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CONTENTS

ISLAMIC FINANCE REVIEW | WWW.ISFIRE.ORG

VOLUME 5 - ISSUE 1 | MARCH 2015

Talking Points Personality

06 Principles of an Islamic Financial System 45 Roslina Abdul Rahman Patrick Mahdi O’Neill Managing Director, Amundi Malaysia Sdn Bhd 18 Band of Brothers Interviews Professor Humayon Dar 12 Hasan Shakib Al-Jabri 26 Do Young Muslims Subscribe to Islamic Finance Products CEO, Sedco Capital Dr Sofiza Azmi 38 Mohd Razlan Mohamed 43 Islamic Exchange Trade Funds (ETF) - A Financial CEO of Malaysian Rating Corporation Berhad (MARC) Innovation Isfire Report Dr. Nafis Alam 46 Specific Risks Facing Banks and Financial Institutions 30 Challenges & Opportunities in Islamic Finance Education (IBIFs) Pause for Thought Yousuf Siddiqui Lahore as a Global Centre of Excellence for Islamic Financial Reporting for Islamic Financial Institutions in 50 52 Finance? Malaysia: Issues and Challenges Professor Humayon Dar Mezbah Uddin & Romzie Rosman

Editor-in-Chief Professor Joseph Falzon Advertisements, Commercial and Professor Humayon Dar University of Malta Subscription Enquiries PhD, Cambridge University M. Saleem Ahmed Ranjha Rizwan Malik Wan Miana Rural Development Programme E: [email protected] International Editorial Board Professor Muhamad Rahimi Osman Dr. Mehmet Asutay T: +44 (0) 7791 762 047 University Teknologi MARA Usaid Hasan Durham University Dr. Usamah Ahmed Uthman Dato’ Dr. Asyraf Wajdi Dusuki E: [email protected] King Fahd University of Petroleum & Minerals T: +92 (0) 323 7533 723 Yayasan Dakwah Islamiah Malaysia Dr. Mian Farooq Haq Designed By Published by State Bank of Pakistan Fahad Alvi Edbiz Consulting Limited Moinuddin Malim [email protected] 4 Montpelier Street Knightbridge Alternative International Management Services Executive Staff London SW7 1EE Professor Kabir Hassan Zia Ullah Zia United Kingdom University of New Orleans Khuram Shehzad T: +44(0) 207 709 3050 Datuk Noripah Kamso Usaid Hasan E: [email protected] Islamic Finance Expert W: www.edbizconsulting.com Dr. Asmadi Mohamed Naim University Utara Malaysia Printed by: Manor Creative, UK

