of the Kingdom of multilateral development banks and the IILM Bahrain. (Islamic Liquidity Management Corporation) Turkey is planning to raise in excess of are considered to be the highest level of $1 billion through sukuk to be issued by Other Sukuk News HQLA. Sukuk backed by commodities and the end of 2015. At the end of June Qatar Islamic other real assets are rated just below the top Bank raised $550 million in Basel level of HQLA, but are still highly rated. In mid June the Islamic Development III compliant Additional Tier 1 The guidance acknowledges that there is Bank (IDB) approved raising the current perpetual sukuk to enhance the currently a shortage of such instruments, limit of the Bank’s medium-term sukuk Bank’s capital adequacy ratios and to which is exacerbated by the low level of issuance programme from $10 billion support future business growth. trading in them. to $25 billion. Over the last 12 years the IDB has consistently been rated Khazanah Nasional Berhad Market Shows Signs of triple ‘A’ by leading credit rating agencies raised $27.1 million from its first Weakness and therefore meets IFSB’s HQLA ethical sukuk. The proceeds of In mid 2015 Standard & Poors revised their requirements. this seven-year sukuk will be used forecasts for sukuk issuance, halving their to fund schools. This is one of the previous expectations to $50 60 billion. The In May Indonesia, currently one of the first sukuk to be issued under the reason for their revision is the fact that Bank most active sovereigns, began marketing Securities Commission Malaysia’s Negara Malaysia (BNM), responsible for a 10-year sukuk aimed at raising around Sustainable and Responsible more than 42% of sukuk issuance in the $500 million. Investment Sukuk framework. first half of 2014, decided to stop issuing short-term sukuk in early 2015. One of Oman is planning its first sovereign At the end of May Pakistan’s BNM’s main objectives with their programme sukuk. Regulatory approval has K-Electric sold the country’s largest of sukuk issuance was to provide liquidity been received and structuring and corporate sukuk. The seven-year instruments for Malaysian banks, but their documentation is apparently at an sukuk raised $215.9 million. It sukuk had proved so popular across a wide advanced stage. The sukuk will aim will be listed on the Karachi stock range of geographies and industry sectors to raise $520 million and will be sold exchange. www.islamic-banking.com IIBI 11 TAKAFUL NEWS NEWHORIZON Rabi Al Awwal - Shaban 1436

The UAE Insurance Authority A.M. Best notes that this is further equity in the UAE is averaging 0.4% Tightens Takaful Regulations complicated by the simplicity of compared to 6% in Saudi Arabia and The UAE Insurance Authority has equity investments when compared 14% in Malaysia. announced its intention to set up a with sukuk investments. Salman Shari’ah committee for takaful operators Siddiqui added: ‘In order to deploy Combine the market conditions with to provide advice on legislation and issues capital into sukuks, asset managers the fact that regulators in the region are in the sector. The Authority believes that at takaful companies need to spend introducing new measures such as higher the lack of such a committee has been a time and resources understanding capital requirements and consolidation key factor in the loss-making situations the structure and risk of each sukuk would seem to be on the cards. It is of takaful operators in the recent past. before investing. This would increase possible to take the view that the recent operating costs, which takaful moves by regulators are a fairly hefty The Authority has also brought its companies can ill-afford given their nudge aimed at encouraging takaful solvency regulations into line with smaller profiles and pressure on operators in the direction of mergers current European standards. Operators performance levels.’ and acquisitions. will have 1-3 years to comply with the new regulations depending on the sector. Is Takaful Market IFSB Invite Comments on The new regulations will apply to both Rationalisation on the Microtakaful conventional and takaful providers. The Cards in the Middle East? In late June the Islamic Financial result will be much stronger oversight of If you search the web for items on Services Board (IFSB) issued a draft the insurance industry, as well as some takaful market consolidation, you will of its joint paper prepared with limits on investment policies, for example discover a host of news items going the International Association of real estate investments must be 30% or back over at least five years suggesting Insurance Supervisors (IAIS) ‘Issues less of total investments. that there are too many takaful in Regulation and Supervision of providers in the market and that a Microtakaful (Islamic Microinsurance)’ Takaful Companies spate of mergers and acquisitions for public consultation. Hampered by Lack of Fixed is imminent. In particular there is a The IFSB believes that regulators and Income Investments tendency to see a single event as an supervisors in jurisdictions where The credit rating agency, A.M. Best in indicator that the process of market takaful providers offer their services a report entitled ‘Sukuk Investment consolidation is under way. have relatively little experience or Opportunities Remain Limited for empirical data to support their role in Middle East Takaful Operators’ notes Recently the Gulf Daily News creating a conducive environment for that takaful operators continue to have reported the fact that the Bahrain the microtakaful market that could very limited levels of fixed income Kuwait Insurance Company work effectively for the lower income investment, with the majority of funds had raised its stake in Takaful segments. The main objective of the invested in cash and short-term deposits, International to 40.9%. In the same joint paper is, therefore, to highlight and equity and real estate assets. The article they reported that Ibrahim Al identify regulatory issues prevailing in problem has been exacerbated by the Zaabi, Director General of the UAE the microtakaful sector and outline the surge in growth of takaful products on Insurance Authority had said that role this sector can play in enhancing offer. several Islamic insurers were seeking financial inclusion. In particular, the guidance from the authority on the objectives include: Salman Siddiqui, financial analyst possibility of mergers and acquisitions. commented, ‘The balance sheet a. To identify the current practices compositions of takaful operators are in While the takaful market is growing at and models used for offering line with their conventional counterparts, a healthy rate (A.M Best are forecasting microtakaful products, and the which also have significant investment it will be worth $20 billion by 2017), challenges and potential concentrations in equity and real estate the engines for growth are in Malaysia . To review the current regulatory assets. This is due to the underdeveloped and Saudi Arabia. The Middle East framework for the microtakaful fixed income markets in the region and is seeing slower growth and very high sector in various jurisdictions and potentially higher attractive returns being levels of competition, with a large suggest initiatives to strengthen achievable through investing in shares number of relatively small takaful the framework and thus enhance and property investments.’ companies. For example, return on financial inclusion through the

12 IIBI www.islamic-banking.com NEWHORIZON January – June 2015 TAKAFUL NEWS

takaful sector; and greater; horses are frequently moved customers’ c. To provide guidance to the around the globe participating in a full needs and regulatory and supervisory calendar of events. Many of these innovating authorities in putting in an horses are highly prized, crowd-drawing with new enabling environment for the Arabian stallions coming from long and products overall development and growth distinctive blood lines. such as this. of the microtakaful sector Lloyd’s unique Richard Bishop, Chief Executive structure The joint paper highlights the Officer, Cobalt Underwriting said, ‘We means we distinguishing features of various are delighted to be able to offer the first are ideally models used for offering microtakaful Lloyd’s Shari’ah-compliant product and equipped to products which, despite being similar provide our clients with access to secure provide Shari’ah-compliant insurance to the models used for takaful products Shari’ah-compliant insurance coverage and reinsurance as we continue to in many respects, pose various unique in what is a very specialised and exciting expand globally.’ supervisory challenges. Backed by a market. It is also another clear sign of survey from the regulatory authorities the London market’s ability to deliver In Brief and microtakaful operators, the joint innovative products that meet the Kenya’s Insurance Regulatory paper delineates the main features changing needs of clients across the Authority (IRA) has issued new of microtakaful from various aspects world in the way they want them to be regulations for takaful operators in including types of participants, product both structured and delivered.’ Kenya. Insurers will have to operate features and contributions as well as conventional and takaful businesses distribution channels. Guy Morrison, Chief Underwriting as completely separate entities, with Officer, Equine at XL Group said, separate reporting of assets, liabilities, It also examines critical issues that ‘Today the movement of horses is revenues and expenses. They will also require the attention of regulatory and supported by a highly specialised have to set up a Shari’ah supervisory supervisory authorities pertaining to the shipment and logistics industry. But council to monitor and advise on the microtakaful sector including separation travel, with varying climate and handling takaful business of funds, solvency and capital adequacy conditions, exposes these animals to a . framework, investment framework and raft of risks.’ The Islamic Insurance Association Shari’ah compliance. Additionally, the of London (IIAL) was launched in late joint paper illustrates the relevance of Mr. Morrison continued, ‘Until now, April 2015. Its members include Lloyd’s, IAIS’ Insurance Core Principles in the owners, especially those of Arabian AIG, Aon, Cobalt Underwriting, Clyde practice of microtakaful. The joint horses, have not had the opportunity & Co., Jardine Lloyd Thompson and paper is available to download from the to insure their treasured animals in Norton Rose Fulbright. The chairman IFSB’s web site. a Shari’ah-compliant manner. We of the new association, Mr Max Taylor, a hope this coverage will give owners former chairman of Lloyd’s, believes this London Displays its Horse the reassurance that their horses are an important development for London Sense well covered when participating and with its pre-eminent position in the XL Group recently announced that supporting the vibrant equine industry insurance market and its commitment together with Cobalt Underwriting – the at events around the world.’ to becoming a global centre for Islamic specialist Shari’ah compliant managing finance. general agency – it has launched the Lloyd’s Director of Global Markets, first Shari’ah-compliant product to be Vincent Vandendael said, ‘It’s very Lloyd’s of London is apparently in available through Lloyd’s of London. positive progress to see the Lloyd’s talks with the Malaysian regulator to The cover is an equine product which market providing its first Shari’ah- set up and office dedicated to takaful. responds to named perils, mortality, compliant insurance coverage. Takaful It is believed that they would use such theft, infertility and permanent disability, insurance products are an important an office to target not only Malaysia, amongst other risks. offering to our customers and business but also Saudi Arabia and the UAE. partners in a growing number of (Lloyd’s opened in an office in the Dubai The need for Shari’ah-compliant Equine markets around the world. It is great International Finance Centre earlier this insurance coverage has never been to see the market adapting to our year.)

www.islamic-banking.com IIBI 13 IN THE SPOTLIGHT NEWHORIZON Rabi Al Awwal - Shaban 1436

The Transformation of UK’s Al Rayan Bank Step out of the side door of Harrods London, world’s most famous department store, give a nod to the double parked Ferraris on your right and you will find Al Rayan Bank’s. In the words of Al Rayan’s press release, ‘The exclusive branch .... will provide Gulf Cooperation Council (GCC) clients with exclusive services.’ The branch is certainly in the right place to attract GCC clients of high net worth. Many of these individuals live in the area and use Harrods as their corner store. The Road to million; renaming the bank Al mainly retail bank, although partners are incentivised Knightsbridge Rayan Bank and expanding its he insisted that retail still to make customer So how did a modest remit to include commercial remained an important introductions and there start-up, then called the property and now, private element of the business. It is also a profit-sharing Islamic Bank of Britain (IBB), banking. (Masraf Al Rayan in is, however, a rather different arrangement in place. One located in Birmingham, with its home market of Qatar has retail business from the one agency, for example, is an the initial remit of providing traditionally focussed on the IBB started in 2004. Mr estate agency and what retail banking for ordinary corporate sector, with retail Choudhury observed that could be more natural Muslims end up in one of banking forming a relatively trying to compete with the than to introduce potential the UK’s most exclusive and minor element of its activities.) big high-street banks on a property purchasers to expensive shopping venues? mass network basis was never a bank offering home IBB opened in 2004 and by The 2014 financial results going to work. It was, he purchase plans. late 2010 The Times was were a landmark for the bank said, too slow and expensive. describing the experiment as with the first profit reported Al Rayan has retained six There is, however, no a flop and in July 2012 in one since its foundation as IBB in retail branches – three in getting away from the fact of the Institute of Islamic 2004. The profit was modest London and one each in that Islamic retail banking Banking and Insurance’s at £1.2 million, but it was Birmingham, Leicester and simply has not taken off regular evening lectures, nevertheless a profit (the loss Manchester, but is betting in the UK. Mr Choudhury Mohammed Amin, an Islamic in 2013 had been £5.5 million). its retail future on internet commented that there finance specialist and former Operating income increased banking and agencies. were probably two main UK Head of Islamic Finance to £11.8 million from £4.4 reasons for the rather at PricewaterhouseCoopers million in 2013 (168%). A Mr Choudhury believes lukewarm response to LLP, described the bank as significant contributor to the that Al Rayan’s cloud-based IBB’s original offering. In ‘running on a shoestring.’ improved performance was internet approach has allowed the first place he said that the bank’s Home Purchase the bank to leapfrog other many Muslims in the UK The bank had made losses Plans (HPPs), which tapped high-street banks with their do not fully understand from its foundation in 2004 into the government’s Help to massive investment in legacy Shari’ah-compliant banking up to and including the 2013 Buy scheme. (HPPs increased computer systems. (Cloud and the role it can play in financial year. This was by 50% in 2014 to £311.6 computing allows businesses their spiritual lives. (Al despite capital injections from million). Retail deposits also to connect to remote devices Rayan has been proactive its then major shareholder grew by 59%. Interestingly, Mr such as smart phones and in trying to educate the Qatar International Islamic Choudhury said that the bank’s tablets, anywhere, anytime UK Muslim population Bank and a cost cutting deposit rates have attracted and is both more scalable with information/ exercise begun in 2012. At non-Muslim customers, who and cost effective than legacy education events held this point the bank remained now account for 80% of the systems.) Al Rayan Bank in locations with a high essentially a retail bank. term deposit business. has also established three Muslim population. For Towards the end of 2013, agency ‘branches’ – in south example, they held two however, Masraf Al Rayan, The Retail Business London (Tooting), Luton such sessions in 2014 for a Qatari bank established in We caught up with Sultan and Blackburn, with three Imaams/religious leaders 2006, appeared on the scene Choudhury, CEO of Al Rayan more being considered in in Blackburn and London.) and made a successful bid Bank before the opening of Glasgow, Leeds and Ilford, At a more practical level, he to acquire IBB, boosting the the Knightsbridge branch. He Essex. These agencies are said that it was difficult for bank’s share capital from just confirmed that the bank is not based passive, co-location a small Islamic bank with a over £24 million to £100 evolving away from being a agreements. The agency limited range of products

14 IIBI www.islamic-banking.com NEWHORIZON January – June 2015 IN THE SPOTLIGHT

to compete with the full more than any other western retail, 40% commercial and rates and discounted fees. service offering of the major government to provide a 20% GCC. Mr Choudhury Tax efficient structuring can high-street banks. level playing field for Islamic has said that retail banking also be provided through banks. The UK government will remain important; it an approved third party. Where Next? has amended regulations in gives the bank a solid and All relationship managers While retail banking still the past 10-15 years, so that, diverse income base. He are Arabic-speaking.’ dominated in 2014, Mr for example, anyone buying did, however, admit, as we Choudhury said that a property using an Islamic noted earlier, that the bank Now they have rounded he expected retail and mortgage does not have to will be evolving away from a out their offering to wealthy commercial to be on an pay double stamp duty. (With dominantly retail model. GCC customers with the equal footing in asset terms an Islamic mortgage a finance private banking branch in by early 2016. It is doubtful provider will typically buy the We suspect, however, that Knightsbridge. (The GCC whether Al Rayan would property and then sell it to in time Al Rayan’s profile element already accounts have been able to achieve the real buyer at a premium, will look very different. In for 20% of Al Rayan’s such a goal without access thus no interest is involved, the next 12 months, it is business.) The question is to the resources of Masraf but there are two property quite likely that commercial how quickly Al Rayan. Do not, however, transactions, which, until the property will become the believe that this is a one amendment, attracted two dominant element in the will this element grow. way street; Masraf Al Rayan tranches of stamp duty.) bank’s business mix. Within Even if retail offerings have their own agenda, six months of Masraf such as the Home Purchase which was highlighted at Perhaps more importantly, the Al Rayan’s acquisition of Plans and ISAs (Individual the Knightsbridge opening Bank of England is currently IBB they were touting the Savings Accounts) continue ceremony by Group CEO, working towards providing advantages of their new UK to grow at the healthy rate Adel Mustafawi. He said, liquidity facilities to Islamic base for GCC customers seen in 2014, it is very likely ‘When Masraf Al Rayan was banks that have been prevented wishing to acquire homes or that retail will be relegated established nine years ago we from accessing the traditional investment properties in the to third position in Al set ourselves the ambitious liquidity facilities, which involve UK, primarily prime central Rayan’s mix within a couple goal of becoming a truly interest-bearing instruments. London sites. Their pitch is of years. The experiment global bank. From the very Mr Choudhury believes that as follows: ‘Al Rayan Bank’s in Shari’ah-compliant retail beginning our strategy was to this will be a significant help to Home Purchase Plan Premier banking in the UK will start from Qatar, then expand Islamic banks in the UK. is tailored to meet the not have been abandoned, to the GCC and ultimately needs of the GCC national, but its role will no longer look beyond. When the time The result is that Masraf with customers offered a be pivotal and the bank’s was right for us to develop Al Rayan has been able to bespoke product and service, profile will look very outside of the GCC, the begin to fulfil its desire to including negotiable rental different. United Kingdom was the develop outside the GCC natural place for us to begin.’ by acquiring a ready- made organisation in a It is interesting that Mr fairly Shari’ah friendly Mustafawi described the UK regulatory environment as ‘the natural place for us to and Al Rayan Bank has begin.’ During the interview found a white knight able with Mr Choudhury we to inject much needed asked whether operating in capital that has enabled a regulatory regime that was the organisation to set up for conventional banks diversify its activities. had in any way hampered the growth of Islamic Mr Choudhury told banking in the UK. He NewHorizon that expressed the view that the currently the bank’s UK government had done business is split 40%, The Opening of Al Rayan’s Private Banking Branch www.islamic-banking.com IIBI 15 FOOD FOR THOUGHT NEWHORIZON Rabi Al Awwal - Shaban 1436

Prophet Muhammad’s Conception of Property as a Bundle of Rights By: Benedikt Koehler Property was first conceived of as a bundle of rights in early Islam. The legal instrument that crystallised this Islamic conception was the waqf, a legal entity delivering public welfare in accordance with the wishes of a benefactor. Trusts, which evolved in the thirteenth century, have a rationale analogous to that of waqfs and, in fact, may have replicated the legal template of waqfs. The finding that waqfs are germane to Islam has ramifications for policies on waqfs in contemporary Islamic societies. Introduction in the waqf, I argue, from the case the original purpose innovation – is an issue of Waqfs are Islamic institutions precedents for the provision of the waqf falls away (the some consequence, because, that provide welfare. of welfare set by Muhammad. income never reverts to the if waqfs only came into being Institutional economists and I reject the claim that waqfs donor and, as a general rule, long after Muhammad’s historians have been studying from the outset represented is applied to poor relief). By lifetime, they are hardly waqfs for three reasons, two an assimilation of pre-existing way of example, a typical essential to the ethos of of which are of interest to legal cultures in Islam’s enlarged waqf in early Islam may have Islam. This paper settles historians while the third empire and I aver that the consisted of a distinct asset the issue of the moment in relates to current policy issues. conduit for transmitting the (say, an orchard), producing history when waqfs appeared: First, philanthropy in medieval template of waqfs to England income (say, a harvest), Muhammad introduced the Islam was of a scale and range may have been the Knights applied to a defined purpose conception of property as unprecedented in Middle Templar and Franciscan friars. (say, feeding orphans). a bundle of rights when Eastern and European history; My argument bears on policy he disposed of conquered second, the legal structure of issues in Islamic societies Poor relief is a core Islamic lands around Khaybar, the waqf conceivably inspired today, in two respects: restoring obligation and the Koran an oasis north of Medin. common law trusts. These Muhammad’s original intent specifies how it should be Moreover, waqfs cannot be two historical facts bear would reverse state control over funded, namely through deemed to be derived from on a third issue, one that is waqfs and it would thereby zakat, a levy on wealth. On non-Islamic precursors, topical today, namely why civil widen the scope for pluralist the other hand, the Koran because antecedent models society in Islamic countries welfare provision that was makes no mention of waqfs; of welfare provision did not seems stagnant and what manifest in the early history of at first blush, therefore, treat property as a bundle of remedy might act as an agent Islam. waqfs do not seem intrinsic rights. We first turn to how of change. Waqfs in many to Islam. A consequential public welfare was delivered Islamic countries have been Background to Waqfs inference, that waqfs came prior to the advent of Islam. nationalised over the course and Welfare into being only long after of the twentieth century – a A word on how a waqf is the death of Muhammad in Precursors to Waqfs policy that, as this article framed. A legal instrument 632, is further strengthened Private philanthropy was shows, not only contravenes constituting a waqf binds three by certain facts, specifically already practised long before the original principles of parties: a donor, a manager, and that waqfs first appeared in the advent of Islam. The the waqf but has thereby beneficiaries. Accordingly, the legal literature in 818 (in a world’s earliest record of also enfeebled a traditional donor passes assets to the waqf; tract by Yayha ibn Adam; a charitable endowment, hub of civil society in Islam. a manager taking control of Hennigan 2004, p. 50) and wherein land was gifted to Deliberations on how to these assets must do so at arm’s the oldest inscription on yield income for a temple, promote civil society in Islam length from the donor and the a building documenting may be a Babylonian legal should rightly consider the purpose to which these assets ownership by a waqf is dated deed dated to ca. 1,300 BC contribution that waqfs made are put is defined in advance. to the tenth century (Cahen (Laum 1914, pp. 207–9). to civil society in Islam. Other determinations include 1961, p. 40). The timing of The Babylonian template particulars such as the manager’s the first waqfs – whether for charitable giving A conception of property as salary, complaints procedures they are a Muhammadan remained substantially a bundle of rights crystallised and what should happen in or a post-Muhammadan unchanged throughout

16 IIBI www.islamic-banking.com NEWHORIZON January – June 2015 FOOD FOR THOUGHT

Roman and Byzantine jizya is a levy on moveable Introduction of Waqfs bequest was of great moment history: assets, usually assets (say, a herd), and kharaj by Muhammad in the evolution of waqfs: dedicated to maintaining is a levy on a fixed asset (say, In Medina, charitable Muhammad was now in religious institutions (or a farm). Thus, the two taxes endowments were a feature a position to fund zakat ancillary functions, such as share an identical rationale – of civic life even before through charging rent on a administering cemeteries), the taxation of non-believers – Muhammad arrived there. capital asset and a mechanism were vested in a public and differ only in the basis of A certain Al Bar had died for administering a waqf was authority, either the state or the assessment. months before Muhammad in place. Two aspects of the church (Hennigan 2004, settled in Medina and had this hadith stand out: first, pp. 52–3). There was an There is an obvious analogy settled a portion of his estate Muhammad was conversant exception, ancient Persia, with zakat and waqfs: they on charity. Muhammad not with reserving an orchard to where benefactors were free share the same purpose – only raised no objection; on provide welfare and second, to appoint administrators provision of welfare – and the contrary, he endorsed this Muhammad applied the term unaffiliated to a church or differ in that zakat is based bequest. Thus Al Bar was ‘the sadaka to what was in fact a state authority1. We will on tax levied on moveable first to will away a third of his waqf. Muhammad saw no return to the implications of assets, whereas a waqf earns wealth and the Messenger of need for new nomenclature to ring-fencing an endowment rents from property in its God allowed it’ (Ibn Sad 2013, distinguish between zakat and from control by state or possession; zakat is managed p. 482). Muhammad acquired waqf. church, because this legal within the public sector, waqfs personal experience of provision has consequences are outside the public sector. handling endowments shortly Muqairiq’s bequest gave of great moment; but for now What may seem an arcane after the Battle of Uhud (in Muhammad a blueprint for note only that the Persian minutia of fiscal procedure 625) when Muqairiq, a Jewish administering a waqf and antecedent is the best fit – which asset base is used to warrior in Muhammad’s his next step was to scale with a waqf. We now turn to yield income – had important armed forces, who was fatally up how this concept was public charity as practised in ramifications for the provision wounded in the Battle of applied. This occurred Muhammad’s Medina. of public welfare. Zakat was Uhud, bequeathed to the following the conquest of levied on moveable wealth Prophet seven properties with Khaybar in 628 (four years The Overlap of (say, a herd) that fluctuated the proviso he put these to use before Muhammad died). Zakat and Waqfs from one year to the next; for the expansion of Islam. Previously, income from It is not obvious why the moveable assets in extremis raids consisted exclusively of Koran could endorse zakat could disappear altogether, The Arab Islamic scholar windfalls; now, Muhammad but not waqfs. However, and, consequently, so could Ibn Sad describes how came into possession of as the economic historian tax yields. Waqfs, on the other Muhammad managed this extensive agricultural estates. Claude Cahen (1961, p. hand, took possession of a endowment. Muhammad The campaign against 45) has shown, conflating fixed asset (say, a building) once spotted his grandson Khaybar marked a new phase financial terms was not with a more predictable Hassan eating fruit from in Muhammad’s bid for uncommon in early Islam. revenue flow. Zakat, therefore, a tree that had been given recognition as pan-Arabian Cahen used in illustration was a less dependable tool for over to provide food for the leader; moreover, the finances the two Islamic taxes on drafting a long-term budget, poor (since no other landed of Muhammad’s polity were non-believers, jizya and whereas a waqf, through endowments in Medina transformed when Khaybar kharaj. Only one of these, control of assets, was thus are ever mentioned, this and its environs were brought jizya, is mentioned by the equipped to commit to welfare orchard must have been under his control. Tenants Koran, whereas kharaj was provision over several budget part of Muqairiq’s bequest). of farms in and near Khaybar only introduced following periods. Muhammad scooped the were not evicted; instead, Muslim occupation of regions fruit from the boy’s mouth Muhammad permitted them outside Arabia, several years We now track back in time and scolded him, ‘Don’t to remain on their land but after Muhammad had died; to Medina in the days of you know you are not to eat imposed on them an annual hence, arguably, kharaj was Muhammad, to the origin sadaka?’ (Ibn Sad 2012, p. tribute, equivalent to 50 superimposed on a Koranic of the first waqfs and how 122; Gil 1998, p. 128. The per cent of their harvests. guideline. But Cahen resolved in practice they came to be term sadaka is a synonym Muhammad, as commander- this ostensible inconsistency: differentiated from zakat. for zakat). Thus, Muqairiq’s in-chief entitled to one fifth 1Furthermore, a distinction was drawn between the endowment’s principal and usufruct (Perikhanian 1983). www.islamic-banking.com IIBI 17 FOOD FOR THOUGHT NEWHORIZON Rabi Al Awwal - Shaban 1436

of any booty, became the using capital assets and ring- of waqfs, on the other hand, for generations they were recipient of a very large fencing them from control by were independent of church passed on only orally and recurring income stream; his a secular or religious authority. or state. This key difference were therefore liable to annual income was higher Previously, assets reserved for explains why prior to the distortions. This assertion, than that of any other Arab the provision of welfare had advent of Islam the state however, was refuted long of the time2. always been in the hands of a or the church absorbed ago by Aloys Sprenger (1856 secular or religious authority, philanthropic institutions, a, b, c). As to the motivation Muhammad simultaneously but henceforth they were whereas the legal structure of of benefactors, there are awarded grants of lands to vested in an independent, waqfs, where administrators doubts about what, if not his Companions, but attached distinct legal entity. Umar were at arm’s length from charity, might explain why the condition that they apply and other Companions had church and state, safeguarded waqfs came into being. An the proceeds from the land to title to physical assets, but their independence. By intuitive putative motivation public welfare. The narrative beneficiaries had claims over creating a vehicle for a civic put forward is pecuniary of events by Ibn Sad shows yields from assets: thus, at that philanthropy that was legally considerations. One might that the term sadaka was still very moment the conception autonomous, Muhammad and question, however, the used interchangeably with of property as a bundle of his Companions had in effect merit of this hypothesis. If waqf: rights had come into being. arrived at a conception of acquisition of personal wealth A transition in jurisprudence, property as a bundle of rights; had been uppermost in the Umar got some land which had proceeded in and the independent status of mind of Muhammad and his at Khaybar and went several stages, had now run its waqf administrators, I submit, Companions, nothing would to the Prophet and he course. Muqairiq, who gifted explains why the philanthropic have prevented them from gave him command in a benefaction to the Prophet sector in Islam spawned owning the lands around it. He said, ‘I got land as head of the community, creativity surpassing that of Khaybar outright. A closer in Khaybar and I did not had complied with traditional its predecessors. (Fixing the fit between intentions and get any property dearer philanthropic practice since timing of the first waqfs has outcomes is provided by the to me than it. What do he did not impose legal the collateral implication Koran, which teaches that you command me to constraints on Muhammad; of settling the question of the provision of charity is do with it?’ He said: ‘If but after Khaybar, Muhammad whether Islamic welfare an essential aspect of Islam. you wish, make it a waqf broke new ground by granting provision imitated Persian ‘Islamic charity’, according and give it as sadaqa.’ to his Companions legal title models: this hypothesis is to Yaacov Lev (2005, p. 144), Umar gave it as sadaqa. over land while constraining disproved because by the time ‘was a sacred charity, a form … the first sadaqa given how they could use income Islam incorporated Persia the of worship, rather than a in Islam were the fruits derived from it and making the template for waqfs was already form of altruistic behaviour’. of the sadaqa of Umar distribution of benefits subject in place.) A vivid illustration of how ibn al Khattab. (Ibn Sad to legal oversight. fundamental to early Islam 2013, p. 280) Reliability of Sources this virtue was is offered The novelty of Muhammad’s Before we leave Arabia and by another of Ibn Sad’s A distinction was drawn approach is thrown into turn our attention to England, hadiths. Once, when one of between property rights over relief by a recapitulation and to how trusts there came Muhammad’s Companions a capital asset and property of traditional models into being, we should pause descried an old man beset rights over the yield from of delivering welfare. for a moment and deal with with dementia suffering that asset. Fixed assets Endowments in the era two questions that recur in the from neglect by his family, were owned by a waqf, but lasting from the Babylonian literature pertinent to the study he upbraided the family and income flows were due to to the Byzantine empires of waqfs. The first concerns compelled them to serve the beneficiaries; the waqf was were administered by state the reliability of hadiths that old man the most delicious the legal entity constituted or church authorities and narrate the evolution of waqfs; and costly dish they could to administer this scheme. no institutional checks and the second what was the true afford; when they objected Muhammad thus complied balances afforded protection motivation of benefactors that ‘he does not know what with the Koranic injunction against these authorities of waqfs. Hadiths, some he is eating’ and complained to provide charity, but he did absorbing and consolidating claim, are unreliable as about the expense, they were so in a new way, namely by endowments. Administrators historical evidence, because cut short with a curt rebuke: 2Following the conquest of Khaybar, Muhammad drew annual rents of 1.5 million gold franks, according to an estimate by Leone Caetani (1907, p. 47). 18 IIBI www.islamic-banking.com NEWHORIZON January – June 2015 FOOD FOR THOUGHT

‘but Allah knows’ (Ibn Sad or any (other) of its the Knights Templar and and health. A corollary of 2012, p. 227). In this hadith needs (it is permitted) Franciscan friars. The the assertion that waqfs the motivation for endowing ... also, Jews have in this evolution of trusts in England originated in Muhammad’s waqfs shines through; respect the same rights as owed much to them in policy measures is that claims Islamic philanthropy can be the Christians. (Gil 1984, particular. The benefactor that civil society in Islam was comprehensively explained by p. 157) 3 of Merton College, Walter de stagnant from the outset are the core values of Islam. Christians must have made use Merton, had close ties to the untenable. These findings of this right, since according Knights Templar; Franciscan have implications for present- The Evolution of Trusts to Ibn Sad (1997, p. 221), friars, according to the legal day policies towards waqfs in and Corporations in ‘Umar II said that the waqf historian Frederick Maitland Islamic societies. Christendom of a dhimmi who leaves a (1894), were conspicuous as In medieval England, the place of worship as a waqf plaintiffs in cases leading to Implications for conception of property as from his property for the the endowment of trusts. Policy Today a bundle of rights again Christians or Jews is allowed’. Precedential actions for trusts Civil society in the West is emerged, in common law, in Christians were exposed to were instigated by an official dynamic, but in the Islamic the form of trusts. A study Islamic philanthropy also as linked to the Knights Templar East, quiescent. One of the statutes of one of beneficiaries. The Omayyad and by Franciscan friars rather of the reasons for this Europe’s earliest instances caliph Abd al Malik instructed than by other parties. Such divergence is thought to lie of trusts – those of Merton his all-powerful minister Hajjaj facts constitute circumstantial in the different pathways College, Oxford, endowed ibn Yusuf to transfer funds to evidence, which, however, falls of evolution of waqfs and in 1264 – has concluded: enable Nestorians (a Christian short of irrefutable evidence; trusts; waqfs remained the ‘Were the Merton documents sect) to build a monastery; but even if circumstantial dominant model of welfare written in Arabic, rather the Abbasid caliph Harun al evidence is not tantamount to provision in medieval Islam than Latin, the statutes Rashid made a donation for proof, it should be noted that while in contemporaneous could surely be accepted as a building a Nestorian monastery no other plausible explanation Europe trusts evolved waqf instrument’ (Gaudiosi in Baghdad (Pahlitzsch 2009, for the emergence of trusts into corporations, which 1988, pp. 1254–5). Such pp. 146–7). A sixteenth- has ever been produced. proved a far more malleable parallels could be dismissed century legal deed that has instrument for combining as spurious – how could come down to us documents Before I move on to modern civic initiatives4. It is true lawyers in England have had a Muslim judge ascertaining policy ramifications, a brief that trusts were precursors knowledge of waqfs? I now the compliance of deeds of a review of the argument of of corporations, the turn to the question of how waqf endowed by a Christian this article up to this point is jurisprudential frame for the jurisprudential expertise lady (Amin 1975). It follows in order. I argue that waqfs which, according to John required to create waqfs could that the mechanism of waqfs originated in provisions Dewey (1926), appeared when have been acquired in Europe. was known to Christians in the made by Muhammad and in 1252 the Vatican issued the Middle East and benefactions that, proceeding from these legal definition of universitasa Islamic law extended the crossed denominational lines. provisions, there emerged as an entity with rights and privilege of endowing waqfs in early Islam an innovative duties distinct from those of to non-Muslims, including Next, we follow the trail legal conception of property, its members5. The creation Christians in Jerusalem. An by which this institutional namely property as a bundle of of the universitas marked early Islamic legal manual expertise might have migrated rights. Placing the origins of a fork in the road from stated: to England. waqfs in Muhammad’s lifetime whence Europe progressed If a Christian makes his by implication supports the towards new forms of legal land or his house waqf Jerusalem was a gateway assertion that early Islam was a entities, whereas Islam did and prescribes that their between Christendom and catalyst for the self-sustaining not. However, empirics revenue be spent for Islam. Two organisations evolution of formative demonstrate that waqfs also repairs in Jerusalem or had a sizeable presence in institutions of civil society proliferated, flourished and to buy oil for its lamps both Jerusalem and England, in sectors such as education expanded for many centuries,

3This manual, Al-Khassaf, is dated to ca. 893. 4‘The waqf became Islam’s main organisational form for providing social services at a time when western Europe started to use the corporation to many of the same ends’ (Kuran 2005, p. 802). 5‘For example, the ‘fiction’ theory of the personality of corporate bodies, or universitates, was promulgated if not originated, by Pope Innocent IV (1243–1254)’ (Dewey 1926, p. 665). www.islamic-banking.com IIBI 19 FOOD FOR THOUGHT NEWHORIZON Rabi Al Awwal - Shaban 1436

even until the modern era women (Hoexter 1998, p. capable of exploiting potential to Ottoman Rule: Institutions, Waqf and Architecture in Cairo. Leiden: Brill. and their decline has been 478). A prominent example institutional creativity. Caetani, L. (1907) Annali d’Islam, vol. 2(i). Milan: Ulrico Hoepli. comparatively recent. Thus, in the sixteenth century was Cahen, C. (1961) ‘Réflexions sur le we need to track back once Roxelana, wife of the sultan Waqfs in the nineteenth and Waqf ancien’, Studia Islamica 14, 37–56. Dewey, J. (1926) ‘The Historic more to Medina in the Suleiman the Magnificent, twentieth centuries came under Background of Corporate Legal Personality’, Yale Law Journal 35(6), seventh century to discover who endowed a Jerusalem state control; and today in many 655–73. the source of the vitality of waqf funded by the revenues Islamic countries governmental Gaudiosi, M. (1988) ‘The Influence of the Islamic Law of Waqf on the waqfs. of 26 villages (Kuran 2001, p. departments are dedicated to Development of the Trust in England: 6 The Case of Merton College’, University 849). Nor did this tradition central management of waqfs . of Pennsylvania Law Review 136(4), Broadening the purposes cease after the Middle Ages; The dynamic inherent in waqfs 1231–61. Gil, M. (1984) ‘Dhimmi Donations and of waqfs began almost at waqfs in Islamic societies at their origin, whereby a bundle Foundations for Jerusalem (638–1099)’, Journal of the Economic and Social History once and as time went on were a significant economic of rights could be assigned to of the Orient 27(4), 156–74. autonomous institutions, thus Gil, M. (1998) ‘The Earliest Waqf waqfs became an important sector until relatively recently. Foundations’, Journal of Near Eastern feature of civic life in Islam. In Egypt, by the time of the atrophied and waqfs suffered the Studies 57(2), 125–40. Hennigan, P. (2004) The Birth of a Legal Muhammad encouraged Ottoman conquest, virtually fate of charitable foundations Institution: The Formation of the Waqf in pre-Islamic eras, namely to In Third-century A.H. Ḥanafī Legal reserving a third of bequests all the buildings in Cairo were Discourse. Leiden: Brill. to charity (Ibn Hanbal waqfs (Behrens-Abouseif be dissolved by church or state Hoexter, M. (1998) ‘Waqf Studies in the Twentieth Century: The State of 2012, vol. 2, hadith 1440). 1994, p. 145). In Istanbul in authorities. What has been the Art’, Journal of the Economic and Social History On a different occasion the eighteenth century, soup stifling a vibrant civil society of the Orient 41(4), 474–95. he instructed another kitchens daily served some in Islamic societies, I submit, Ibn Hanbal, Ahmad (2012) Musnad (3 vols). Riyadh: Dar-us-Salam Companion, Othman, to buy 30,000 meals; on the eve of has not been the presence of Publications. Ibn Sad, Muhammad (1997) The Men a well and give it over to free the foundation of the Republic waqfs but, on the contrary, their of Madina, vol. 1. London: TaHa use (Ibn Hanbal 2012, vol. of Turkey in 1923, waqfs disappearance. To privatise Publishers. Ibn Sad, Muhammad ( 2012) Kitab 1, hadiths 511, 545). Abu owned three-quarters of arable waqfs, by implication, would be a At-Tabaqat Al-Kabir. Volume VI: The Scholars of Kufa. London: Ta-Ha Bakr, the first caliph, created land in the country (Kuran policy prescription strengthening Publishers. a waqf for the benefit of 2001, pp. 849–50). the civil sector and reigniting the Ibn Sad, Muhammad (2013) Kitab At-tabaqat Al-kabir. Volume III: The his descendants; Umar, the institutional dynamic once set in Companions of Badr. London: Ta-Ha Publishers. second caliph, passed his Summary motion by Muhammad. Kuran, T. (2001) ‘The Provision of entitlement to one fifth of the Waqfs originated in the era of Public Goods under Islamic Law: References Origins, Impact, and Limitations of booty following the conquest Muhammad rather than at a Amin, Muhammad (1975) ‘Un acte de the Waqf System’, Law & Society Review foundation de waqf par une Chrétienne (Xe 35(4), 841–98. of Egypt to a waqf (Gil later stage of Islamic history. siècle h., XVIe s. chr.)’, Journal of the Economic Kuran, T. (2005) ‘The Absence of the 1998, p. 128). Benefactors Moreover, waqfs do not serve and Social History of the Orient 18(1), 43–52. Corporation in Islamic Law: Origins Behrens-Abouseif, D. (1994) Egypt’s Adjustment and Persistence’, American Journal of were inventive in their choice as an example of institutional Comparative Law 53(4), 785–834. Benedikt Laum, B. (1914) Stiftungen in der of dedicated purposes; stagnation in Islam, contrasting griechischen und römischen Antike, vol. 2. mosques, schools, hospitals, with European dynamism, for Koehler, now Leipzig: Teubner. Lev, Y. (2005) Charity, Endowments, and homes for the aged were but two reasons: first, Europeans retired, spent Charitable Institutions in Medieval Islam. his career Gainesville, FL: University Press of a few of the proliferating were exposed to waqfs in Florida. Jerusalem, where they were involved Maitland, F. W. (1894) ‘The Origin of beneficiaries of waqfs. Nor Uses’, Harvard Law Review 8(3), 127–37. were benefactions of waqfs authorised to introduce them in financial Pahlitzsch, J. (2009) ‘Christian Pious innovation in both the City Foundations as an Element between the preserve of Islam’s male and in Europe the first trusts Late Antiquity and Islam’, in M. Frenkel replicated the very structure of London and as a former and Y. Lev (eds), Charity and Giving in elite; donors came from every Monotheistic Religions. Berlin: de Gruyter. section of society (Hoexter of waqfs; and second, waqfs economic adviser in to the UK Perikhanian, A. (1983) ‘Iranian Society government. In retirement and Law’, in E. Yarshater (ed.), The 1998, p. 478). Women in outgrew their initial scale and Cambridge History of Iran, vol. 3(2). even up to the recent past he has turned his attention Cambridge: Cambridge University particular were conspicuous Press. in the history of waqfs from were a malleable instrument to the history of finance and Sprenger, A. (1856a) ‘Über has authored several books das Traditionswesen bei den the first: Umar appointed as for welfare provision. It Arabern’, Zeitschrift der deutschen on both conventional and morgenländischen Gesellschaft 10, 1–17. manager of the first waqf his follows, therefore, that waqfs Sprenger, A. (1856b) ‘Notes on Alfred daughter, Hafsa (Hennigan – by proliferation of purpose, Islamic finance includingEarly von Kremer’s Edition of Waqidy’s Islam and the Birth of Capitalism Campaigns’, Journal of the Asiatic Society 2004, p. 162); and between 20 range of social strata involved of Bengal 25, 53–74, 199–220. published in 2014. He was Sprenger, A. (1856c) ‘On the per cent and 50 per cent of all and assets under management Origin and Progress of Writing medieval waqfs are estimated – were in every respect educated at the Universities of Down Historical Facts Among the Musulmans’, Journal of the Asiatic to have been endowed by suggestive of a civil society Yale and Tübingen. Society of Bengal 25, 303–29, 375–81.