4 FROM THE EDITOR From the EDITOR ISFIRE celebrates success stories in Islamic banking and finance (IBF). This quarter’s success story is told through an extensive interview of Hasan Al Jabri, CEO of SEDCO Capital. This follows some very distinguished cover stories shared with our readers in the last three years. The most notable of the cover stories in 2014 was that of His Excellency Dato’ Seri Najib Razak, Prime Minister of Malaysia, whose government continues to play a lead role in the global developments in IBF. Hasan Al Jabri’s story is equally inspiring, as he led a team of asset managers based in Saudi Arabia to bring the social responsibility concerns to the forefront of Islamic asset management on a global level. Social responsibility is a focus of policy debate all over the world. Sooner or later, IBF will have to embrace it to maintain its relevance to the masses. The profitability of Islamic financial institutions is on a rise, and with it its commitment to social responsibility must be firmed up. Pharmaceutical firms around the world, while being immensely profitable, are now committing themselves to patient assistance programmes by way of offering free or discounted access to medicine to those who otherwise cannot afford to pay for costly medical treatment. Islamic banks and financial institutions will have to gradually show their commitment to the financially excluded – those who either have no access to financial services or cannot afford to pay for such an access. Without committing to social responsibility, Islamic banks and financial institutions will find it difficult to appeal a new generation of the users of financial services, who are increasingly becoming aware of and committed to social issues. Dr Sofiza Azmi’s article highlights this new trend. She points out that only a fraction of the Gen-Y uses Islamic financial services beyond the basic products like current accounts. Islamic banks can make further inroads into the younger generations by offering the services consistent with a modern financial lifestyle. Corporate governance in IBF is the focus of an article contributed by Mezbah Uddin and Romzie Rosman. Financial reporting in the context of Malaysian Islamic financial services industry should be of interest to the regulators who are looking into developing similar regimes in their respective countries. A unique feature on ownership and control in IBF is included in this issue. It looks into the shareholdings of some of the major players in IBF to detect any hidden agenda or non-business motives of the promoters. The readers will observe that IBF is a purely business phenomenon, with shareholders driven by profit motive as much as their conventional counterparts. Some of the leading personalities in IBF are also mentioned in this context. We have Roslina Abdul Rahman, CEO of Amundi Islamic Malaysia Sdn Bhd, as our featured personality under our regular Personality interview. A detailed interview of Mohd Razlan Mohamed, CEO of MARC, is included to give an insight into the company that won a Global Islamic Finance Award as the best Islamic rating agency in Dubai last year. So big is the success story of MARC that we decided to interview Professor Humayon Dar, PhD (Cam- the man who has been behind the recent success of a global Islamic rating agency. bridge) Editor-in-Chief In this issue, we also focus on Islamic financial education. A comprehensive report is included to highlight challenges and opportunities in development of human resources and nurturing talent in IBF. In Pause for Thought, I have argued for developing Lahore as a centre of excellence for IBF. This is followed by my participation in the third Global Forum on Islamic Finance, organised by COMSATS Institute of Information Technology Lahore on March 11-12, 2015. Lahore certainly deserves attention of the global Islamic financial services industry, and so is Almaty where we are holding our fifth Global Islamic Finance Awards at the end of September this year. Patrick Mahdi O’Neil continues with his two-part analysis of the monetary system based on debt-based money