20 IIBI www.islamic-banking.com NEWHORIZON January – June 2015 POINT OF VIEW

Islamic Finance: Confessions of a Conventional Banker By: Moin Qazi

A Contentious Issue no knowledge? It is the are others who believe that J.M. Keynes did not define One of the most contentious possessors of understanding accepting the term as the interest but mentioned the issues that has taxed the mind that are mindful’ (Q39:9). modern equivalent of riba, rate of interest as ‘The of Muslims is the concept particularly on account of percentage of excess of of interest in modern day If we closely read verses modern finance having been a sum of units of money economies. The Islamic 275-281 of Surah Baqarah, cleansed of the element contracted for forward clerics (ulema) have exhibited it leaves us in no doubt that of usury and its coercive units of time over the spot an ambivalent stand on riba (any addition or interest) character, would amount to a or cash price of the sum major issues concerning is prohibited. Similarly very superficial interpretation thus contracted for forward Islamic finance and on most predetermined interest to of a term that has multiple delivery.’ occasions have preferred depositors is also equally layers that colour it. Riba, to diplomatically deflect not approved by Islam. In according to this school, has However, Muslim, socialist questions relating to it. Islam, capital is not capital a sinister connotation and is and a number of capitalist Islamic finance is one of in the conventional sense; it actually meant to construe economists have questioned the greyest areas of both is a potential capital, which the coercive informal finance these explanations on both scholarship and practice and has to be channelled through practices followed and theoretical and technical has attracted a very small businesses to generate pursued by usurious and grounds. They often stress pool of talented researchers. additional income. Money rapacious moneylenders. the point that money capital This is largely on account cannot grow by itself. It has cannot be treated as capital of the misplaced notion that to be used entrepreneurially In modern secular economic goods on the same basis discussions on Islamic finance so that both the health of systems interest plays a as productive factors. It are fraught with serious the economy and individual very important role. In is pertinent to remark consequences and implications wellbeing are enhanced. The fact, in the Western world here that the lending of and there are strong Federal Court of Pakistan, people cannot think of any money for interest was possibilities of one getting the highest judicial forum of economic system without abhorred and, in most trapped in an act of heresy. Pakistan, has unequivocally interest. From a theoretical cases, prohibited by all the The whole approach is clearly declared that interest in any standpoint, interest has been monotheistic religions. An antithetical to the Qur’anic form, irrespective of the logic a debatable subject among eminent Western economist, vision in which humankind is we use, is reprehensible. economic and political Roy Harrod, regards the challenged to reflect, ponder theorists. Abu Saud defines abolition of interest as the and meditate: all qualities Riba and Secular interest as ‘the excess of only way to avert a collapse more connected with heurism Economies money paid by the borrower of capitalism. Not only this, and tentativeness and usually Although the accepted to the lender over and above but he speaks with great regarded as the basis of position in Islamic countries the principal for the use of admiration for an interest- wisdom (‘He granteth wisdom is very clear, there are still the lender’s liquid money less society in his work to whom He pleaseth; and he several strands of conflict over a certain period of time’. on Economic Dynamics. to whom wisdom is granted on the position in secular Economists have presented Harrod clearly recognises receiveth indeed a benefit countries, particularly different interpretations of that, ‘It is not the profit overflowing; but none will those which have seen a interest. Samuelson states itself, earned by services, grasp the Message but men series of failures of Islamic that ‘Interest is the price by assiduity, by imagination of understanding’ (Q: 2; 269). financial institutions. In of rental for the use of or by courage, but the The Qur’anic assumption these countries there is still money’. Don Patinkin gives continued interest accruing is that knowledge and no unanimity among the the following definition: from the accumulation reflection will invariably and Muslim clerics and bankers ‘Interest is one of the forms that makes that profit taker inevitably lead to God: ‘Are on the correct meaning of of income from property, the eventually appear parasitical’ the possessors of knowledge the term riba. Some prefer to other forms being dividends, and he further states that an equal with those who possess translate it as interest. There rent and profit.’ However, interest-less society, which www.islamic-banking.com IIBI 21 POINT OF VIEW NEWHORIZON Rabi Al Awwal - Shaban 1436

will be a totally new kind of his labour, money and time actually spends the amount received by the Prophet, who society, ‘would be the correct or he purchases it from borrowed from the creditor died a few days later; hence and final answer to all that is someone else. In both cases, and has to return the same the Companions had no justly advanced by the critics the vendor along with his amount with an addition opportunity to ask him about of capitalism.’ capital employs labour, time, by way of interest. In its the Shari’ah implications of intellect and experience and general, linguistic sense, the relevant injection - so Defining Riba presents it before that buyer the term riba denotes an much so that even ‘Umar Islam is a complete code of and by selling he makes ‘addition’ to or an ‘increase’ ibn al-Khattab is reliably life, which offers its own some profit on top of it. of a thing over and above reported to have said: ‘The social, political and economic In exchanging the product, its original size or amount; last [of Qur’an] that was systems to guide human sometimes he may incur a in the terminology of the revealed was the passage behaviour in all spheres of loss instead of making a Qur’an, it signifies any [lit., ‘the verse’] on riba; and, life. History has recorded profit. So he (the vendor) unlawful addition by way behold, the Apostle of God that the economic system has to take the risk of losses of interest, to a sum of passed away without [lit., of Islam, for the first time in pursuit of trade. money or goods lent by one ‘before’] having explained its in the world had established person or body of persons meaning to us’ (Ibn Hanbal, social and economic justice On the other hand, in to another. Considering on the authority of Sa’id ibn during the period of al- interest transactions there the problem in terms of al-Musayyab). Khalifah al-Rashidah. In is no division of profit the economic conditions any ideal Muslim society, between the two parties prevailing at or before Some people say that no socio-economic justice on the basis of equality. A their time, most early practice of commercial is considered as one person lends his money to Muslim jurists identified loans existed in Arabia at of the most significant someone as a loan on the this unlawful addition with that time and people used characteristics for the social, condition that the borrower profits obtained through to borrow money for their political and economic as has to pay a certain amount any kind of interest-bearing personal needs only. On well as all realms of human of money in addition to the loans irrespective of the rate the basis of this plea, they interaction. Exploitation principal within the given of interest and the economic say that the interest which and any source of unjustified time period. Here, the lender motivation involved. With has been forbidden by Islam enrichment in Islam are or financier gets additional all this - as is evidenced by relates to the latter form. prohibited. The Holy pre-fixed money with the the voluminous juridical For this reason, they hold Qur’an has emphatically principal. During this period literature on this subject - that interest is lawful when instructed Muslims not to it is not always possible for Islamic scholars have not it is charged on a loan taken acquire each other’s property the debtor to make a profit. yet been able to reach an for industry and commerce. wrongfully. Islam is not an This is, in fact, an exchange absolute agreement on They contend that since the ascetic religion. It takes a of time and leisure. From the definition of riba: a borrowers in the industrial positive view of life as the the point of view of trade, definition, that is, which and commercial sectors make natural outcome of the belief the moment a commodity would cover all conceivable huge profits from such loans, that human beings are the is exchanged for its price legal situations and positively how does it become unlawful vicegerents of God. the transaction comes to an respond to all the exigencies if they pay the lender a small end. The purchaser does of a variable economic fixed annual amount against In pre-Islamic Arabian not give anything after that environment. In the words it? In their opinion, it is a society, interest or riba was transaction to the vendor. In of Ibn Kathir (in his right of the lender, which considered similar to trade, their transaction, whether commentary on 2: 275), ‘the should be paid to him on his but the Qur’an has enunciated of houses, land or other subject of riba is one of wealth. But such arguments that trade and interest are not material, the original remains the most difficult subjects are totally wrong for two the same. In trade, there are intact and is returned to for many of scholars (ahl major reasons: two parties involved – one is the owner afterwards. It is al-’ilm)’. It should be borne the purchaser and the other only for the use of it that in mind that the passage The Shari’ah establishes is the vendor. The vendor the hirer has to pay the rent condemning or prohibiting distinctly Islamic concepts of makes a particular product to the owner, but in the riba in legal terms (2: 275- money and capital, focusing or commodity by exerting case of interest, the debtor 281) was the last revelation on the relationship between

22 IIBI www.islamic-banking.com NEWHORIZON January – June 2015 POINT OF VIEW

risk and profit and the social Importantly, participants the fundamental differentiator Muslims are attracted to responsibilities of financial in an ijara and holders is the nature of money itself: Islamic banking is that, at its institutions and individuals. of a sukuk have no in Islamic economic theory, heart, it is an ethical system As is widely known, the guaranteed return and are money is merely a medium of where depositors trust the payment or receipt of all all economically aligned in exchange, not a commodity to bank to invest their savings forms of interest (or riba) the long-term success of the be traded. It has no intrinsic in partnership, sharing any is strictly forbidden by the project. If the project fails, value. Financial transactions profits which are generated. Qur’an. This prohibition they cannot simply take their must have an underlying is intended to prevent profits to date and sell off attachment to the ‘real Unlike conventional banks, exploitation from the use the loan collateral to recoup economy’. Real assets must be Islamic banks do not use of money and to share their investment. As a result, bought and sold as opposed to financial instruments based profit and loss. Money is a Islamic finance encourages the trading of intangible pieces on speculation, which can means of exchange – not the creation of social value of paper, like the infamous introduce a high element an asset that grows over alongside economic value. derivatives that brought down of risk to customers’ time. Islam also forbids its and Lehman savings and assets. Instead, followers from dealing in Islamic Values Brothers and (in theory at least) investments are backed prohibited goods – alcohol, Because it has at its core because money itself should by physical assets, such pork products, tobacco, the concept of both parties have an asset backing, it cannot as property or metals. pornography and weapons. to a transaction explicitly be created out of thin air. Following Shari’ah-compliant The basic premise under sharing the risk, the argument rules for investment, Islamic Shari’ah law that no one has been made that Islamic But are the ideals of Islamic banks will never invest in should profit purely from finance is, in fact, more finance reflected in the industries which are not money, leads to a shift in sustainable than its western industry? An industry deemed positive for society, both parties’ perspective counterpart. In addition, as dominated by conventional so those connected with away from the short-term questions still remain over bankers addicted to cheap gambling, pornography, transaction and towards the whether the banks that were credit and exotic derivatives has alcohol, tobacco or arms. longer-term relationship and pushed to the brink during focused on ‘reverse engineering’ its consequences. the recent financial crisis have of conventional financial Even after three decades as actually changed their ways products into their Shari’ah- a banker and as one who is In short, the structures and become more responsible compliant counterparts. An a humble student of Islam, that have evolved do away in their investment activities, emphasis on the letter of the I doubt whether I can with classic debt – and the the continued growth of law over the spirit of the law defend interest-regulated banks that provide such Islamic finance demonstrates has left the layman confused. banking. I can only seek financing – in exchange for the growing acceptance in the With a global Muslim solace in the Qur’anic verse direct participation in risk market of radically different population of 1.6 billion, 2:286:’Our Lord, do not and reward. For example, approaches. much of it under-penetrated impose blame upon us if an ijara can be used to by financial services, surely the we have forgotten or erred.’ purchase real estate for the Islam lays great emphasis on time has come to emphasise I bow my head in humble purpose of leasing it out to entrepreneurship and believes broader ethical principles over gratitude to Almighty God tenants and the rental income that investors should become adherence to arcane contractual seeking His acceptance and is distributed pro rata to stakeholders in businesses in mechanisms? Just as Christian mercy and pray that He subscribers. A sukuk is a fully order to generate income. It financiers in the Middle Ages may grant me the sincerity negotiable certificate that can also emphasises, however, created elaborate contractual of purpose in presenting a be bought and sold on the that the business venture structures to circumvent the correct understanding of secondary market and allows must be carried out in the Church’s ban on usury, is his controversial issue to the new owner to ‘step into true Islamic ethos of honesty, Islamic finance not guilty of the the readers. As with every the shoes’ of the original piety and trust; otherwise the very same today? human effort, it cannot holder, taking all the rights, precious investment of the be claimed to be infallible. obligations and liabilities depositors would be doomed. The Attraction of Following in the footsteps relating to the underlying Conventional commentators Islamic Banking of the great 12th century assets that accompany the describe the industry as The reason that Andalusian philosopher Ibn certificate. banking without interest, but non-Muslims, as well as Rushd, I repeat after him: www.islamic-banking.com IIBI 23 POINT OF VIEW NEWHORIZON Rabi Al Awwal - Shaban 1436

A Comparison of Islamic and Conventional Finance Systems Characteristics Islamic Finance System Conventional Finance System (Interest based system) Business framework Based on Shari’ah laws- Shari’ah Not based on religious laws or scholars ensure adherence to islamic guidelines- only secular banking laws. laws and provide guidance. Balance between moral and material The requirement to finance physical Excessive use of credit and debt requirement assets which banks usually take financing can lead to financial problems. ownership of before resale reduces over extension of credit Equity financing with risk to capital Available. Enables several parties, Not generally available through including the Islamic bank to provide commercial banks, but through venture equity capital to a project or venture. capital companies and investment banks Losses are shared on the basis of equity which typically take equity stakes and participation while profits are shared management control of an enterprise on a pre-agreed ratio. Management for providing start-up finance. of the enterprise can be in one of several forms depending on whether the financing is through Mudarabah, Musharaka, etc. Prohibition of gharar Available. Enables several parties, Trading and dealing in derivatives of including the Islamic bank to provide various forms is allowed. equity capital to a project or venture. Losses are shared on the basis of equity participation while profits are shared on a pre-agreed ratio. Management of the enterprise can be in one of several forms depending on whether the financing is through Mudarabah, Musharaka, etc. Profit and loss sharing All transactions are bsed on this The principle is not applied. Returns principle. Returns are variable, to depositors are irrespective of bank dependent on bank performance performance and profitability. The and not guaranteed. But the risks are customer as depositer is like a lender managed to ensure better returns and does not share in the success of than deposit accounts. Consumer can the enterprise beyond receiving a fixed participate in the profit upside i.e. in rate of predetermined interest. Unlike a more equitable way than receiving a the Islamic system the depositor cannot predetermined return. theoretically gain subject to improved bank performance. ‘God knows every single Islamic banking in India a is that they offer soft and and the loss is absorbed letter, and perhaps God will total disaster. God alone is subsidised loans to the poor, by the banks. Every year accept my excuse and forgive our help! He alone is Witness self employed and farmers. thousand of crores of my stumbling in His bounty, of our commitment and The annual rate of interest rupees are being written off generosity, munificence and Judge of our deed! I still for the poor is 4.25% and for by banks. Where recoveries excellence –there is no God believe that conventional farmers it is 7%. Similarly have to be enforced, it is but He!’ banking in India is humane in the case of defaulters, done in a dignified manner, and just and not usurious and if a bank is convinced that after following proper legal Conventional exploitative. the default is not wilful and procedures. Similarly the Banking in India deliberate and is on account operations of banks are I have practiced conventional One unique feature of of genuine circumstances monitored very stringently banking because I found public sector banks in India the amount is written off by the Reserve Bank of India 24 IIBI www.islamic-banking.com NEWHORIZON January – June 2015 POINT OF VIEW

and the interests of depositors, of husbandry. direct weapon for eradicating interpretation of the Qur’an, particularly the small Hamlet Act 1, scene 3, 75–77 usurious and unscrupulous infuse fresh vigour and depositors, are well protected. moneylenders who have encourage multi-dimensional The assets of the defaulters Islamic Banking in turned borrowers into slaves analysis. The safe approach are seized only in exceptional India and stripped them of all of sticking to an obscurantist circumstances and only after One issue that must engage their self respect. It would methodology would only keep all the efforts of the banks in us is that if Islamic banking be grossly unfair to equate muddling and obfuscating the recovering the loan amount is a viable alternative for us, modern banking with money issues. fail and particularly when it how can we justify the collapse lending. In fact money involves hardcore defaulters. of so many Islamic financial lenders are treated as outcasts The real challenge is from In short, banks in India are institutions in India in recent in the formal financial system. the classical school which playing a developmental times. The protagonists of They have no presence in the disdains any discussion on this role in addition to providing Islamic banking must offer a universe of civilized finance. issue. This would certainly banking services. Instead of satisfactory explanation. The It would be foolish on our not help because ours is a demonising banks without real problem is that we are part if we try to include very vibrant religion with a any evidence, Shari’ah experts not prepared for a reasoned them in the debate: they are a strong emphasis on reason should build awareness of the debate and the issue acquires totally alien species. and reflection. The discussion status of public sector banks emotional overtones whenever is all the more important on in India. The root cause of it comes up for discussion. Development banking is very account of the complexities misconception is on account Confusion continues to professionally operated and in that confront contemporary of the various interpretations prevail with sharp divisions developing economies interest society. It will help to of riba. of opinion. As a result the rates are subsidised to enable crystallise the true perspective ordinary Muslim is in a fix individuals and institutions to for all the stakeholders: the One serious complaint as to what is the right course set up their own businesses flag bearers of Shari’ah, against the prevalent model of action for him. Crores of to earn a livelihood. Giant proponents of Islamic finance, of Islamic banking is that rupees are lying unclaimed leaps in all spheres of life academics, jurists and the interest is being charged in by depositors and are being have been powered by global banking community. the garb of a service fee. In appropriated by banks because financial institutions who fact loans from Islamic banks of lack of clarity on the issues. have promoted healthcare, The industry balances on a are much costlier than those education, entrepreneurship, turning point. The next few from conventional financial The situation in India is very self employment and a years will determine whether institutions, particularly different. We do not live in host of services that have the history of Islamic finance public sector banks. The an Islamic state. The spate profoundly influenced human blindly follows that of defenders of the conventional of failures of Islamic banks life medieval European finance banking, particularly the in India has caused untold or whether its revolutionary model followed by public and suffering to small depositors. It is time we moved out of ideals can bring something of development banks, argue There is no alternative except the classical paradigm of the benefit to the whole world. that their methods are shorn to transact with conventional of the coercive practices banks. Islamic banks require generally related to the money Shari’ah Councils manned by Moin Qazi is a well known banker, author lending and usury of private experts in both Shari’ah and and journalist. He holds doctorates sharks and Shylocks, which banking. There is a severe in Economics and English. He is the drew the famous quote from dearth of such experts. The author of several books on Islamic topics Shakespeare: world’s major banks are facing including bestselling biographies of the problems because of absence Prophet Muhammad and Caliph Umar. He Polonius: of good experts. writes regularly for several international Neither a borrower nor a publications and was Visiting Fellow at the University of lender be, In Conclusion Manchester. He is also a recipient of the UNESCO World For loan oft loses both itself Modern-day banking has Politics Essay Gold Medal and Rotary International’s and friend, emerged out of the wisdom Vocational Excellence Award.. And borrowing dulls the edge gleaned over the ages and is a www.islamic-banking.com IIBI 25 LSE-HARVARD LECTURE NEWHORIZON Rabi Al Awwal - Shaban 1436

Risk Sharing and Cooperative Finance: A Short Report The eighth annual public lecture on Islamic finance was jointly organised by the Harvard Law School (HLS) and the London School of Economics and Political Science (LSE) on Wednesday, 12th of February, 2014. The aim of the annual lecture series is to expand dialogue and understanding of contemporary issues in Islamic finance. The lecture was chaired by David Kershaw, Professor, Department of Law, LSE. The two speakers were Paul Mills, Senior Economist, International Monetary Fund, London Office and Farmida Bi, Head of Islamic Finance, Norton Rose Fulbright, LLP, London. 1. The first speaker, Paul Mills argued that a debt Mills, who is an economist contract is initially cheaper The subsidies in favour of with a keen interest in than a risk-sharing contract values-based finance, because of reasons such as debt should be removed focused on the dominance lower transactions costs. The of debt and limited risk full costs of debt, however, if not reversed and there sharing in contemporary are realised over time because ought to be a credible threat finance. He said that debt contributes to financial the global financial crisis instability. The costs of that there will be no that started in 2008 is the instability (or negative ‘calamitous failure’ of externalities) are paid by bail-outs. ‘orthodox debt finance.’ others, such as taxpayers and bestowed upon it corporate because for him sukuk While this failure has led creditors in bankruptcy, as tax breaks, individual tax were meant to be a pass- to some reflection, it has experienced in the bail-outs in breaks, favourable capital through structure (like a not led to any fundamental the 2008 global financial crisis. adequacy requirements for mutual fund), which does soul searching. The West In fact, the full cost of debt banks and implicit rescues for not involve a default. In has had a debt-based goes further because instability the ‘too big to fail.’ reality, sukuk have been financial system for about brought about by debt leads structured to behave like 400 years, which has to policies that are prone to Mills was of the view that conventional bonds and this created substantial path accelerating inflation, which the failure of debt-based is why they are subject to dependence and network also serve as a tax on savers. finance has not led to Islamic credit risk. The controversy externalities in favour of He said that debt is subsidised finance being seized upon in 2007-08 regarding the 2 debt. by the authorities who have as the alternative despite the Islamic authenticity of emphasis on risk sharing certain sukuk structures and The controversy in in Islamic finance. He whether they are Shari‘ah- attributed this to the limited compliant, highlighted the 2007-08 regarding the Islamic degree of profit-and-loss lack of standardisation in sharing that occurs in Islamic Islamic finance. Mills said authenticity of certain sukuk finance in practice and a lack that for Islamic finance to of standardisation in the become an alternative to structures and whether they Islamic finance industry. He conventional debt-based referred to the cynicism that finance and grow its appeal are Shari‘ah-compliant, exists among some Western beyond Muslims, it should observers that Islamic finance drop the Islamic label in highlighted the lack of is simply dressing up interest favour of other labels, such standardisation in Islamic in other guises. He said he as ‘risk-sharing’, was puzzled by the idea of ‘co-ownership’, ‘debt- finance. ‘default’ in sukuk (or Islamic freedom’ and ‘relational investment certificate) finance.’ 1Please note that the views expressed by the speakers in this event do not necessarily represent the views of their employers. 2In simple terms, path dependence can be described as the continued use of a product because it was used historically and transition costs are greater than the long- term benefits of a superior arrangement. Network externalities are the effects on a user of others using the same product. The prevalence of the Qwerty keyboard, despite there being more efficient eyk layouts, is an example of both path dependence and network externalities.

26 IIBI www.islamic-banking.com NEWHORIZON January – June 2015 LSE-HARVARD LECTURE

Regarding how to make risk Member-owned mutuals have focused more on the Islamic sharing more acceptable to certain advantages over listed finance industry and drew policymakers, Mills suggested shareholder-owned entities, parallels between Islamic emphasising the full costs of for instance, mutuals do not banks and mutuals. She said debt finance. He said that have to deal with the whims the Islamic finance industry economists and their macro- of the financial markets. is facing an ‘identity crisis.’ economic models tend not Mutuals, however, are not There is an ongoing anxiety to take into account financial without their challenges, about whether the industry is systems and non-linear such as seen in the scandal putting form over substance behaviour of debt where recently hitting the UK’s Co- and whether or not it is staying there is suddenly a default op Bank. Some countries, true to its original principles. after a period of stability. such as Spain, are effectively The questions being raised

The subsidies in favour of excluding mutuals as they are that, if the Islamic finance Farmida Bi debt should be removed if see mutuals as exacerbating industry does not charge not reversed and there ought the crisis by lending for interest but charges something Islamic finance industry to be a credible threat that non-commercial reasons and that is like interest, is the is using the Islamic label there will be no bail-outs. He reducing bank profitability industry needed and does it but whether it is actually said that the payment system elsewhere. Mutuals have have a long term future. following Islamic principles. should be separated from a role to play, but they are Farmida said that the banking system. Letting ‘not a silver bullet’, as, like Farmida pointed out that one Islamic banks do not the banks run the payment commercial banks, they of the earliest experiments in operate according to system is similar to letting succumb to many of the Islamic finance was inspired the ‘original dream’ of a hedge fund run a utility. same temptations as banks in by European mutuals. Mutual a two-tier investment Due to the very nature of its a debt-based system. finance in Germany can be agency (mudaraba), where operations, a utility cannot traced to 1852 whereas the individuals were supposed to be allowed to fail, and to save Mills was candid in sharing first experiment in Islamic invest in an Islamic bank on the utility, the hedge fund his disappointment with banking, -- Mit Ghamr Savings a risk-sharing basis; the bank would have to be rescued. the Church over debt-based Bank in Egypt – came into was then supposed to invest Mills argued in favour of financing. He believed that being in 1963, after about 111 in businesses on a risk- mechanisms that facilitate Biblical teachings are for years, and its founder Ahmad sharing basis. A challenge debt-equity swaps and enable freedom from debt and the El Najjar was influenced with risk-sharing financing the passing of losses to ‘Church went the wrong way’ by German mutuals. Both is whether people actually creditors. Instead of debt- when it accepted interest- Islamic and mutual banks have want to put their principal based home financing, there based debt financing. He emerged largely unscathed at risk, moving away from should be more lease-to-buy pointed out that Biblical from the global financial a fixed contractual return. arrangements, which can teachings relating to debt crisis, but Islamic banks are Where Islamic finance has then be securitised to enable are more stringent than compared to conventional offered profit-and-loss participation by long-term Qur‘anic teaching on debt. banks rather than mutuals. sharing arrangements, the investors, such as insurance He argued debt freedom and take-up is not known to be companies and pension funds. risk sharing are ‘common She disagreed with Paul Mills high. It remains unclear ground’ between Christianity who had suggested that the if people hate debt-based Commenting on the role and Islam. Mills anticipates Islamic finance industry finance as much as the of mutuals, Mills said that that ‘without a move to true should drop the Islamic label. media would have us believe all major building societies risk sharing’, we face ‘several She said that many Muslims and what alternative, if any, that demutualised in the decades of debt burdens still are underbanked and in some do people want. UK to become banks failed to bear.’ countries such as Indonesia during the 2008 financial these unbanked Muslims are Farmida was of the view crisis, such as Abbey Speaking next, Farmida Bi, a more likely to deal with a bank that the appetite for National, Northern Rock, practicing lawyer with hands- that uses the Islamic label. risk by Islamic financial Alliance & Leicester, on experience of structuring The challenge, according institutions as well as and Bradford & Bingley. Islamic finance transactions, to Farmida, is not that the mutuals has been lower www.islamic-banking.com IIBI 27 QUALIFICATIONS & TRAINING, MEMBERSHIP, PUBLICATIONS

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“IIBI has played a major role in Islamic finance in London through its lectures, seminars and courses. Its diplomas are internationally recognised, and have been taken by hundreds of Muslims and non- Muslims interested in Islamic finance.” Professor (retired) Rodney Wilson, School of Government and International Affairs Member of the Durham Centre for Islamic Economics and Finance Durham University, Durham, United Kingdom

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“Help ye one another in righteousness and piety...” [5:2 The Holy Qur’an] The need for Islamic Finance Education The Pioneering Role of IIBI Our Aim There would have been no career in Islamic To motivate, educate and develop people to Finance for me and for many of my friends achieve their personal and professional goals without the Institute of Islamic Banking and through distance education, practical training, Insurance. The organisation provided the only membership, research and publications. source for education and response to the need The goal of the IIBI is to empower individuals across Europe. So it feels that none of the new with knowledge and understanding the or developmental programmes of education processes that enable them to conduct their would have occurred and would have never dealings based on the universal principles of been able to meet the need without the Institute Adl (justice), Niyyah (intention that translate in place. into good actions), Ikhlaas (purity, morality), Richard Thomas, OBE, Chief Executive Gatehouse Bank, London, United Kingdom. 2011 Ihsan (perfection, excellence), and avoiding Haram (actions and activities that are morally reprehensible).

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“The IIBI comes to mind as the original thought leadership platform from which many of the products, services and ideas have come to the Islamic Finance Industry.” Iqbal Khan, Fajr Capital, UAE/UK, Former CEO & Founder, HSBC Amanah. 2009

“The IIBI is an organisation with which the CISI has been working for several years. I can confirm that the IIBI plays an important role in the promotion of UK Islamic finance education and IIBI is an active member of the Education and Training working group of the UKIslamic Finance Secretariat (UKIFS) which is part of CityUK.” Ruth Martin, Managing Director, Chartered Institute for Securities & Investment (CISI) UK. 2013

“Many of the practitioners in Islamic finance and related support disciplines have benefited from an association with the IIBI. With its dedicated work over the decades, the IIBI has become the first port of call for anybody exploring Islamic finance in the UK and worldwide. “ Mohamed Iqbal Asaria, CBE Visiting Faculty, CASS Business School, Teaching Fellow Aston Business School, Visiting Faculty, Bangor Business School, UK. 2013

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than that of conventional at the heart of the ideas financial institutions. The underlying Islamic finance. Islamic financial institutions Islamic prohibitions of riba (unearned gain, usury) Farmida argued that a need to decide if their and gharar (excessive model for an Islamic purpose is to merely earn uncertainty, trading in risk) financial institution is the have helped keep the Islamic UK retailer John Lewis. It profits for shareholders or finance industry away from is a partnership owned by the use of leverage and its employees and it lives are they there to serve the speculative instruments its values, such as every such as collateralised debt employee working in a community. obligations and credit default busy period like Christmas, a debt-based system towards line with the treatment of swaps. This has helped save treating customers well greater risk sharing, Mills equity. Elaborating upon the Islamic finance industry or limiting the difference said that even though we sukuk structures, Farmida from the worst of the global between the pay of senior have a culture of debt that Bi explained that most financial crisis, although management and shop- is but servitude, the interests sukuk are asset based and it has suffered from its floor workers. She said a of politicians in winning therefore similar to fixed excessive exposure to the real way forward for Islamic elections and lobbying by income instruments, their estate bubble. financial institutions is to special interest groups in return does not depend become more like mutuals favour of the status quo on the performance of Talking about the ethics of in their legal structure. They make progress difficult. He the underlying asset but Islamic finance, Farmida should go beyond the usual also suggested removing is tied to an interest-rate said European mutuals exclusionary screening of the tax advantages from benchmark, which remains had similar objectives ‘sin’ businesses and consider debt and bringing it into controversial. regarding socio-economic the kind of projects they will justice as early Islamic be financing with respect financial institutions. to social and environmental This report was Pursuit of socio-economic impact. She emphasised the authored by Professor justice throughout the identity crisis facing Islamic Nazim Ali, who is now chain means taking into finance and questioned what Professor and Director, account the interests of is going to be its unique Centre for Islamic not just shareholders but selling proposition compared Economics and Finance, stakeholders that include to conventional finance and Qatar Faculty of Islamic customers and employees. conventional ethical finance Studies, Hamad Bin Islamic financial institutions offered by mutuals. Farmida Khalifa University. He need to decide if their believes that this unique was the Director of purpose is to merely earn selling proposition will be a the Islamic Finance profits for shareholders or key determinant of whether Project (IFP) at Harvard are they there to serve the or not the two billion global Law School, Harvard community. She referred to Muslim populations by 2030 University from 1995 until 2014. For the last thirty discussions among Shari‘ah will chose to invest in Islamic years, he has focused his research efforts exclusively scholars on the need to take finance or simply look for on the field of Islamic finance. He has played a lead into account the impact on the best deal in the market role in organising several conferences, workshops and society and the environment regardless of who is offering symposia, including the Harvard University Forum in a religious ruling (fatwa) it. on Islamic Finance and the annual workshop at the concerning Islamic finance. The presentations by Paul London School of Economics. He also led the effort This holistic view, going Mills and Farmida Bi were that resulted in the publication of the world’s first behind shareholders and followed by an active academic software database covering the Islamic details of legal contracts, question and answer session. finance sector, the IFP DataBank http://www. is needed to bring socio- Answering a question ifpprogram.com/ economic justice, which is regarding moving away from

30 IIBI www.islamic-banking.com NEWHORIZON January – June 2015 COUNTRY FOCUS

Turkey Revisited Background laws were extended to the action plan issued at the Participation Bank At the beginning of 2013, participation banks. end of 2013. The Centre is Growth NewHorizon produced a not only designed to foster So how well are Turkey’s Country Focus article on In 2009 participation banking the growth of interest-free participation banks doing? Islamic banking in Turkey. began to emerge from the finance in Turkey, but also Participation banks are It reviewed the birth of the shadows and the Islamic to try to develop Istanbul as certainly growing faster modern Turkish state under finance industry in Turkey a major financial centre to than conventional banks in Mustafa Kemal Atatűrk with began work to establish Turkey rival London, Tokyo, New Turkey. Figures vary slightly its secular, Western-facing as a regional centre of Islamic York and Frankfurt. depending on the source, but character and strong state finance. generally they all agree that control over its economy. The Centre will become deposit growth is somewhere By the 1980s, however, A Turkish Action Plan a centre of excellence around 25% year on year the country had become At the end of 2013 the facilitating the sharing for participation banks, disillusioned with the centrist Banking Regulation and of data and providing which is double the growth approach and its failure to Supervision Agency (BDDK) technical assistance and for conventional banks. deliver strong economic in cooperation with the PBAT consultancy. At the opening (Turkey’s Participation Banks performance. It was at this published an action plan to of the Centre, Dr Jim Association put the growth time that interest-free financial bring participation banking Yong Kim, Head of the in 2013 at 27.9%.) It must, institutions were allowed to set into the mainstream. These World Bank said, ‘This however, be remembered up and the first Islamic banks actions were basically designed centre is a major symbol that currently participation (or participation banks as they to establish a clear regulatory of our common aim to banks only account for are called in Turkey) began framework, which would set develop Islamic finance on 5% of the total banking to emerge, although they out the aims of interest-free a global basis. Turkey will sector. This effectively operated in very restricted finance, along with setting provide a contribution to means that growth per $100 circumstances, being outside standards appropriate to the the neighbouring countries in actual terms was $1.25 the regulatory framework Turkish market; establishing and even to the world with for participation banks and of the central bank, with advisory bodies and clear lines these developments. The nearly $12 for conventional no central bank guarantee of communication between Centre, which will provide banks. The sector has a long of customer deposits and the industry and the religious global access, was shaped by way to go to achieve critical prevented from investing in authorities; promoting greater the cooperation between the mass. government securities. understanding of interest- World Bank and the Turkish free finance among Turks Government, the Turkish Increasing the In 2001, following a major in general; encouraging public and the private Number of economic crisis, which saw educational institutions to sector. The recent rapid Participation Banks 20 banks fail, including develop courses in Islamic growth and globalisation The Turkish government, one participation bank, the economics and finance and of Islamic finance have however, seems determined situation began to change. setting up a research centre for increased the total value of to boost interest-free finance Participation banks were interest-free finance. Islamic financial assets to to both strengthen ties with brought under the regulatory US$1.5 trillion worldwide. oil-rich Gulf economies control of the central Global Islamic While many countries, led and to diversify its investor bank through compulsory Finance Development by Bahrain, Saudi Arabia, base. (The importance membership of the Union Centre Kuwait and Malaysia, of diversification was of Private Finance Houses, One of the signal successes already have a large-scale underscored when the US which eventually evolved for Islamic finance in Turkey Islamic finance sector. Federal Reserve announced into the Participation Banks has been the opening of the Some other countries like that it was scaling back Association of Turkey World Bank’s Global Islamic Luxembourg and the UK its economic stimulus (PBAT). In 2006 deposit Finance Development Centre, have taken important steps programme and when guarantees and protection which also fulfils one of the to develop these financial the improvements in US under the bankruptcy BDDK’s objectives in the instruments.’ economic conditions began www.islamic-banking.com IIBI 31 COUNTRY FOCUS NEWHORIZON Rabi Al Awwal - Shaban 1436

to divert investor attention commentator said that Islamic Development Bank to TL 28 billion), profit has been away from emerging markets.) the bank would have 20 fund the new subsidiary. There steadily declining from TL branches and 400 employees were no further details about 301 million in 2009 to TL 180 The government target is by the end of 2015 growing the size of the operation or million in 2013 ( the decline for Islamic banking assets to to 170 branches and potential opening date, but it was 5% between 2012 and reach 15% of total banking 2,200 employees in 2018. seems likely that by the early 2013). assets by 2023. One way (Initially, Ziraat sought to months of 2016 Turkey will to help achieve that goal is get into the market through have almost double the number In 2014 the wheels fell off. In to increase the number of the acquisition of Bank of participation banks it has the nine months to the end participation banks active in Asya, which is the largest currently. of September 2014 the bank the market, which has been of the existing participation had notched up losses of stuck stubbornly at four for banks in terms of assets, Kuwait Finance House TL 301 million; there was a some years - Albaraka, Bank but it is the only one with (KFH) has also announced significant outflow of deposits Asya, Kuyveyt Türk and no dominant shareholders. their intention of setting up from the bank, mainly due Türkiye Finans. (Hopefully, No shareholder has a stake a bank in Turkey, aiming to to the flight of government- new entrants would not just greater than 10% and be the largest Islamic banking linked depositors and assets spread existing business a nearly 54% of shares are operation in the country had fallen by around 25%. little more thinly.) publicly held. Negotiations, with 500 branches. This The bank closed 80 branches however, broke down and to announcement and shed 1,708 jobs. (At the By mid 2013 the Turkish understand why this might followed KFH’s decision to beginning of 2015, Bank government was talking about have happened readers review their operations in Asya also sold its 40% stake state owned banks offering should go to the section in Malaysia, potentially looking to in Tamweel Africa Holdings Islamic services, although this article on Bank Asya.) sell their operations there. to the Islamic Corporation this would have to be done for the Development of through separate subsidiaries, At the end of 2014 a second Established the Private Sector for $37.7 as Turkish law does not of the state-owned banks, Participation Banks million.) permit window operations. Halkbank applied to set up Asya Bank They specifically mentioned an Islamic banking affiliate. Asya , the largest of the In June 2011 Banka Asya Ziraat Bank, Halkbank and Halkbank expect to raise the Turkish participation banks, is apparently employed Goldman Vakifbank. capital for the new affiliate seen as home grown and it was Sachs to try and find a buyer through a rights issue and certainly set up in 1996 through for the bank. Talks with Qatar In late 2014 BSRA approved are also aiming to open for the offices of a consortium of Islamic Bank (QIB) broke an application from state- business in 2015. Their local businessmen, but only down in early August amid owned Ziraat Bankasi to set aim is to have 150 branches 14.5% of its shareholders rumours that the state-owned up a participation bank with operating throughout are identified as domestic, Ziraat Bank was interested in capital of $300 million and Turkey. (In December with 85% being unspecified acquiring Bank Asya. These in May 2015 Ziraat opened 2013 the CEO of Halkbank according to the BDDK, rumours were denied by its first Islamic branch in was one of those detained Turkey’s Banking Regulation government officials a few Istanbul. A government as part of a fairly wide- and Supervision Agency. Asya days later, so effectively leaving went public in 2006, when Ziraat Bank HQ ranging enquiry into Bank Asya high and dry. corruption at the highest it floated 23% of its shares. (There have been suggestions levels of government and Currently 53.47% of their that the Turkish government commerce.) shares are publicly held. By deliberately sabotaged the the end of 2013 it had 280 potential deal with QIB.) Vakifbank have also begun domestic branches and one to take steps towards abroad. Bank Asya’s shares were opening an Islamic suspended on the Turkish subsidiary. The bank’s Although its total assets have stock exchange for a month board granted approval at grown steadily year on year, in the late summer and when the end of 2014 for the with a 33% increase between trading resumed their shares raising of a $300 million 2012 and 2013 (from 21 fell 11.3% on the first day of loan guaranteed by the billion Turkish Lira (TL) to trading. The problems seem