creation, with a view to suggest an Islamic solution. Dr Nafis Alam is our new contributor who has written on exchange traded funds. The readers will observe that this issue of ISFIRE has improved significantly in terms of design and format. This is due to the collective efforts of Edbiz team, especially Fahad Alvi who has spent considerably more time in improving the outlook of the magazine. I am thankful to the entire team and all the contributors who have made ISFIRE as number one publication in IBF. From this issue, ISFIRE has become official publication of Islamic Bankers Association – a London-based body representing interests of the global community of Islamic bankers and associated professionals.

5 TALKING POINTS

In the Name of Allah, the Merciful, the Compassionate Principles of an Islamic Financial System Patrick Mahdi O’Neill Independent Financial Adviser

To know the light, we must also see the says in the holy Quran “I have only created to account for their wealth in the next life – how darkness. In part 1 (ISFIRE Nov 2014 Issue) we Jinns and men, that they may worship you earned it and spent it. For those with little have already taken a look at how the darkness (or serve) Me”. (Surah 51 Al-Dhariyat) wealth, it is also a test – will one accept what of the current financial system has enveloped For the believer, this life and all its possessions Allah has bestowed with patience (sabir) and the world and enslaved most of mankind and wealth are but a test. This life is very short without complaining. “Be sure We shall test to unending debt and interest repayments. and fleeting. Allah (SWT) said in Surah 57 AL- you with something of fear and hunger, The result is debt mountains piled upon debt Hadid Verse 20: some loss in goods, lives and the fruits mountains created out of nothing inflicting (of your toil), but give glad tidings to “Know that the life of this world is interest compounding without mercy stealing those who patiently persevere. (155) purchasing power and appropriating the only play and amusement, pomp and Who say: when afflicted with calamity: wealth and resources of mankind to enrich the mutual boasting among you, and rivalry “To Allah we belong and to Him is our global elite of our financial system. In the 2nd in respect of wealth and children, return.” (156) They are those on whom part, we take a look at how a financial system as the likeness of vegetation after (descend) blessings from their Lord rooted in the principles of Islam and adheres rain, thereof the growth is pleasing and Mercy and they are the ones that to the Shari’a offers a financial system which is to the tiller; Afterwards it dries up beneficial and mercy to all of mankind. receive guidance”. (Surah 2 Al-Baqara) and you see it turning yellow; then it Islam is a mercy from Allah. So it follows a Becomes straw. But in the Hereafter Allah (SWT), is the owner of all wealth “To financial system based on Islamic principles (there is both), a severe Torment Him belongs what is in the heavens and will be a mercy for all mankind. The philosophy, (For the disbelievers, evil doers), and on earth, and all between them, and outlook and orientation of an Islamic financial Forgiveness from Allah and (His) Good all beneath the soil.” (Surah 20 Ta-Ha) system are in complete contrast to the financial Pleasure (for the believers, good doers), There are 2 dimensions to this. Firstly, we system we know and govern our lives today. whereas the life of the world is only a recognise and believe that whatever wealth It requires a complete shift in our thinking, deceiving enjoyment.” we have is by the will of Allah. Secondly, no attitude and relationship with money and matter how wealthy you are, you only possess wealth. For those who have been given great wealth, your wealth for as long as the lifespan Allah has Let’s start at the beginning! For Muslims, the it is both a great blessing and benefit to be written for you. After you die, your wealth will meaning of life is no great mystery. Allah (SWT), grateful to Allah, but also a test as they will have be passed on to somebody else. Even on our

6 ISLAMIC FINANCE REVIEW | WWW.ISFIRE.ORG TALKING POINTS death, believers cannot will their estate (except Today in our modern world, interest by most usury, if ye are indeed believers. (278) a portion) as they wish – it is stipulated in the is viewed as a very normal part of life. The If ye do it not, take notice of war from Shari’a how one’s estate should be distributed. prices of assets, evaluation of investments Allah and His Messenger: but if ye and projects, lending and even Islamic banking Another very important concept in Islam is repent ye shall have your capital sums; are all effected by interest rates. You could balance and moderation in all aspects of our deal not unjustly and ye shall not be almost say the interest rate is considered to be lives. Our material pursuits should be balanced dealt with unjustly” (Surah 2 Al-Baqara) a ‘universal law of money’. Even many western with our spiritual needs. Individual’s needs writers who are very eloquent in their criticism should be weighed against society’s needs. And it is not just the one who charges interest of different aspects of the financial system will We are free to pursue profit and seek to that has to worry – it is a serious sin for all rarely talk about interest as being the root of increase our wealth, but it should not come at parties involved in Riba dealings. In a hadith of the problem. Of course this was not always the the expense of our worship and duties to our case. For most of human history, the charging our Prophet (PBUH) said, “Allah has cursed Creator. Our pursuit of personal gain, should of interest was universally despised by most the one who consumes Riba (interest), not come at the expense of society, nor the societies and religions. For example, in England the one who gives it, the one who detriment of the environment, or impinge on in the 13th century, usury was illegal and linked records it and the witnesses.” He said: the rights of anyone else. to blasphemy. In this period, those guilty of “they are all the same” (Sahih Muslim) usury, had their assets seized. This included Allah (SWT) says “Those who, when Moving on from the charging of interest itself, 300 English Jews who were hanged and had they spend, are not extravagant and I believe the next important step is to look at their property confiscated. Aristotle (384 – not niggardly, but hold a just balance the support structures of our Riba or interest 322 BC) the Greek philosopher and one of between those (extremes)” (Surah 25 based financial system. Interest derives from the fathers of Western thought, wrote about Al-Furqan) Debt. Debt is manufactured by our banking lending of money at interest; system via Fractional Reserve Banking (FRB) Who was the best person who embodied the “The most hated sort, and with the and most of our Fiat Money comes into teachings of Islam and set the best example in greatest reason, is usury, which makes existence as interest bearing bank debt. This both actions and words for us to follow? This of a gain out of money itself, and not from relationship is summarised in the diagram course was our beloved Prophet Muhammad the natural object of it. For money below. (Peace be Upon Him). In a beautiful hadith was intended to be used in exchange, Remember the vast majority of our interest (reported saying) “None of you (truly) but not to increase at interest. And bearing debt has been manufactured by banks believes until he loves for his brother this term interest, which means the out of nothing via FRB which typically accounts what he loves for himself.” (Al-Bukhari birth of money from money, is applied for 97% of our fiat money supply. and Muslim). In another saying ‘He who to the breeding of money because sleeps on a full stomach whilst his Amongst the vast majority of the ulema the offspring resembles the parent. (scholars) and people there is almost neighbour goes hungry is not one of Wherefore of a mode of getting wealth unanimous agreement that all forms of interest us’ (Bukhari). Care, compassion and mercy this is the most unnatural”. constitute Riba. What is less clear and certainly for others are part of our religion and are a much less discussed is the position regarding duty incumbent upon the Muslims. Imagine if So the prohibition and condemnation of Riba or FRB and Fiat Currency. Of course both of our business dealings, trade and investments the charging of interest in the Quran is not new. these monetary phenomena did not exist at the reflected these ideals – our world truly would The verses in the holy Quran use strong and time of the Prophet (PBUH) or for most of the be a more prosperous, kind and happy place for dramatic language to leave no doubt regarding existence of the Islamic Empires/Era. FRB did all. the serious nature of Riba, its prohibition and not evolve organically in Muslim lands – it has Whilst an Islamic financial system is built on utter condemnation. In Surah Al-Baqara, Allah been imposed via the former colonial powers. (SWT) says; the foundations of values and beliefs, it must I am not a Shari’a expert, so I will not get also have specific rulings and detailed guidance “Those who devour usury will not stand entangled in a debate about the Shari’a to enable us to achieve a system which meets except as stands one whom the Evil One compliance or not of FRB and Fiat Currency. the objectives of the Shari’a and fulfils our role However, I will certainly argue that they and duties as trustees of our planet and all the by his touch hath driven to madness. That is because they say: “Trade is like go against the maqasid (objectives) of resources and wealth Allah has provided for us. Shari’a. Please refer to part 1 where I give a usury,” but Allah hath permitted trade The best known of these injunctions is the comprehensive critique of the financial system and forbidden usury. Those who after prohibition of Riba, which literally means – I will not repeat all the criticisms here, but excess, increase or addition. There are receiving direction from their Lord, l will just focus on one key aspect which is different types or categories of Riba, but the desist, shall be pardoned for the past; inflation. most prevalent and widespread type of Riba their case is for Allah (to judge); but those who repeat (the offence) are When you increase the supply of something, all practiced in our world today is the charging other things being equal you reduce its price or companions of the Fire: they will abide of interest, which is what this article will focus value. So it is with money. Via FRB the money on. Interest can be defined as the charge for therein (for ever). (Surah 2 Al-Baqara) supply is dramatically increased. Fiat money borrowing money, typically expressed as (especially the electronic version), because it an annual percentage rate i.e. if you borrow For those who persist in demanding interest, has no real value can be produced endlessly at money, you have to pay the principal back plus they are given a very bleak warning from Allah; almost no cost. However, though fiat money an additional amount of money – the additional has no real value you can buy real things with it. amount or increase is interest. “O ye who believe! Fear Allah and give up what remains of your demand for So essentially the banking system can produce something of no real value with little or no cost