32 IIBI www.islamic-banking.com This photo was missing got from web please resend please web from got missing was photo This NEWHORIZON January – June 2015 COUNTRY FOCUS

to be related to a rather ugly beleaguered Bank Asya’s Asya is now severely, if not Another landmark battle between Bank Asya capital. The Capital Markets mortally wounded. development has been a and the Turkish government. Board, however, have not partnership agreement with The bank was founded yet approved the capital Albaraka Turk Bank participation bank, Kuveyt by supporters of the now increase and are reported Albaraka Turk bank, the Türk, to launch private US-based Islamic scholar, to have made the following oldest of the participation pension schemes, through Fethullah Gülen, who has statement, ‘The Board will banks, was established a new company, Katilim been implicated in a ‘plot’ to decide on Bank Asya’s capital in 1984 and opened for Emeklilik ve Hayat. investigate former cabinet increase. The financial business in 1985. It is 66% ministers and officials for conditions of companies foreign owned. The majority Turkiye Finans corruption, including two that will participate in the shareholder of Albaraka Turkiye Finans came into of President Erdoğan’s sons. capital increase will also Turk is the Bahrain based being at the end of 2005 Reports in the Turkish media be investigated. We will Albaraka Group (54.06%) with the merger of two suggested that President also examine whether the with minority shareholdings organisations – Family Finans Erdoğan and his government partners are financially held by the Islamic and Andolu Finans. Early in were deliberately trying to capable of granting Development Bank (7.84%) 2008 60% of Turkiye Finans sink the bank, stating that the amounts they have and the Alharthy Family shares were acquired by the it does not have a sound undertaken to deposit.’ (3.45%). Domestic Turkish National Commercial Bank structure. In the past year he shareholders make up just (NCB) of Saudi Arabia. (This has variously described the In February 2015 Turkey’s less than 11% of the total. holding by NCB has since bank as ‘bust’, ‘bankrupt’ and banking watchdog, the Just over 23% of the shares grown to 66.27%.) Turkiye ‘failed’. Some legal experts BDDK, took management are publically traded on the Finans serves an estimated in Turkey suggest that this control of the bank and in Istanbul Stock Exchange 1 million customers through constitutes a crime under May 2015 Turkish authorities following an Initial Public 259 branches. The bank is Turkish law. took full control. Turkey’s Offering (IPO) in 2007. the most profitable of the Savings Deposit Insurance participation banks. Such a situation is unlikely to Fund (TMSF), which is The bank had total assets have a positive effect on the responsible for dealing of TL 17.2, a 40% increase The bank is very active in the confidence of international with troubled banks, is now over 2012. Profits rose to TL sukuk market, but in 2014 investors, which Turkey needs responsible for the running 241.41 million, an increase of they broke new ground by to woo if it is to kick start of Bank Asya. Turkey’s around 25%. In the first nine being the first Turkish bank its stagnating economy. It is Official Gazette subsequently months of 2014, it looked as to issue a Malaysian ringgit- suggested that this stagnation announced that the bank though the bank was on track denominated sukuk in the is not so much due to global would be sold in its entirety for another good year with Malaysian capital market. economic trends, but to or in parts. Shareholders profits up 21% on the same Turkey’s failure to implement of the bank are expected to period in 2013. Assets were In late 2014 the bank structural improvements. mount a legal challenge to up 25%. The number of announced its intention In particular it has been the seizure. braches had increased to 187 of setting up to establish suggested the autonomy of by late 2014 from 166 at the operations in Bahrain. No the Central Bank of Turkey This situation has all end of 2013. details were available at the and the Banking Regulation the characteristics of time of going to press as to and Supervision Agency the gunfight at the OK Although it is the oldest of when this might happen or (BDDK) has to some extent Corral, where most of the the four participation banks what type of licence the bank been compromised since protagonists were killed or it is also the smallest in terms are seeking. 2007. This is really bad news severely wounded. Only of assets, loans and deposits. for a country seeking inward Wyatt Earp walked away The bank has been raising At the end of June 2015 the investment. unharmed and it is anybody’s money to fund expansion and bank’s CEO, Derya Gurerk, guess whether the Wyatt diversify its funding sources resigned unexpectedly and In early January financiers Earp role will be played by through syndicated murabaha without explanation, although connected with the Gülen Fethullah Gülen or President facilities. It has raised funds internet chatter suggests Movement stumped up TL Erdoğan. One thing is in this way in every year since that there are allegations of 92 million to increase the absolutely certain Bank 2010. corruption involving the www.islamic-banking.com IIBI 33 COUNTRY FOCUS NEWHORIZON Rabi Al Awwal - Shaban 1436

purchase of a site for a new through its wholesale with GDP falling back to growth may, however, be headquarters building. He banking branch in Bahrain, $615 billion. Much of Turkey’s political situation. had been in post since 2011. its subsidiary incorporated the recovery since 2009, In parliamentary elections Osman Celik, an executive in the DIFC in Dubai, its however, has been reliant on in June 2015 President vice president of the bank financial services branch foreign investment, which Erdogan’s AKP failed to will take over as CEO in Mannheim, Germany is notoriously fickle. In gain an overall majority temporarily. and most recently its first particular a probable US following 12 years in power. fully-fledged Islamic bank interest rate rise in 2015, as Forming a coalition has Kuyvet Türk operation in Frankfurt, well as a reduction in the US proved impossible, with the The major shareholders in Germany designed to serve Federal Reserve’s bond buying nationalists, Kurds and the Kuyvet Türk are Kuwait the 4 million Turks living and programme, are having an Republican People’s Party Finance House with 62% working in Germany. effect. This is likely to result (CHP) refusing to enter of the bank’s shares, in less investment flowing coalition with AKP. In mid the General Directorate Economic into emerging economies August attempts to form Foundation of Turkey with Background such as Turkey. Coupled a coalition were formally 19%, The Public Institution As we observed in our 2013 with continuing economic abandoned. President for Social Security with 9% article, Islamic banking does weakness in Eurozone Erdogan could ask the next and the Islamic Development not exist in a vacuum; the countries, Turkey’s biggest largest party, the CHP, to try Bank with 9%. It had 269 economic, political and legal trading partners, sustaining to form a government, but a branches at the end of 2013. and regulatory environments growth in Turkey is looking snap election seems to be the in which it operates affect progressively difficult. The most likely outcome of the Assets rose 37% between its growth. Since the World Bank is forecasting stalemate. There is, however, 2012 and 2013 to TL millennium Turkey has GDP growth of just over 3% no clear evidence that the 25.9 billion and profits experienced two significant for 2014 and only modest election result would be very were up 20% to TL 300 economic crises. In 2001 growth in the short to different. This has inevitably million. It also has the the problems were largely medium term. had a negative effect on the highest proportion of domestic weak regulation, Turkish economy with the foreign deposits among the the accumulation of bad The government has also Turkish currency hitting participation banks at 48%. debts and a loan book that failed to bring down the record lows and there is no It is, in some respects, the was heavily skewed to the unemployment rate. In sign that the situation will most conservative of the public sector. In February the third quarter of 2014 improve in the foreseeable participation banks, being 2001 the Turkish lira became unemployment was running future. considered to be the most a free floating currency and at 10.7%, the highest rate risk averse with a Capital fell 40% in three days leading for four years and youth At the micro level the Adequacy Ratio that is to rampant inflation and a unemployment was 20%. situation at Bank Asya, where correspondingly high. liquidity crisis. More than the Turkish government 20 banks failed in this crisis, Turkey’s government point appear to have been involved The bank was the first of the including one participation to their success in reducing in a deliberate attempt to participation banks to issue bank, Ihlas Finans. The the current account trade bring the bank down, is sukuk, tapping the market actions taken in the wake deficit, but, this is not due to just the tip of the iceberg. in 2010 shortly after the of this crisis had a dramatic booming exports, which are There is now an all-out war framework to support sukuk effect and World Bank data actually falling; it is due to between the government issuance became law in 2010. on Turkish Gross Domestic even faster falling imports. and Gülen’s Hizmet They have continued to be Product (GDP) shows GDP The falling oil prices in later movement, which can only active in the sukuk market rising from $196 billion in 2014 and early 2015 have damage Turkey’s economy and are currently planning to the trough of the 2001 crisis been a positive factor for including its financial sector issue a ringgit-denominated to $647 billion in 2008. Turkey, which is heavily and particularly the nascent sukuk in Malaysia. dependent on imported oil. Islamic finance industry. The The second crisis was a state of affairs is now so bad Kuveyt Türk provides related to the 2008 global Political Background that some commentators are banking services to financial situation, which The biggest threat to even suggesting that Turkey international customers caused a blip in the growth economic stability and is not that far from being a

34 IIBI www.islamic-banking.com NEWHORIZON January – June 2015 COUNTRY FOCUS

failed state. While all this reason to be optimistic therefore have to be its membership of NATO internal turmoil is going on, about Turkey’s future as a cautious about the future and east as it attempts to Turkey is also dealing with major financial centre in the of Islamic finance, indeed strengthen its ties with the political instability in the region. Since the beginning the whole financial Arab neighbours. If it Middle East, particularly the of 2013 a number of things industry, in Turkey. can successfully balance threat of IS on its doorstep. have changed – the political these two aspects of its stability of the whole region Turkey has been viewed personality, in the long term The Future for has worsened appreciably; as the bridge between Turkey could become a very Islamic Finance in the results of recent elections Europe and Asia since important financial centre Turkey leading to a hung parliament antiquity. The Romans for the Middle East and the The present government and no effective government even called the region, Gulf with local strength has taken important steps is a serious problem; the Pontica Asiana, the Asian in both conventional and to make Turkey a friendlier stand-off between the bridge. That is both Islamic finance, but only environment for Islamic Turkish government Gülen’s Turkey’s strength and its if there is a resolution to finance and it is reasonable Hizmet movement has not weakness. Today, Turkey is Turkey’s internal and regional to assume that, providing yet run its course and has facing west with its pursuit political and economic there is no disruptive the potential to destabilise of EU membership and problems. change in government, a big Turkey; the economic assumption in the present weakness situation, they will continue within the along this path, particularly Eurozone, encouraged by the success of exacerbated the country’s first sovereign by the Greek sukuk. The threats to further situation, progress are, however, both shows little external and internal. Stable sign of political and economic improvement environments are essential (we have for banks, conventional and yet to see Islamic, to flourish. Any hint whether the of instability will affect both quantitative domestic and international easing confidence in the system. measures For example, in 2012/2013 announced it had been rumoured that by the a number of Gulf financial European institutions were expressing Central Bank strong interest in setting in January up operations in Turkey. 2015 will Two years later nothing has make any materialised. difference) and with oil The problem for Turkey revenues is that some of the factors dipping affecting stability are beyond dramatically their direct control, for the example, a return to solid investment economic growth in Europe, appetite of Turkey’s major trading Gulf states partner and political unrest is likely to be in the region. Two years depressed. ago we felt there was every We would, Blue Mosque, Istanbul www.islamic-banking.com IIBI 35 LEGAL MATTERS NEWHORIZON Rabi Al Awwal - Shaban 1436

Proposal for the Dubai World Islamic Finance Arbitration Tribunal (DWIFAC) and Jurisprudence Office (DWIFACJO) as the Dispute Resolution Mechanism and Centre for the Islamic Finance Industry By: Camille Paldi, CEO, FAAIF Limited and Events DMCC Managing Director, ilovetheuae.com Introduction Engineers (FIDIC) built- in dispute resolution, a confidence in and across As the Islamic finance designating the Dubai World uniform Islamic banking law, the Islamic finance industry. industry is growing annually Islamic Finance Arbitration an arbitration centre, and a The DWIFAC standardised at a rate of 10% to 15% per Centre (DWIFAC) as the centralised Shari’ah authority dispute resolution contract year, it is imperative that a arbitration centre. If the in the form of the Supreme contains a built-in dispute unique, independent legal contractual dispute resolution Shari’ah Council. resolution mechanism, framework is established procedure is exhausted, then facilitating early dispute in order to effectively the dispute may be referred to It is clear that state courts settlement and completion adjudicate Islamic finance DWIFAC, which may utilise in common and civil law of contracts. This contract disputes. Currently, Islamic the Model Islamic Banking jurisdictions are inadequate may be attached to all Islamic finance disputes are being Law created by DWIFACJO to adjudicate Islamic finance finance contracts industry- adjudicated in inadequate civil as the substantive law of the disputes due to the lack of wide, making DWIFAC the and common law courts and arbitration, the procedural recognition of Shari’ah law, central dispute resolution arbitration centres where the law of the seat of the lack of independent Shari’ah authority for the industry. contracts in dispute are being arbitration and the DWIFAC advisory committees and/ transformed from Islamic to arbitration rules, which or the inability of court staff DWIFACJO Uniform conventional transactions. includes Shari’ah and lex to apply effectively Islamic Banking Law The aim of this paper is mercatoria. The arbitration finance and Shari’ah concepts As it stands now, the UAE to explore the role of the centre may be staffed with in dispute resolution. In does not have an Islamic Dubai World Islamic Finance the world’s top Shari’ah addition, the currently Banking law, however, it has Arbitration Centre (DWIFAC) scholars and Islamic finance existing arbitration centres a law allowing Islamic Banks and its jurisprudence office lawyers, judges and experts are insufficient to handle to exist, UAE Federal Law (DWIFACJO) as the dispute who can provide input about Islamic finance matters due No. 6 of 1985 Regarding Islamic resolution centre of the the Shari’ah aspects of the to lack of properly trained Banks, Financial Institutions Islamic finance industry, dispute through the use of staff, inadequate procedure and Investment Companies. fitting in with the recent 2013 an Islamic form of ex aqueo et and rules, misapplication and There had previously been a Sheikh Mohammad ‘Dubai bono, which allows disputes to non-application of Shari’ah proposed law for governing as the Capital of the Islamic be settled using commercial and preference for national Islamic banks in 1985, but Economy’ initiative. practice rather than purely law, legal uncertainty and lack it had not been backed up legal devices. of popularity as a mode of by a decree and therefore, Islamic finance contracts dispute resolution. DWIFAC that is why the law is not in should include an additional DWIFAC and may offer the Islamic existence now. However, standardised dispute DWIFACJO finance industry a globally Federal Law No. 6 of 1985 resolution contract issued DWIFAC along with the recognised arbitration centre was promulgated to legalise by Dubai World Islamic DWIFAC Jurisprudence complete with the DWIFAC Islamic banking in the UAE. Finance Arbitration Centre Office shall be the central jurisprudence office, which Article 5 provides that a Jurisprudence Office command station for Islamic may issue a uniform Islamic Supreme Shari’ah Council (DWIFACJO) with a built-in finance dispute resolution banking law and a standardised should be established and dispute resolution procedure in the UAE, GCC, and DWIFAC dispute resolution approved through a cabinet similar to the International the world, providing a contract, creating harmony, decision, but it never Federation of Consulting standardised contract with legal certainty and investor materialised. The Supreme

36 IIBI www.islamic-banking.com NEWHORIZON January – June 2015 LEGAL MATTERS

Shari’ah Council would UAE, which may be utilised to override the relevant thirty with such amendments as oversee Islamic banks, by all existing UAE dispute day limit and if it so decides, agreed between them. The financial institutions and resolution bodies, including it shall advise both parties composition of the DAB investment companies and the Central Bank of the UAE, accordingly. shall be by nomination its opinion would be binding. the Dubai Courts and the and then joint-selection. However, Article 6 was DIFC/DFSA, which lacks The DAB shall have 60 days DAB members are to be implemented, which requires such a board. The Supreme to issue a binding ruling, remunerated jointly by the that each Islamic firm Shari’ah Council may fulfil its which must be implemented parties with each paying half establish its own Shari’ah original purpose of approving immediately. If either party of any fees. DAB members Supervisory Authority the Shari’ah boards of all is not satisfied with the DAB may only be replaced by (SSA) consisting of three Islamic financial institutions ruling, either party can give mutual agreement. The members, to be approved in the UAE, including in the notice of dissatisfaction to the appointment of any member by the Shari’ah Supervisory DIFC. other before the 30 days after may be terminated by Council (ISRA 2013:656) and the day on which that party mutual agreement of both inserted into the articles of The DWIFAC received the decision on or parties, but not by any association (ISRA 2013: 656). Standardised Dispute before the 30 days after the day party acting alone. Unless The SSA is obligated to apply Resolution Contract on which the said period of otherwise agreed by both Shari’ah to the company I propose that DWIFACJO 60 days expired. If there is no parties, the appointment of operations and contracts issue a standardised dispute dissatisfaction within 30 days the DAB shall expire when (Thani, Abdullah, Hasan resolution contract, which after the day on which that the discharge of the matter 2004: 256). may be attached to the main party received the decision, the shall have become effective. contract. The DWIFACJO DAB’s decision shall become Where the parties fail or are DWIFACJO may take the standardised dispute final and binding upon both otherwise unable to agree opportunity to formulate resolution contract may parties. The DAB’s decision upon the appointment, and issue a Uniform Islamic contain a similar built-in may then only be overturned nomination or replacement Banking Law based upon dispute resolution mechanism by settlement or arbitration. of any member of the DAB, the draft of the UAE 1985 as the FIDIC contract then the appointing official Islamic Banking Law, UAE containing three stages The DAB shall consist of three so named in the contract shall Federal Law No. 6 of 1985 including (1) the Dispute people who must be suitably make the appointment. Regarding Islamic Banks, Resolution Board (DAB), qualified in law, Islamic finance Financial Institutions and (2) amicable settlement and and Shari’ah. Each party shall DWIFAC may establish an Investment Companies, the Law (3) final referral to DWIFAC nominate one member for the Ambassadors List similar Regulating Islamic Financial arbitration. Within thirty approval of the other party. to the FIDIC President’s Business DIFC Law No. 13 of days of the occurrence of the The parties shall consult both List, from which arbitrators 2004 and AAOIFI (Accounting subject-matter of a dispute, these members and shall agree and DAB members may be and Auditing Organisation for any party to the contract may upon the third member, who selected, if not specified in Islamic Financial Institutions) submit a claim to the DAB, shall be appointed to act as the contract. Persons who standards. The new law addressed to the chairman chairman. However, if a list of have successfully completed may then be utilised as the of the DAB and with a potential members is included a DWIFAC Adjudication substantive law in DWIFAC copy to all parties to the in the contract, the members Assessment Workshop and arbitrations and submitted contract. However, if any shall be selected from those on International Arbitrator’s to the UAE government for of the parties to the contract the list, other than anyone who Islamic Finance Contracts approval and gazetting as considers that there are is unable or unwilling to accept Course and applied for entry this law would be necessary circumstances, which justify appointment to the DAB. to the DWIFAC Ambassadors for the UAE in order to fulfil the late submission, that List of Approved Dispute its mandate of becoming party may submit the details The agreement between Adjudicators are entered the capital of the Islamic to the DAB for a ruling. If the parties and either a sole on the List for five years. economy. In addition, the DAB considers that it, in member (adjudicator) or each Successful attendees at an DWIFAC may establish a all the circumstances, is fair of the three members shall Adjudication Assessment central Shari’ah Supervisory and reasonable that the late incorporate by reference Workshop are required to Authority or Supreme submission be accepted, the the General Conditions as be fluent in English and to Shari’ah Council for the DAB shall have the authority written by DWIFACJO, be thoroughly familiar with www.islamic-banking.com IIBI 37 LEGAL MATTERS NEWHORIZON Rabi Al Awwal - Shaban 1436

Islamic finance, law and evidence in the arbitration. Shari’ah Supreme Council mandated in the DFSA rules Shari’ah. Arbitration may be commenced established by DWIFAC shall (DFSA: 2011) and the DFSA prior to or after completion of act as the highest Shari’ah currently requires the use of There may be situations the contract. The obligations authority for DWIFAC AAOIFI standards for Islamic where a party fails to comply of the Parties and the DAB arbitration, the UAE and the financial business (DFSA: with a DAB decision. In shall not be altered by reason of DIFC. 2011). In addition, the DFSA such cases, the other party any arbitration being conducted utilises the IFSB standards may refer the failure to during the progress of the DWIFAC in determining its capital DWIFAC arbitration. Where contract. Relationships Courts adequacy regulations and notice of dissatisfaction and Tribunals there are also special rules for has been given, both parties The arbitration shall be A special component of Islamic funds and for sukuk shall attempt to settle the conducted in the English the DWIFAC dispute (DFSA: 2010). dispute amicably before language and any arbitral resolution mechanism is the the commencement of decision shall be final and special relationship between The DIFC has been actively arbitration. However, binding. All of the DWIFAC DWIFAC, the Central Bank of promoting Islamic finance unless both parties agree decisions are to be published the UAE, the Dubai Courts, with the Law Regulating Islamic otherwise, arbitration may in English, French and Arabic the DIFC, DIFC-LCIA Financial Business DIFC be commenced on or after and the arbitration itself to be (Dubai International Financial Law No. 13 of 2004, the the fiftieth day after the conducted in English. In the Centre - London Court of establishment of the Islamic day on which notice of event of a conflict of laws, International Arbitration) and Finance Advisory Council dissatisfaction was given. the Shari’ah shall prevail. A DIAC (Dubai International in 2005, the presence of the The attempt to obtain an valid arbitration decision Arbitration Centre). The Islamic International Rating amicable settlement during should lead to a verdict that Central Bank of the UAE Agency (‘IIRA’) from 2006, this prescribed period conforms to the rules of the (CBUAE) was formed in 1980 and an MOU between the of 50 days is a condition Shari’ah (AAOIFI 2004:559). and is primarily responsible DFSA and the Securities precedent to a referral to The Shari’ah and legal basis of for overseeing banks in the Commission of Malaysia arbitration. There is no the arbitration decision shall UAE, except in the DIFC, facilitating cross-border flows given timeframe to refer be mentioned in the decision where the regulatory authority of Islamic Finance between a dispute to arbitration, (AAOIFI 2004:559). is the Dubai Financial Services the DIFC and Malaysia in however it should be without Authority or (DFSA). The 2006. There appears to be undue delay. Once the In the context of DWIFAC, the DFSA is a Shari’ah Systems a substantial amount of arbitration procedure has Centre may make arrangements Regulator, requiring that Islamic finance business been initiated, the arbitration with the Dubai and DIFC any Islamic firm must have being conducted in the DIFC, shall commence according courts for enforceability of a Shari’ah Supervisory under the regulation of the to the DWIFAC arbitration DWIFAC arbitration awards. Board (SSB). The DFSA DFSA, however, the DIFC rules. However, parties to the dispute is unfortunately not itself a lacks an adequate Islamic must realise that the arbitration Shari’ah regulator and has finance dispute resolution The arbitrator(s) shall have award issued by DWIFAC may not constituted its’ own mechanism and centralised full power to open up, review be overturned or enforced in Shari’ah Board to oversee Shari’ah authority. and revise any decision of other jurisdictions (International the regimes in Islamic firms the DAB relevant to the Bechtel Co. Ltd. v. Department (DFSA: 2010). Under the DWIFAC, which shall be dispute. Neither party shall of Civil Aviation of the Shari’ah Systems Regulator funded by Sheikh Mohammed be limited in the proceedings Government of Dubai300 F. requirements, the firm must bin Rashid Al Maktoum, before the arbitrator(s) to Supp. 2d 112 (DDC. 2004)) have systems and controls to may act as the independent the evidence or arguments or challenged in UAE courts implement the SSB’s rulings central dispute resolution previously put before the based on Article 216 of the and must conduct annual authority and Shari’ah DAB to obtain its decision Civil Procedure Law. Shari’ah Shari’ah reviews and audits regulator connecting all of or to the reasons for Supreme Council decisions shall and produce disclosures based the adjudication apparatus dissatisfaction given in its act as a source of precedent and on AAOIFI standards (DFSA: of Dubai, the UAE, notice of dissatisfaction. shall be binding, thus providing 2010). In general, most of and the DIFC into one Any decision of the DAB legal certainty to Islamic finance the disclosures recommended consolidated framework for shall be admissible in dispute adjudication. The by the IFSB are already the adjudication of Islamic

38 IIBI www.islamic-banking.com NEWHORIZON January – June 2015 LEGAL MATTERS

finance disputes with a Shari’ah and Islamic finance/ Kluwer Law International. pp. 411 – 435. centralised Shari’ah authority law arbitrators. DWIFAC Al-Zuhayli, W. (2007) Financial DIFC Courts. (2009) Protocol of in the form of the Shari’ah may also organise and Transactions in Islamic Enforcement Between the Dubai Supreme Council. The utilise the existing dispute Jurisprudence, Damascus: Dar al Courts and DIFC Courts (2009), decisions of the Shari’ah resolution framework in Fikr. [Online], Available: http:// Supreme Council shall be Dubai, the DIFC and the Azlin, A. (2013) Islamic Financing difccourts.complinet.com/net_ binding and available to the UAE, consolidating the and the Relevant Laws of the file_store/new_rulebooks/d/i/ UAE, Al-Tamimi and Company public for review, thereby centres into one hierarchical DIFCC_enf_protocol_summary. [Online], Available: http://www. pdf [27 July 2013]. giving certainty to legal system, which includes the tamimi.com/en/magazine/law- DIFC Courts. (2009) Summary decisions and promoting Shari’ah Supreme Council for update/section-7/june-5/islamic- of the 2009 Protocol of confidence amongst the efficient adjudication and financing-and-the-relevant-laws- Enforcement between the investors. The DIFC, Dubai regulation of Islamic finance of-the-uae.html [13 August 2013]. Dubai Courts and DIFC Courts, Courts, Central Bank of disputes. Anthony, G. and Marrone, M.A. [Online], Available: http:// the UAE and the IICRCA (2010) Recent Developments in difccourts.complinet.com/net_ may refer arbitration to Bibliography Arbitration Law in the Middle file_store/new_rulebooks/d/i/ DWIFAC and/or utilise the Agha, O. (2009) ‘Islamic Finance East, [Online], Available: http:// DIFCC_enf_protocol_summary. DWIFAC Ambassador’s List Dispute Resolution’, Islamic www.wwhgd.com/news- pdf [27 July 2013]. and facilities. In addition, Finance News, Leading Lawyers article-71.html [27 July 2013]. De Silva, D. 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(2013) The Jackson ADR FIDIC Red Book (1999) London: the Shari’ah Boards Instead, financial centres, which Handbook, Oxford: Oxford Thomas Telford Publishing. Conference Proceeding,’ The University Press. Foster, N.H.D. (2006) adjudicates disputes using 5th Annual AAOIFI Shari’ah Civil Procedures Law, Federal ‘Encounters Between Legal arbitration incorporating Supervisory Boards Conference Law No. 11 of 1992 as amended Systems: Recent Cases lex mercatoria and Shari’ah, for Islamic Financial Institutions, by Federal Law No. 30 of 2005. Concerning Islamic Commercial the DWIFACJO uniform Manama, Bahrain. Civil Transactions Law Federal Law in Secular Courts’, Amicus banking law, the DWIFAC Al-Tamimi, E. (2004) Practical Law No. 5 of 1985. Curiae, vol. 68, pp. 2-9. arbitration rules and the Guide to Litigation and Colon, J.C. (2011) ‘Choice of Hamid, T.A. and Trakic, M.A. procedural law of Dubai as Arbitration in the United Arab Law and Islamic Finance’, Texas (2012) ‘Enforceability of Islamic well as using highly qualified Emirates, The Netherlands: International Law Journal, vol. 46, Financial Contracts in Secular www.islamic-banking.com IIBI 39 LEGAL MATTERS NEWHORIZON Rabi Al Awwal - Shaban 1436

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Ms. Paldi Riba and the Unresolved and Future Perspectives’, founded the Franco- Issues’, Review of Islamic Conference Proceeding at the American Alliance for Economics, vol. 3, no. 3, pp. International Conference on Islamic Finance and ilovetheuae.com (UAE Laws and 19-27. Islamic Financial Services: Islamic Finance). KLRCA Arbitration Rules, Emerging Opportunities for [Online], Available: http:// Law/Economic Reforms of www.klrca.org.my/scripts/ the Developing Nations, 6-8 view-anchor.asp?cat=29 [15 October 2009, University 40 IIBI www.islamic-banking.com NEWHORIZON January – June 2015 IIBI LECTURES

April 2015 Lecture - Accounting and Reporting Practices for Islamic Banks in UK and Overseas by Mohammed Amin Mr Amin said that he Theoretical has increased or decreased in This has been a genuine would begin his lecture by Implications the intervening three years. sale. If you are reporting looking at the objectives Taking a hypothetical what really happened, the of accounting as set out example, a customer owns a Under IFRS (International customer has received $100 by the IASB (International building, purchased for $20, Financial Reporting Standards) in cash for a building they Accounting Standards many years ago. In January the building stays on the bought for $20 and the tax Board) and AAOIFI 2012 they sell the building to customer’s balance sheet, authorities may well want to (Accounting and Auditing the bank for $100 and enter effectively behaving as though tax that gain. In the absence Organisation for Islamic into a leaseback arrangement there has been no sale. The of special tax law, there is a Financial Institutions) and for $5 per annum for three bank will simply report interest taxable sale of this building. their theoretical implications years and then they are going income of $5 in each of If you did this transaction in and then go on to talk about to buy the building back the three years of the lease, the UK, right now, I suspect some recent developments for $110. That transaction because, as far as the bank is the gain would be taxable. that he felt would improve can be arranged using concerned, this is just another The chart below shows how consistency in accounting conventional accounting loan. The building is simply IFRS and AAOIFI would standards. He said he practices. Alternatively it the security for the loan. The report the transactions. would conclude with some is possible to arrange the customer keeps the building recommendations of his transaction using Shari’ah- on its balance sheet and shows The theoretical conclusions own. compliant contracts. the loan liability to the bank. are that: • IFRS accounting shows The Objectives of The building belongs to the Mr Amin said AAOIFI should the economic effect of Accounting bank during the lease period; show real transactions, but one transactions The IASB set out, quite a proper sale has taken place, thing they have not bothered • Many Islamic finance some time ago, their overall but under both conventional doing is checking this example transactions are conceptual framework. The and Islamic accounting rules, against their own published economically equivalent objectives are to provide the bank has no economic accounting standards. Mr to interest-based financial information, interest in the building. The Amin said he wanted to bring transactions. IFRS measure performance and agreement is that a certain out the principles behind accounts for them help people make economic sum will be paid to the bank AAOIFI’s commitment accordingly decisions. These objectives at the contract’s maturity, to report real transactions • The main goal of are governed by the regardless of whether the showing whether something AAOIFI accounting concepts of substance and market value of the property is Shari’ah compliant or not. standards is to assess economic reality. That is a very clear and focussed set of objectives.

AAOIFI on the other hand has separate types of objectives. Very much in line with the IASB, the key objective is to report an organisation’s financial position, but in a manner that will reveal what is halal and what is haram. The problem is that the twin objectives may conflict. www.islamic-banking.com IIBI 41 IIBI LECTURES NEWHORIZON Rabi Al Awwal - Shaban 1436

whether transactions are accounting standards, even 4. profit equalisation across 31 countries, with no Shari’ah compliant though all banking in Iran is reserves due to more than 10 respondents • Theoretical analysis Islamic by law. significant differences in per country. All of the suggests this should practice respondents were drawn often result in different Mr Amin commented that he from the ‘Top Islamic accounting from IFRS. has been saying for several Mr Amin said that in his Financial Institutions’ list years that AAOIFI is wasting opinion the third area of published by The Banker AAOIFI has conflicting its time. It is producing focus is probably the most in November 2013. The standards – to assess Shari’ah accounting standards for such important. If one bank has respondent organisations had compliance and at the same a small part of the planet that something on its balance to have accounts in English. time to report economic it might as well not bother. sheet and another bank The full report is freely effects. Mr Amin said that he Malaysia, the UK, the UAE, does not, that is a pretty big available on the following would expect these conflicting Saudi Arabia and so on all difference. website: http://www.aossg. goals to lead to problematic account under IFRS. org/docs/Publications/ accounting standards. AAOIFI’s initial reaction AOSSG_Islamic_Finance_ Achieving Greater was that they did not want WG-Paper_Post_6th_ Who Uses Which Consistency to know. From day one Meeting-2_Mar15.pdf Standards How do we get consistency? they were invited to join the The Americans are a law Firstly, the IASB is starting to IASB consultative group and According to the survey the unto themselves. They have take Islamic finance seriously. without any clear explanation reporting framework for the US GAAP, which at one For a long time they ignored as to why, they said no. Some sample institutions was as time used to be the most Islamic finance, but they have 18 months later, in December follows: important accounting standard decided to be helpful, because 2014, common sense • 46% IFRS or IFRS in the world, but, because there has been inconsistency prevailed and they decided to as adopted by the the rest of the world ganged in the way different Islamic join and they are even going jurisdiction up and decided to IFRS, banks account for identical to host the next meeting of • 34% local GAAP America has realised it cannot transactions. This was as the group. Mr Amin said that – 14% without rule the world in terms of a result of there being no he expected that IFRS rules differential accounting. As a result, there detailed application guidance and guidance on accounting requirements is an agreement between in IFRS for Islamic banks; for Islamic financial for Islamic the US Financial Standards banks and their auditors were transactions should lead to transactions and Accounting Board (FASB) and free at times to make up their much greater consistency 20% with differential the International Accounting own minds. across the world. requirements for Standards Board (IASB) Islamic transactions to converge. Most of that The IASB set up a Specific Issues and • 18% AAOIFI convergence will be done by consultative group on Examples • 2% unspecified the Americans, so eventually Shari’ah-compliant The Asian-Oceanian Standard the Americans should be transactions. It commenced Setters Group (AOSSG) is What actually happened accounting under IFRS. work in July 2013 and they based mostly in South-East when accounting for leases? set out four areas on which to Asia and includes countries There were 87 instances AAOIFI accounting standards focus: such as Malaysia. The Group of lessors in ijarah with are used and are compulsory 1. the application of IFRS had been looking seriously at arrangements to transfer for Islamic financial 9’s classification and Islamic finance for some time. ownership of which: institutions in Bahrain, measurement principles In March 2015 they published • 14% recognised IAS 17 Jordan, Lebanon, Oman and 2. the application of the a study called ‘Financial finance lease receivable Sudan. The rest of the world IASB’s proposed lease Reporting by Islamic • 45% recognised IAS ignores AAOIFI accounting standard to ijarah Financial Institutions: A study 39/IFRS 9 financial standards, including countries 3. whether restricted and of financial statements of asset at amortised cost you would expect to use them unrestricted investment Islamic financial institutions’, • 37% recognised such as Saudi Arabia and accounts are to be which is really illuminating. AAOIFI FAS No 8 the UAE. Even Iran does presented on or off The sample consisted of 132 leased asset subject to not bother with AAOIFI balance sheet Islamic financial institutions depreciation.

42 IIBI www.islamic-banking.com NEWHORIZON January – June 2015 IIBI LECTURES

The other big area is banks operating customer • 16% used some other from that process either by customer investment investment accounts. method such as straight charging for specific services accounts. Industry practice line, cash or accruals. or engaging in credit or says that there are two What actually happens in maturity transformation. different kinds of such practice? A lot of banks do Again there is a terrible When you put money into a accounts. There are not even distinguish between lack of consistency. It is to bank you are usually highly unrestricted ones where unrestricted and restricted be hoped that as the IFRS confident of getting that a customer hands over accounts; they do not consultative group start money out of the bank on money to the bank; the distinguish between deposits to produce really detailed the day when the bank has bank does with it whatever that are genuine liabilities and applications, this kind of promised to give it to you. it wants and shares some investment accounts. That inconsistency will become a With credit risk the bank is of the profits with the demonstrates how sloppy thing of the past at least in giving that money to people customer. There are also an enormous amount of the countries that adopt IFRS you would not normally want restricted ones, where the Islamic banking is. Mr Amin standards. It will take longer to supply it to yourself such customer, usually a large expressed the view that it in countries that have some as small businesses, third customer, stipulates what was sad that many of these other standard. parties that you do not know, the bank can do with it, banks probably have ‘’ and customers borrowing which is much closer to accounting firms signing off The situation was very similar money for mortgages. The asset management. The their accounts. with the 111 banks that had bank sits in the middle and issue is how do you classify murabaha transactions. takes that credit risk. With these accounts? Are they Since there is not that kind maturity transformation a liability of the bank; are of disclosure what the study 64 used the effective interest the bank takes your money they part of the bank’s did was to use the language method and promises to give it back equity like a minority that banks actually use; they 11 used proportional to you in seven days’ time, interest, where it is equity will usually describe this as allocation meanwhile they will lend it to as far as outside creditors some kind of mudarabah 12 used a ‘time-apportioned’ somebody for five years. As are concerned, but it is not transaction, so that is what basis long as the bank is good at really true equity, because the study used. They found 24 used other methods juggling that, there is nothing the return is being paid out that 79 of the respondent including straight line, cash wrong with it. to the investor or do you banks had them. Of these and accruals. ignore them completely 79, 50 recorded them as The purpose of accounting and have it off balance financial liabilities; 13 as Mr Amin commented that for the way that banks sheet? While having a bank an intermediary element using a straight-line method operate is to measure liability off balance sheet between liability and equity; was like something out of the economic reality. That leads sounds really perverse, 12 as an intermediary 1800s. to my first recommendation, you have it in the model element off balance sheet; which is that all Islamic bank of asset management. If three as a financial liability Recommendations accounts should be prepared you look at the accounts and off balance sheet and Firstly, how should you think under IFRS, because IFRS of an asset management one off balance sheet. This about the accounting issues is designed with one goal company, you will find was incredibly inconsistent themselves? Before you in mind and one goal only, that the one thing it does accounting. can come up with detailed which is to measure economic not have on its balance recommendations about reality as best you can. You sheet is vast quantities Looking first at ijarah, how how to account, you need a can argue about individual of investments, because did the 87 banks using this conceptual framework. Mr standards, but the goal is to these are held in trust for instrument account for the Amin said that his view, which measure economic reality and the people who put the financing? is very controversial, is that that is the best way of doing money into the funds. In • 61% used the effective Islamic banks are banks. A it. fact the investments are interest method bank is an organisation that often held by third-party • 9% used proportional receives money from one There is, however, a second custodians. It is a case of allocation set of customers; provides leg to this conceptual what is an acceptable model • 14% used a ‘time- finance to another set of framework, because I have in the case of Islamic apportioned’ basis customers and makes money not forgotten that Islamic www.islamic-banking.com IIBI 43 IIBI LECTURES NEWHORIZON Rabi Al Awwal - Shaban 1436

banks are Islamic banks and the people being financed and that really matters. are also dealing with an May 2015 Lecture - From It matters to their Islamic bank, because it is shareholders. There are an Islamic bank. The bank, Halal to Halal and Tayyib people who will own shares therefore, must provide by M Iqbal Asaria in Islamic banks, who additional disclosures beyond will never own shares in a IFRS to demonstrate Shari’ah Introduction innovative solutions. conventional bank, because compliance, but the way Mr Iqbal Asaria began by There is an increase in the they believe it would be to demonstrate Shari’ah observing that there is an issuance of sukuk, which against the laws of God to compliance is not by messing increasingly significant role is trying to replace interest- do so. There are also staff up the primary financial for Islamic finance in Malaysia bearing bonds, but in doing who work in Islamic banks statements. Additional and in many GCC countries. that the balance between and who do not want to information in the notes to Malaysia has set a target for equity and debt has been work in a conventional the accounts to demonstrate Islamic finance to be 25% skewed towards debt, bank. People depositing Shari’ah compliance is highly of its economy in the next particularly because of rating money desirable. three years and it is working agencies, which understand systematically to achieve that. debt-based structures better; they do not understand Mohammed Amin graduated Most of the products that equity structures in terms of in mathematics from Clare we see, however, are reverse rating. There is, therefore, College, Cambridge and obtained engineered from conventional a tension between having a Post Graduate Certificate in products and this has both equity structures and not Education from Leeds University. benefits and pitfalls; Islamic having them. Part of the He then trained as a chartered finance institutions may have benefit of the Basel III capital accountant and in 1978 qualified to fit things into structures requirements is that some as a chartered tax advisor. In with which they do not agree. Islamic banks have been 1995 he also became an associate For example, one of the main forced to issue what are called member of the Association of issues that practitioners face is perpetual tier one bonds, Corporate Treasurers. how to structure things without which are much more loss interest-bearing debt and absorbing than before. These For 33 years he practiced as a tax advisor, most recently working around that involves have come about, however, spending 19 years as a tax partner in Price Waterhouse, quite challenging problems. through necessity, to meet now PricewaterhouseCoopers LLP. He was the first Not least it can result in Islamic Basel III requirements rather Muslim to be admitted to the Price Waterhouse partnership financial products being more than positive design moves on in the UK, specialising in international tax and the taxation expensive. the party of Islamic banks. of derivatives and foreign exchange and for four years he led the firm’s UK finance and treasury tax network. A structure that is based One key question is – are we on murabaha, which is cost going to a great deal of effort Before his retirement at the end of 2009, he was PwC’s plus financing and known for something that has no head of Islamic finance in the UK and a member of PwC’s as tawarruq, has come to real benefits; is there any real four person Global Islamic Finance Leadership Team. He dominate retail banking social impact. In addition has presented on Islamic finance around the world as well structures. Mr Asaria said Shari’ah has a certain number as advising the UK Government. In retirement, as well that in his view this is one of of basic objectives. For as Islamic finance consulting and writing, he now spends the least satisfactory Islamic example, Muslim economists most of his time ‘giving back’ to the community by writing, finance products intellectually have always contended speaking, informal mentoring and active involvement speaking. In any new that the basic purpose of in a number of organisations. He has a longstanding products coming to the economics in Islam is to relationship with IIBI, being a regular speaker at IIBI market such as credit cards deliver a certain degree of events and a frequent contributor to New Horizon, of and consumption loans equity and justice. Are these which he is a member of the Editorial Advisory Board. there is a tendency to mimic financial products advancing conventional products and that objective or not? If not, not to look for newer, more where is Islamic finance going

44 IIBI www.islamic-banking.com NEWHORIZON January – June 2015 IIBI LECTURES

wrong? This is the challenge They formed a pilgrims’ the breach of them; We define Shari’ah compliance we are posed today. fund, which had 4.3 million they necessarily acquire as the removal of riba and do customers. When Bank Islam a new sacredness from not think about anything else. Definitions was formed in Malaysia in the this consideration. That Other parameters are ignored There is the term halal, 1980s, the pilgrims’ fund too our regard to the will of or de-emphasised and so you which is well known. the majority stake and so the the Deity ought to be have a disconnect between In general it signifies bank opened with 4.3 million the supreme rule of our form and substance. In form permissibility’ in principle it customers. We will call that conduct can be doubted you have removed riba, but in is permissible. Sometimes, Shari’ah based. There was a by nobody who believes substance nothing is changing. however, in the Qur’an need with which people could his existence. How itself Allah decides to use identify and then grow with it. vain, how absurd would Atomistic versus the terms halal and tayyib it be for man, either Holistic Views together – permissible and Following the financial to oppose or neglect The problem is that the wholesome. The question crisis, there began to be talk the commands that view of Shari’ah scholars is why. If halal is enough, of morality in economics; were laid upon him and jurists is atomistic; it is why does he add another it cannot be a completely by Infinite Wisdom, not holistic. Take a product qualifying objective. There is amoral activity. There are and Infinite Power. such as tawarruq, you want a something in wholesomeness consequences, particularly The idea that however loan of $100 from the bank that needs to be examined. in terms of inequality, that we may escape the and you want to pay it back Is something that is halal need to be factored in. There observation of man in a year. A normal loan always wholesome? If not, is also the issue of ethics or be placed above where you pay interest would what do we need to do to with socially-responsible and the reach of human be haram, so it needs to be make it wholesome? environmentally sensitive punishment, yet we are structured to be Shari’ah funds. Increasing numbers always acting under the compliant. About 10 years ago a of people want to know how eye and exposed to the debate started about the their money is being used punishment of God, You go to the bank and terms Shari’ah compliant rather than just sitting back the greatest avenger of the banks says it will buy a and Shari’ah based. For and accepting a return. injustice, is a motive commodity from Supplier A example, in the 1960s, capable of restraining at $100; the bank sells it to Professor Aziz, who was a The Moral Context the most headstrong you at $110 payable in year professor of economics in Most people will probably passions.’ one as a murabaha contract; the University of Malaysia know Adam Smith as the you will sell the commodity to and also the father of the author of The Wealth of This is the moral context Buyer B and get $100. At the present governor of the Nations, in which he talks when he is talking about the end of the year you will pay central bank of Malaysia, about the invisible hand of operations of the market. $110 to the bank. Neither you wrote a paper and presented the market, but not many If you strip away the moral nor the bank care what the it to the prime minister, that people know that his first context, you get what we commodity was or whether said the basic desire of every book was called The Theory of have today. Similarly Islamic it was actually purchased or Malay, in the main rural, Moral Sentiments. It includes finance, if it is stripped of its not, but it is a fully Shari’ah- agricultural workers, was the following: moral context, we get what compliant transaction, so the to go for hajj. They would we have today. We need to scholars will say it is fine. save for their whole lives to ‘When the general rebuild the moral context. fulfil this desire. He said that rules, which determine In form it is fully compliant, if Malaysia was to form an the merit and demerit If you talk to Muslims but in substance you can see institution so that they could of actions come thus about Islamic finance, they that it is problematic. For save money, which would be to be regarded as the say, ‘Just remove riba and many retail Islamic banks, this invested back into improving laws of an All-powerful everything will be fine.’ It is is 80% of their balance sheet. agricultural production, then Being, who watches just like people who say, ‘Just they would be able to go for over our conduct leave the market alone and There is another problem hajj eight years earlier. When and who in the life to everything will be fine.’ Mr here. The loan you get can be they looked at it later, it was come will reward the Asaria said that he does not spent on anything; there are actually 12 years earlier. observance and punish think that is true. no conditions attached to the www.islamic-banking.com IIBI 45 IIBI LECTURES NEWHORIZON Rabi Al Awwal - Shaban 1436

loan in terms of the purpose, It does not count as debt, He said the priority was multilateral institutions so once again the connection but the risk of bankruptcy not riba. There were other about how to measure the between the real economy and is the same, whether the things such as literacy levels effect of their poverty- the monetary economy is lost. debt is interest bearing or that needed to change more reduction activities. Originally it was designed to Islamic. Wherever there urgently to make a difference. Eventually that discussion link productive purposes and is a fixed payment the He was ridiculed for his views, led to the publication of the finance. The way it is used possibility of bankruptcy is but Mr Asaria said that he Millennium Development now is like normal consumer there when profits decline, thought this was a view that Goals. Now, staff at the debt, so the main underlying so the bankruptcy risk is not needed to be considered in World Bank, for example, objective, the maqasid, is gone. mitigated by it being halal. relation to Islamic finance. have to state on every project This is a problem. how it will impact on any of There is no holistic perspective. Alternative the MDGs. The challenge The scholars are not looking Islamic Finance in Approaches for Islamic finance is to at what the end result of the Context The Shari’ah supervisory find as similar measure to transaction is. They are looking The question is can Islamic process is very atomistic and embed some of our desired at each part of the transaction; finance flourish when there Shari’ah scholars tend to take objectives, because the each part is compliant so the are other socio-economic the view that it is not their Shari’ah scholars cannot do whole transaction is compliant. factors making it difficult to job to look at things in their it. If, however, we do not We cannot go on like this; we achieve the objectives that holistic context. Their vision is do it, Mr Asaria expressed need to find a process to stop should characterise a Muslim limited to Shari’ah compliance. the view that young people making things halal that are society. Sayyid Nawab Haider We need to find ways to will not take up Islamic not wholesome. Can things Naqvi, who was the president encourage them to take a finance; they might study it, become haram because they are of the Pakistan Institute of broader view. because it might help them not wholesome? It is a difficult Development Economics, to get a job, but they will issue. wrote a book called Ethics We need to look at whether not take up the products. and Economics. At the time things that are halal are also When researchers ask people Halal Debt he wrote the book there was tayyib, because being closer to whether they will take up If you do stock screening, a demand that riba should be that ideal will bring us closer Islamic products, they say one of the criteria is the removed from Pakistan. It to being ethical, socially- they will, but the fact is that gearing ratio, the percentage was his view that this would responsible communities. they do not. Mrs Asaria of debt, should be under one do nothing for Pakistan; it In the 1980s and 1990s there said that he felt strongly that third. This is a rule laid down would make no difference to was a big debate with and part of the solution was to by Shari’ah scholars. What people’s lives, so what was the among the combine halal and tayyib. happens if it is Islamic debt? point. M Iqbal Asaria, a qualified economist June 2015 Lecture - External and accountant, is an associate of Afkar Consulting Ltd. He is also head of Shari’ah Compliance Audit European operations for Yasaar Ltd and non-executive director at Amiri and Islamic Funds’ Capital Services. He has worked as Challenges and Practicalities an investment analyst in the City of London for several years. More recently by Dr Najib Aswad he has been involved in consultancy on financial product Dr Najib Al Aswad said that are astonishing practices structuring and niche marketing services to faith and ethnic islamic Funds receive far in the market, where you communities in the UK and was a member of the Governor less attention than Islamic see financial institutions of the Bank of England’s working party set up to facilitate banks, probably because claiming to be Islamic the introduction of Shari’ah-compliant financial products they form a much smaller without even having the in the UK market. He teaches graduate level courses in part of the Islamic finance minimum requirement of Islamic finance, banking and insurance at a variety of UK industry, but at the end of the being Shari’ah compliant, universities and business schools. He was awarded a CBE day they make a reasonable without having the requisite in 2005 for services to international development. impact. Unfortunately there knowledge and sometimes

46 IIBI www.islamic-banking.com NEWHORIZON January – June 2015 IIBI LECTURES

you see organisations duty. In some jurisdictions to the normal organisational Purification is the amount operating with a fatwa signed such as Oman and Bahrain structure. any Shari’ah board would ask in 1995 and applying it in the regulators have made a to be donated to charity so the current market. This is specific set of regulations When a company offers it is non-permissible income why it is critical to have an with which they need to products and services that and should not go into the understanding about Shari’ah- comply, if they are claiming claim to be Shari’ah compliant income statement. Zakah is compliance requirements and to be Shari’ah compliant. then you have non-compliance the obligation for Muslims to the context of Islamic funds, risk straight away. For donate a certain amount of especially now because of Is conformity with the rules example, a company can money on a periodic basis. the recent growth in their of Shari’ah something that have a murabaha product Some financial institutions numbers and the size of the is complementary or is it an that is offered to clients, but offer an advisory service on funds they control. (Currently obligation? It is an obligation if there is a single mistake this to their clients. Islamic funds stand at $80 from a spiritual point of in the implementation, the billion and are projected to view, sometimes from a Shari’ah supervisory board Shari’ah Governance reach $180 billion within five regulatory point of view and of that institution can decide Framework years.) from a transparency point of to purify all the profit, i.e. The Shari’ah supervisory view. When an organisations the profit must be donated board is at the head of Shari’ah Compliance claims a product is Shari’ah to charity. This is why the Shari’ah governance and Governance compliant, clients have a right procedures manuals in all framework in any Islamic Shari’ah for Muslims is to know and the organisations Islamic financial institutions financial institution. It the legal framework that has the obligation of proving have to be reviewed from will consist of a minimum regulates all aspects of their that its products and services a Shari’ah-compliance of three Islamic scholars lives and that includes the are Shari’ah compliant. perspective. Shari’ah controls specialising in Fiqh Al- relationship between them should be added in to make Muamalat, the section of and their God and also the When there is a failure to sure the implementation and Shari’ah law focussing on relationship between them and adhere to Shari’ah principles, documentation both comply dealings between humans other human beings. In the there is the danger of having with Shari’ah requirements. and especially financial context of Islamic financial non-Shari’ah-compliance risk. transactions. Their main duty institutions the situation will This is a risk that is unique to Even in accounting treatment is overseeing transactions and be a bit more complex. Mr Al Islamic finance institutions. there is a risk of Shari’ah giving the overarching levels Aswad said that he intended to It can be very significant and non-compliance. For example, of guidance and supervision. look at the practical issues and can lead to both financial and a delay in a client payment try to avoid the theological reputational losses. There for a murabaha transaction, The second level is Shari’ah background about what have been situations where from a Shari’ah perspective review department. This is Shari’ah is and what are the Islamic finance institutions and according to AAOIFI, a an internal department that sources and go straight to how have had to close down and bank cannot profit from the will act as the right hand it is being implemented by in the modern world of social delay; it is, however, allowed to of the Shari’ah supervisory Islamic financial institutions media the risk is enhanced. It make late payment charges if board. Their role is to and funds in reality. is, therefore, very important there are no valid reasons for provide the day-to-day for Islamic financial the delay. These late payment Shari’ah compliance support, Islamic funds are financial institutions to take the issue charges, however, should be disseminating information institutions that have to be very seriously. donated to charity. If a late and the fatwas that have been regulated and they also have to payment charge is accounted approved by the Shari’ah be Shari’ah compliant. They Key Areas of Shari’ah as ‘fees receivable’, that is supervisory board. are subject to two governance Non-Compliance Shari’ah non-compliant; it models – the corporate Shari’ah-non-compliance should be going into a charity The third element is the governance model and the risk is a risk that can affect account approved by the external Shari’ah auditor, Shari’ah governance model. the financials of a company. Shari’ah supervisory board. whose role is very similar This is what makes them Shari’ah governance to an external financial different; Shari’ah compliance according to AAOIFI Purification and zakah are auditor providing a second in the context of Islamic requires a set of components very specific topics peculiar to layer of assurance. Their finance is a moral and spiritual in addition to the normal Islamic financial institutions. mandate is providing periodic www.islamic-banking.com IIBI 47 IIBI LECTURES NEWHORIZON Rabi Al Awwal - Shaban 1436

Shari’ah compliance audits the management, getting all resolutions passed. The does not change and the stock to ensure the Shari’ah review their feedback and finally current folder contains the remains non-compliant then department are doing what documenting everything documents pertaining to the it has to be sold. The active they are required to do and the so that it can be presented current audit year including management element needs organisation is complying with to the Shari’ah supervisory the procedures, which should closer monitoring, because a the guidance of the Shari’ah board for their approval. be updated each year. manager is making investment supervisory board. Once the report has been decisions based on his own approved, the final stage is With public funds the calculations, if he is buying The Shari’ah supervisory a follow up to ensure that auditors are probably looking outside an approved list and board and the external any agreed remedial actions at equities that are passively therefore the residual risk is Shari’ah auditor are have been implemented. managed. The Shari’ah greater. independent bodies, although requirements for such funds they are employed by the The Planning Stage are twofold according to Private equity funds will be Islamic financial institution. Islamic funds will have two AAOIFI. Firstly the fund investing in private companies objectives – the Shari’ah- needs to exclude all Shari’ah- through private arrangements; External Shari’ah compliance status of non-compliant stocks such they are not listed equities Compliance Audit the investments and the as companies that produce and that is another challenge. This is the process of strength of the internal alcohol and casino operators. Private equity funds will reviewing the controls, controls. Once these two Second, is filtering out normally have two types of procedures and investment objectives have been agreed companies that are Shari’ah transactions – capital calls transactions to ensure three with the management, it compliant, but where there and share distributions. objectives are met. Firstly, will be necessary to identify are some non-compliant Typically they will have a lot there is the overall Shari’ah and detail inherent Shari’ah- aspects to their work, such of investments, effectively compliance test on the non-compliance risks in all as their exposure to interest- spreading their risk, because investments of the fund. functions. For example, bearing debt. Once these two these small companies Second, there is the strength say we have a public fund types of equity are excluded, represent a higher risk. Some of the internal control system investing in stocks, the first the fund has the universe of these companies will take so that, if there is a Shari’ah- area that will need to be from which they can select off; others will go bankrupt. non-compliance issue, internal examined is the mechanism their investments. controls can determine why they have in place for Shari’ah auditors have to look it has occurred and how it purchasing equities or To determine whether the at both types of transaction. can be resolved. Third, have stocks, which is an area of investments meet Shari’ah In capital calls, the fund the management performed potential non-compliance. requirements, the auditor invests money and for each their role in a manner that will Once the mechanism has will have to look at a list of capital call there should be ensure the requirements of been identified the auditor purchases, but will also have Shari’ah approval, i.e. each Shari’ah are met. needs to examine the to look at a list of holdings, company should be examined residual risk. So, although because a stock could have and approved by the Shari’ah The process is very simple and there may be an approved been Shari’ah compliant review department. is very similar to any financial list of stocks, the risk is when it was purchased, audit. There are four phases. that a manager purchases but has since become non- With share distributions, it Firstly, there is a planning outside that list. compliant due to change in works the other way around. phase to agree on the scope its operations. If the auditor Shares are coming to the of the Shari’ah audit, the The Execution Stage finds a non-compliant stock fund manager, but these timeline, agree the parameters There will be two types in the purchase list then this transactions also need Shari’ah that need to be checked and of audit folders – current is an active breach. If the approval. identify any potentially weak and permanent. The non-compliant stock is in areas in relation to Shari’ah permanent folder contains the holdings list, then is a Sukuk funds are more non-compliance. The second a complete history, passive breach. In the latter straightforward. They have stage is execution. The third including all the Shari’ah case, a fund manager may be been approved by Shari’ah stage is reporting, discussing supervisory board meeting given a grace period of three supervisory boards, however the findings of the audit with minutes with records of months, but if the situation some Shari’ah scholars

48 IIBI www.islamic-banking.com NEWHORIZON January – June 2015 IIBI LECTURES

will want to approve every recommend a capital gains company is operating in Key Challenges for investment and the auditor methodology together with a Shari’ah-compliant way. Fund Managers will have to ascertain whether a dividends methodology, so Sometimes the rating is Firstly, there is lack of approval has been granted for that, if a stock grows in value, room for improvement awareness and knowledge. each purchase. Other scholars they will need to ensure the and sometimes that rating Many fund managers will take a different approach, stock was Shari’ah compliant can be unsatisfactory. The think that, because they e.g. giving a list of approved throughout the period of the report has to be submitted have started equity funds issuers. Much will depend on gain. If it was not, the gain to the Shari’ah supervisory previously, starting an Islamic the structure of the fund and would need to be purified. board and they will have to fund is not going to be a big the jurisdiction in which it is AAOIFI recommend yet a give their annual fatwa and issue. Unfortunately that is located. third methodology, which is a list of remedial actions. not the reality. earnings based, which looks at Property funds have in two the total earnings, regardless The Importance The Shari’ah-compliance main types – development of whether the company of the External function adds an additional and rental services. With has declared a dividend or Shari’ah Audit layer of cost to the overall development funds all the made a loss. If there is an The foregoing has business, which results in agreements will have to be earnings line that is not demonstrated how an lower returns for investors. examined to ensure they Shari’ah compliant, then it external audit works In addition, sometimes are Shari’ah compliant. needs to be purified. Typically and just how involved mistakes in the Shari’ah- Similarly with rental services, Islamic funds just notify the the auditors are all the compliance function might all agreements have to investors of the amount of transactions. This reflects cause the business to incur be examined for Shari’ah purification as a percentage the difference between losses. The fund manager, compliance and any interest- of their shares, so that just having a fatwa at the therefore, needs to structure based clauses have to be purification becomes their end of the year for this the Shari’ah-compliance in a removed. In addition the final own responsibility. structure and having all cost effective manner, while use of these properties has to this active involvement in ensuring Shari’ah compliance. be Shari’ah compliant. This Reporting and the business, ensuring that is not an issue for residential Follow-up all the transactions are in Any Shari’ah-compliant properties; however, in All the findings are compliance with Shari’ah fund, especially when commercial property it may documented in the Shari’ah requirements. exposed to public equity, will be if the final use involves, for compliance audit report. have a smaller investment example, the sale of alcohol. The first stage is the issue Firstly, the importance is universe and therefore fewer rating. Suppose there is acting as a pre-audit risk diversification opportunities. Tests for purification also an investment that is not mitigation tool. When we In investment terms that have to be checked by the Shari’ah compliant; this is an have this layer of assurance, means they have higher Shari’ah auditor. This issue that has a significant it will ensure the company volatility and their exposure involves ensuring that there impact. This is why issues is complying with Shari’ah. to fewer asset classes will is a detailed methodology should be divided into two Having an internal Shari’ah make them less competitive approved by the Shari’ah elements – priority and level review is sometimes and attractive when scholars; there is a procedures of significance. Priority important, but having compared with conventional manual for implementing the dictates how quickly any independent monitoring funds. methodology and a template remedial action should take is very important. The to report this to investors. In place; who is responsible for independent verification An additional headache for the context of public equity, taking that action and what is that all parties in the the find manager is that for example, some scholars the risk to which the company company are striving to he can buy stock that is would recommend using a is exposed. Once all this has achieve Shari’ah Shari’ah compliant and after dividends methodology. This been documented, a rating compliance will spread a period of time it becomes involves looking at every given and a follow-up plan confidence to all non-compliant. Sometimes dividend payment and deciding agreed, then there will be an stakeholders including that will result in having to the proportion of the income audit rating. A satisfactory investors, the Shari’ah sell in unfavourable market that needs to be purified. rating means that from the supervisory board and conditions and potentially Other Shari’ah scholars would auditor’s point of view this regulators. make losses. www.islamic-banking.com IIBI 49 IIBI LECTURES NEWHORIZON Rabi Al Awwal - Shaban 1436

Sometimes a fund can be very important violation that When auditors look at auditor should have holding equity to which needs to be addressed. equities or sukuk, they an understanding warrants and rights are given. cannot do much about of the political and Warrants and rights have some There are also rebalancing the structures themselves, cultural sensitivities Shari’ah-non-compliance issues. Some fund managers, because they are just doing of those jurisdictions. issues and so the fund has to particularly passive the audit. So how can they • The external Shari’ah- sell them in the market, again fund managers, will do ensure that the objectives of compliance audit causing profitability issues. rebalancing on a quarterly Shari’ah are being achieved? should be seen as an basis, but if a stock becomes First they must make sure evolving tool. Conventional fund managers non-compliant within a their external Shari’ah audit • It should be looked can use interest-based risk few days of purchase, the is in line with the objectives at as an investment, hedging tools – options, swaps fund will have held a non- of the company. The not as a cost to the and futures, for example. This compliant stock for almost audit should be based on company. will minimise their exposure to three months. principles and not rules. The • It should be different currencies and market audit should also be designed integrated within risks. Islamic funds do not Other factors include specifically for an individual the overall Shari’ah- have access to all these risk- human error, lack of close fund, in line with their needs compliance structure hedging tools. Although there supervision in periodic and not an off-the-shelf of the company. are some Shari’ah-compliant, audits and exploiting the solution. The main focus risk-hedging tools, they are not guidelines. should be added value and If all of these elements widely accepted at the moment not a loss-minimisation tool. are taken into account, and they do not cover all the Mitigating the risk of then the external Shari’ah- areas that convention risk- Shari’ah non-compliance Final Thoughts compliance audit should hedging tools do. can be achieved in various • Many of the Islamic ensure that the substance ways including building funds are located in and the form of doing this Unintentional, non-Shari’ah- training capacity for all fund Islamic countries and exercise have been compliant income and managers; making audits the external Shari’ah satisfied. purification is another key a compulsory exercise; challenge, where the fund developing ad hoc Shari’ah- manager will have to inform compliance models to Najib Al Aswad is a seasoned and the investors that certain ensure that funds do not multilingual professional with extensive income has to be purified. face technical restrictions expertise across various sectors of the Again this will reduce the level or rebalancing issues and Islamic finance industry. Currently as the of return for investors. making Shari’ah guidelines Senior Manager at IFAAS he is leading many and procedures clearer with international projects across the Gulf and Shari’ah-Non- sanctions when guidelines Europe. He has rich experience in Shari’ah compliance Compliance are ignored. where he has been designing Shari’ah Governance Violations Frameworks, evaluating and assessing Shari’ah non- Why do violations happen? The Form and compliance risks, and conducting Shari’ah audits for many There is, of course, lack of Substance Debate Islamic financial institutions worldwide including a number knowledge. There are also If you go to any Islamic of Islamic funds with aggregate assets under management the technical restrictions of finance conference, there will of $5 billion. the investment model. Some always be a discussion about investment managers will form and substance. These Najib is an AAOIFI Certified Shari’ah Adviser & structure their investment debates will identify products Auditor (CSAA - Bahrain), an AAOIFI Certified Islamic model based on the asset that are Shari’ah compliant Professional Accountant (CIPA - Bahrain), and an universe that is permissible in form, but they are not Accredited IFQ Trainer by the Chartered Institute for at a given point. After a few achieving the real objectives Securities & Investment (CISI - UK). He also holds months, however, the Shari’ah- of Shari’ah. What are the Distinction in MSc Islamic finance from Durham compliant status of these implications for Islamic University and a first class PGDip in Finance & Banking. stocks may change. This is a funds?

50 IIBI www.islamic-banking.com NEWHORIZON January – June 2015 IIBI NEWS

IIBI Awards in Islamic Banking and Insurance

To-date hundreds of students have secured Islamic finance qualifications from IIBI and many are employed in the Islamic financial sector. Presently students from more than 80 countries are enrolled in IIBI courses by distance learning. Each course builds students’ knowledge of Islamic banking and takaful concepts as well as their practical applications. The Post Graduate Diploma, IIBI’s flagship course, also supports students seeking to pursue higher studies. In the period January to June 2015, the following students successfully completed their studies: Post Graduate Diploma in Islamic Banking and Insurance (PGD) Awards ► Abba Babandi Gumel, Chief Accountant, Nigerian Railway Corporation, Nigeria ► Abdul Mobeen Akram, UK ► Abdullahi Ismail Ibrahim, Assistant Branch Manager, Chase Bank Kenya Ltd, Kenya ► Ahamed Hibbathur Rahuman Ahamed Ashkar, Junior Executive Assistant, Amana Bank Ltd, Sri Lanka ► Ahmad Usman Kollere, Senior Manager, National Insurance Commission, Nigeria ► Ahmed Shabani Ndope, Director Sterling Capital Ltd, Kenya ► Julien Carasse, Principal Consultant, Syncordis, Luxembourg ► Khadija Ali Mbarak, Cash Officer, Gulf African Bank, Kenya ► Mark Wafula Wanjala, Legal Counsel, Bloom Zeit Ltd, Kenya ► Misdhaaque Ahmed Manarudeen, Finance Officer, Sri Lanka ► Mohamed Ayoub Niyaz, Trainee Banking Associate, Amana Bank Ltd, Sri Lanka ► Mohammad Amir Ashraff, India ► Mohammed Abdallah Mohammed, Delivery Channel, The People’s Bank of Zanzibar, Tanzania ► Mounia Belkadi, Auditor Trainee, ONAPAR, Morocco ► Muhammad Doma, Underwriting Department Head, Niger Insurance Plc, Nigeria ► Saad Allah Benkhabba, Head of Working Capital – MENA Region, WSP/Parsons Brinckerhoff, UAE ► Ahmed Shabani Ndope, Director, Sterling Capital Ltd, Kenya

Isa Nsereko, Islamic Banking Professional, Uganda I now have a much more clear understanding of Islamic Banking and Finance. The course addressed how the principles and concepts of Islamic Banking are applied within Islamic Financial Institutions (IFIs) and the key challenges faced by the IFIs in the implementation of Islamic Banking and Finance. I have also found the principles and ideology of Takaful very unique from conventional insurance. I now appreciate the need for Islamic Banking and Finance as a value proposition that is geared towards attaining public good and well-being of society at large.

www.islamic-banking.com IIBI 51 IIBI NEWS NEWHORIZON Rabi Al Awwal - Shaban 1436

Diploma in Islamic Banking (DIB) Awards

► Ahmed Taha Abdel Ghani, Associate – Business Development Department, Rige Capital Holdings, Egypt ► Julien Carasse, Principal Consultant, Syncordis, Luxembourg ► Caroline Alexandra Hagg, Trainee Solicitor, Herbert Smith Freehills, UK ► Helena Da Conceicao Enosse, Banco De Mocambique, Mozambique ► Zainab Idris, Denmark ► Igor Beretta, Executive Director, Bank Julius Baer & Co, Switzerland ► Jasri Jamal, Associate Professor, The National University of Malaysia, Malaysia ► Emilia Da Conceicao Fanuel Nabunda Matsinhe, Lawyer Examiner, Banco De Mocambique, Mozambique ► Mohamed Yacoob Kassim, UK ► Moses Ssentamn, Operations Manager, Forex Bureau, Uganada ► Robert Nalbach, Executive Director, Bank Julius Baer & Co, Switzerland ► Wajhe Fatima, UK

Caroline Alexandra Hagg, Trainee Solicitor, Herbert Smith Freehills, UK I found the course very stimulating. It really opened my eyes to a whole new area of finance. It has been excellent preparation for the work I hope to do in the future as a lawyer,and will hopefully allow me to be seconded to a country or company working under Islamic financial principles

52 IIBI www.islamic-banking.com NEWHORIZON January – June 2015 IIBI NEWS

Diary of Events September 2015 17-18: The Inaugural Africa Islamic that ICISEF-2015 will serve as a Finance Forum, Abidjan, Ivory Coast discussion forum and platform 1-2: Global Ethical Finance Forum, Sponsored jointly by the Islamic that strengthens the link between Edinburgh, Scotland Corporation for the Development of academia and industry. The Officially hosted by the Scottish the Private Sector, part of the Islamic organisers, the University of Sakarya Government, this forum has been Development Bank and the government are currently at the stage of inviting organised by Middle East Global of the Ivory Coast will include sessions papers and the final programme will Advisors in conjunction with the Islamic on takaful in Africa, Developing the Ivory not be finalised until mid September. Finance Council UK. It covers Islamic Coast as an Islamic investment destination, All contact and programme finance as well as other forms of ethical trends in Islamic asset management and information is via the icisef website. finance and responsible investing. asset allocation strategies and attracting www.icisef.org Speakers include Dr Zeti Aziz of Bank cross-border investments. Negara Malaysia, Professor Dr Laldin Contact: Emerson Dinesh November 2015 of ISRA, Richard de Belder of Dentons Tel: +603 2162 7800 ext 43 and Sultan Choudhury of Al Rayan Email: emerson.dinesh@ 17-18: 7th World Islamic Retail Bank. Sessions will include a look at the REDmoneygroup.com Banking Conference, Dubai ways in which different elements of the www.redmoneyevents.com The theme for this conference is ethical finance sector can co-operate and ‘Creating Smarter Banking’. It will learn from each other, as well as ways October 2015 explore all aspects of innovative, in which suluk and green bonds can technically advanced and competitive become part of the mainstream. 19: IFN Forum Kuwait, Kuwait City retail banking strategies to provide Contact: Christina Rebello While Kuwaiti investors seeking Shari’ah- a customer-smart Islamic banking Email: [email protected] compliant investments have been very experience. At the time of writing www.geff2105.com active in overseas markets, the domestic there is no further information about market has had limited opportunities. In the agenda. 8-9: Inaugural Symposium on Islamic an attempt to allow for more domestic Contact: Mohor Mukherjee Economics and Finance, Istanbul, activity Kuwait’s regulators have begun to Tel: +971 4609 1570 Turkey revise laws. It is against this background Email: mohor.mukherkee@ This conference has been jointly that the conference takes place. Topics fleminggulf.com organised by Global Islamic Finance in this half-day conference will include www.fleminggulf.com Development Center (GIFDC), the outlook for Islamic finance in Kuwait; Islamic Development Bank (IDB), treasury and liquidity management in GCC 1-3: 22nd World Islamic Banking Islamic Research and Training Institute financial institutions and Kuwait’s potential Conference, Manama, Bahrain (IRTI), Guidance Financial Group and as an investment destination. There are as yet no programme Borsa Istanbul. Its aim is to promote Contact: Emerson Dinesh details available about this the exchange of cutting-edge ideas Tel: +603 2162 7800 ext 43 conference, organised by Middle and foster objective discussion on Email: emerson.dinesh@ East Global Advisors (formerly Islamic economics and finance among REDmoneygroup.com Mega Events). If you want to academicians, policy makers, private www.redmoneyevents.com register for a brochure as soon as this sector and development practitioners. become available or make an early Its theme is Islamic Finance: A Catalyst 21-23: International Congress on bird booking, contact details can be for Shared Prosperity. The speakers Islamic Economics and Finance, found below. The conference will be are drawn mainly from the world of Sakarya, Turkey held at the Gulf Hotel Convention academia and international institutions This congress aims to provide a platform Centre. such as the World Bank and the for researchers, academicians as well as Contact: Sahar International Monetary Fund. industrial and business professionals Tel: +971 4 441 4946 Contact: Canan Ozcan from all over the world to present their Email: sahar@meglobaladvisors. Email: [email protected] research papers in the area of Islamic com www.worldbank.org economics and finance. It is expected www.meglobaladvisors.com www.islamic-banking.com IIBI 53 BOOK REVIEW NEWHORIZON Rabi Al Awwal - Shaban 1436

Derivatives in Islamic Finance: Examining the Market Risk Management Framework

By: Dr Sherif Ayoub. Publisher: Edinburgh University Press (2014) ISBN: 9780748695706 Reviewed by: Richard de Belder, Partner with Dentons and Global Head of Islamic Finance

As the author notes in which means that, unfairly, He analyses the theory and There is also an the preface, this book is these risks have to be retained practice of conventional interesting exploration a product of his curiosity by real sector economic agents derivatives in the next of the technicalities about the controversy even though they are not part chapter and, in particular, involved in using surrounding derivatives of their core commercial the economics of derivative derivatives as hedging in Islamic finance and the activities. His view is that the instruments including how tools through considering ‘divergent, and seemingly management of market risks the pricing of derivative various types of obstinate, views of some of that do not relate to a person’s instruments is formulated. derivative instruments. the notable members of the core business activities (and Islamic finance community’ which can be distinguished when it comes to considering from gambling) is defensible the use of derivatives. on a proper Shari’ah analysis of economic principles. The book analyses economic principles, the Shari’ah, After a short introductory commercial risk issues and chapter, the second chapter policy factors which, in explores the methodology in the author’s view, have not Mua’amalat (truth formation). been adequately considered Dr Ayoub describes the and debated in the area of different Shari’ah processes derivatives. He maintains that are used to investigate that many of the current issues and to seek the truth positions of the Shari’ah such as maslaha (public scholars (both individually interest), qiyas (analogical and through organisations reasoning) and igma’a such as AAOIFI and the (consensus). OIC) have been too legally orientated and have not In the third chapter entitled recognised that the view of ‘Market risks and their the Shari’ah on economic management’ he discusses matters will inherently be in detail the types of market an economic one (and not risks faced by real sector a legal one that focuses on entities (and Islamic finance contractual technicalities). organisations supporting He argues that this is holding their operations), the modern back the development of risk management framework derivates for market-based and the rationale behind the risks in Islamic finance, concept of hedging.

54 IIBI www.islamic-banking.com NEWHORIZON January – June 2015 BOOK REVIEW

financial intermediaries as not associated with their core The author makes the speculators and examines trading activities (in contrast the issue of whether it to pure gambling activities). interesting observation in the is permissible for them conclusion to this chapter to charge fees for these Dr. Ayoub must be activities. congratulated for that ‘it is not evident that .... Throughout Dr Ayoub undertaking this extremely maintains that the Islamic thoughtful, carefully argued God limited the economic finance discourse has and detailed explanation of been too focused on the various issues that affect practices of Muslims to either the legal sphere when the analysis of derivatives interpreting the scriptures in the Islamic finance trade (with an underlying and instead more space (and indeed often, by corporeal asset) or riba with credence should be given extension, other areas of to economic theories Islamic finance). nothing permitted that can explain human behaviour and the way While not everyone may in-between.’ they utilise resources. He agree with all of Dr Ayoub’s In the following chapter the interesting observation believes there needs to be arguments, his work deserves author looks at derivatives in the conclusion to this a better understanding of to be seen as an extremely in Islamic finance. Here he chapter that ‘it is not evident riba, maysir and gharar important contribution to considers resolutions that that .... God limited the when analysing the the debate not only about have been passed by various economic practices of modern day need for real derivatives but also how to Islamic standard-setting Muslims to either trade (with sector economic agents to move Islamic finance away bodies, theoretical and an underlying corporeal access derivatives in order from its over-emphasis on contractual Shari’ah issues asset) or riba with nothing to manage market risks form over substance. and contemporary derivatives permitted in-between.’ in Islamic finance. The next chapter is entitled The sixth chapter deals ‘Maysir, hedging and Richard de Belder is a with the permissibility of derivatives’. It contains an partner at SNR Denton the underlying variables in-depth consideration of and returned to the UK and the recognition of the gambling, both in the context in 2007 after being the derivative contract. Here of Western and Islamic Managing Partner in the he undertakes a review of jurisprudence. He also firm’s Abu Dhabi office. various pronouncements considers the ‘recent trend in He has been involved with by bodies such as AAOIFI the Islamic finance literature the Middle East since 1979 and has and the OIC in relation to to define the ‘act’ of maysir spent 20 years living and working in the the use of interest rate and by linking it to any zero-sum UAE and Oman. Richard heads up the currency benchmarks as well arrangement in an absolute firm’s Islamic finance practice. Richard as prohibitions on trading monetary sense.’ The has many years’ experience in dealing in indices and trading in discussion considers where with Shari’ah scholars and has been currencies. He also analyses speculation fits into the actively involved in the structuring and the nature of money in spectrum with investment documentation of many leading Shari’ah Islam and considers the IAS at one end and gambling compliant transactions. treatment of derivatives. at the other. Dr Ayoub The author makes the also considers the role of www.islamic-banking.com IIBI 55 GLOSSARY NEWHORIZON Rabi Al Awwal - Shaban 1436

GLOSSARY arboun mudarabah Shari’ah board An Islamic version of option, a deposit for the A form of business contract in which one party brings An authority appointed by an Islamic financial delivery of a specified quantity of a commodity on a capital and the other personal effort. The proportionate institution, which supervises and ensures the predetermined date. share in profit is determined by mutual agreement at the Shari’ah compliance of new product development start. But the loss, if any, is borne only by the owner of as well as existing operations. bai al-ina the capital, in which case the entrepreneur gets nothing This refers to the selling of an asset by the bank to the for his labour. shirkah customer on a deferred payments basis, then buying A contract between two or more persons who back the asset at a lower price, and paying the customer mudarib launch a business or financial enterprise to make in cash terms. In a mudarabah contract, the person or party who acts as profit. sukuk entrepreneur. Similar characteristics to that of a conventional commodity murabaha bond with the key difference being that they are A murabaha contract using certain specified murabaha asset backed; a sukuk represents proportionate commodities, through a metal exchange. A contract of sale between the bank and its client for the beneficial ownership in the underlying asset. The sale of goods at a price plus an agreed profit margin for asset will be leased to the client to yield the return fatwa the bank. The contract involves the purchase of goods on the sukuk. A ruling made by a competent Shari’ah scholar on a by the bank which then sells them to the client at an particular issue, where fiqh (Islamic jurisprudence) is agreed mark-up. Repayment is usually in instalments. ta’awuni unclear. It is an opinion, and is not legally binding. A principle of mutual assistance. tabarru A musharakah donation covenant in which the participants gharar An agreement under which the Islamic bank provides agree to mutually help each other by contributing Lit: uncertainty, hazard, chance or risk. Technically, sale funds which are mingled with the funds of the business financially. of a thing which is not present at hand; or the sale of enterprise and others. All providers of capital are entitled a thing whose consequence or outcome is not known; to participate in the management but not necessarily takaful or a sale involving risk or hazard in which one does not required to do so. The profit is distributed among the A form of Islamic insurance based on the Quranic know whether it will come to be or not. partners in predetermined ratios, while the loss is borne principle of mutual assistance (ta’awuni). It provides by each partner in proportion to his contribution mutual protection of assets and property and offers Hadith joint risk sharing in the event of a loss by one of its A record of the sayings, deeds or tacit approval of the musharakah, diminishing members. Prophet Muhammad (PBUH) halal Activities which are An agreement which allows equity participation and permissible according to Shari’ah. provides a method through which the bank keeps on tawaruq reducing its equity in the project and ultimately transfers A sale of a commodity to the customer by a bank haram the ownership of the asset to the on deferred payment at cost plus profit. The Activities which are prohibited according to Shari’ah. participants. customer then a third party on a spot basis and gets instant cash. ijara qard hasan A leasing contract under which a bank purchases and An interest-free loan given for either welfare purposes ummah leases out a building or equipment or any other facility or for fulfilling short-term funding requirements. The The diaspora or ‘Community of the Believers’ required by its client for a rental fee. The duration borrower is only obligated to pay back the principal (ummat al-mu’minin), the world-wide community of the lease and rental fees are agreed in advance. amount of the loan. of Muslims. Ownership of the equipment remains in the hands of the bank. rab-al-maal wa’ad In a mudarabah contract the person who invests the A promise to buy or sell certain goods in a certain ijara sukuk capital. retakaful Reinsurance based on Islamic principles. quantity at a certain time in future at a certain price. A sukuk having ijara as an underlying structure. It is a mechanism used by direct insurance companies to It is not a legally binding agreement. protect their retained business by achieving geographic ijara wa iqtina spread and obtaining protection, above certain threshold wakala The same as ijara except the business owner is values, from larger, specialist reinsurance companies and A contract of agency in which one person appoints committed to buying the building or equipment or pools. someone else to perform a certain task on his facility at the end of the lease period. Fees previously behalf, usually against a certain fee. paid constitute part of the purchase price. It is riba commonly used for home and commercial equipment Lit: increase or addition. Technically it denotes any waqf financing. increase or addition to capital obtained by the lender as An appropriation or tying-up of a property in istisna a condition of the loan. Any risk-free or ‘guaranteed’ perpetuity so that no propriety rights can be A contract of acquisition of goods by specification rate of return on a loan or investment is riba. Riba, in all exercised over the usufruct. The waqf property can or order, where the price is fixed in advance, but the forms, is prohibited in Islam. Usually, riba and interest neither be sold nor inherited nor donated to anyone. goods are manufactured and delivered at a later date. are used interchangeably. Normally, the price is paid progressively in accordance zakat with the progress of the job. salam An obligation on Muslims to pay a prescribed Salam means a contract in which advance payment is percentage of their wealth to specified categories maysir made for goods to be delivered later on. Shari’ah Refers in their society, when their wealth exceeds a certain Gambling – a prohibited activity, as it is a zero-sum to the laws contained in or derived from the Quran limit. Zakat purifies wealth. The objective is to take game just transferring the wealth not creating new and the Sunnah (practice and traditions of the Prophet away a part of the wealth of the well-to-do and to wealth. Muhammad (PBUH) distribute it among the poor and the needy.

56 IIBI www.islamic-banking.com NEWHORIZON January – June 2015

IBC

www.islamic-banking.com IIBI 57