7 ISLAMIC FINANCE REVIEW | MARCH 2015 TALKING POINTS

the Institute of Democracy). By allowing FRB INTEREST and Fiat Currency to exist we give this power to Central Banks, World Banks, and Commercial Banks. Governments legislate to facilitate and cooperate because in the short run they benefit from easy money via quantitative easing i.e. money printing or more correctly loading up more national debt. Money which has intrinsic value or at least backed by such, will take this power away. Interestingly, Personal Income Tax DEBIT was introduced in US in 1913 the same year as the formation of the US Federal Reserve – coincidence or collusion between government and banking! For further reading on this critical subject MONEY matter I would also like to refer the reader to BANKING = a paper by Dr. Ahamed Kameel Mydin Meera = FLAT and Dr Moussa Larbani (both Professors at FRB International Islamic University Malaysia) CURRENCY “Ownership Effects of Fractional Reserve Banking: An Islamic Perspective”. In great detail they tackle the issues of FRB and Fiat and via interest repayments acquire money is straining under its debt burdens. A major Currency from an Islamic perspective. They for nothing which entitles them of course to debt crisis or default will have a domino effect assert that FRB “….violates the ownership acquire real wealth. FRB and Fiat Currency are causing more defaults leading to systemic crisis principle in Islam while inflicting a deadly duo working in tandem to increase the in our financial system. Inevitably, the global profound injustice on the economy money supply/debt levels which is therefore financial system will eventually collapse under and society”. They further argue that “… constantly eroding the value of money. the weight of its debts. Just global government debt alone is now over $55 Trillion. To give this money creation through FRB is creation Simply, now one needs to ask who benefits the colossal figure more meaning, let’s look at the of purchasing power out of nothing most and who suffers the most from inflation? per capita debt of some of the key countries. which brings about unjust ownership The poor in society and those on low incomes The public debt per head of population (for transfers of assets in the economy, to are the most badly affected. Their cost of living every man, woman and child) in USD (source: the bank effectively, paid for by the is constantly on the increase and many are The Economist): whole economy through inflation. This forced into high interest debts, just to survive. Wealthy business owners and investors benefit • USA $46,214 transfer of ownership is not based on human effort by taking on legitimate the most. As prices go up, the prices of the • UK $41,929 goods and services they provide increase which risks… They conclude “…. that FRB has • Japan $97,450 increases their profits and business value. Over elements of riba that goes against the the long term, asset prices such as property, This is only public debt. Counting private and maqasid al-Shari’ah; and therefore can stock markets and commodities have increased public debt, ING estimate total world’s debt at be termed illegal or haram from Islamic an astounding $223.3 trillion! This amounts to dramatically. Such a system that favours the perspective”. rich and penalises the poor certainly does not 313% of global gross domestic product. The next major prohibition is gambling. In fulfil the maqasid al-Shari’a. Many advocate returning to money which Arabic, it is referred to by Maysir which is the has an intrinsic value or at least backed by Some argue in favour of debt, because it acquisition of wealth by chance instead of by something of intrinsic value. Traditionally, allows individuals, businesses and government effort and Qimar which refers to a game of throughout most of human monetary history to spend more (whether for investment or chance. Allah (SWT) says in the holy Quran; consumption). One person’s expenditure is this has been gold and silver. Al-Qaadhi Abu another person’s income. Thus allowing and Bakar Ibn Al-Arabi, (Ahkaamul Quran, 3/1064) “O who you believe! Intoxicants (e.g. increasing debt increases income, wealth and defined money “(The gold dinar & silver alcohol) and gambling and idols and overall economic growth. This narrative paints dirham) is the medium to measure the (lottery by) arrows are an abomination a very attractive and compelling case for value of things ... they are the judge in of Satan’s work, so avoid them so that debt. However, it is a false promise – you get a measuring and determining the value you may get salvation. Satan’s only short term boost, but at the sacrifice of future of wealth when there are differences in desire is to create among you enmity expenditure as debt and interest have to be quantity or when the value of the thing and hatred by means of intoxicants and repaid. This exponential growth in our debt has is unknown.” gambling and stop you from praying and been caused by our man made financial system. remembering Allah. Will you not then The result is the world crushed by an inverted “Money power is the greatest power stop?” (Surah 5 Ma’idah) pyramid of debt. As the debt pile accelerates, … in the whole world. It is the power increasing amounts of income are required to to give and the power to take away, service it, thus continuously reducing the ability Gambling is a huge and lucrative industry. the power to destroy and the power to Forbes estimated the global market to be of those in debt to repay. Even with near zero or create, the power to crush opposition negative real interest rates much of the world worth $417 billion in 2012 - and this just or bestow favours” (The Money Trick, by

8 ISLAMIC FINANCE REVIEW | WWW.ISFIRE.ORG TALKING POINTS represents ‘legal’ gambling. Black market and corruption. It is often accompanied by even nations go bust. This is in addition to all gambling is huge – just illegal sports betting other vices such as drinking and drugs and the usual problems associated with gambling in Hong Kong alone generates about $64.5 like a domino leads to many more vices. already mentioned. Huge corporations and Billion each year. Sports match-betting industry These include cheating, fraud, stealing and governments have been brought to their knees (legal & illegal) is worth anywhere between accumulation of gambling debts. The lure of as result of the reckless actions of speculators. $700bn and $1tn a year. The world’s biggest easy money, the glitter and dazzle of casinos Speculation is a huge waste of time and market is the U.S., which accounts for 25% of make gambling very addictive. Addiction leads resource – no new wealth is created, it is simply the world’s gambling profits. China is the 2nd to financial ruin and disaster for individuals and transferred from one to other and constantly biggest market, but counting illegal gambling it brings heartbreak and sorrow to their families. eroded by the fees of brokers and taxes of is estimated to be 1.5 to 2 times as large as the Most profit comes from problem gamblers governments. U.S. In many countries up to 70 to 80% of the – however they pay a heavy price with their Another very important principle is the adult population participate in some form of jobs, their houses, their health and their avoidance of Uncertainty or using the Arabic gambling. families. It discourages hard and honest work term ‘Gharar’. Gharar is a broad concept and promotes selfishness, hatred and greed. Obviously from an Islamic perspective there that encompasses deceit, fraud, uncertainty, Obsessive gamblers waste an extraordinary is no distinction between legal and illegal danger, peril, delusion, or hazard that might amount of their time neglecting family and gambling – whether sanctioned by a state lead to destruction or loss. This means that work. or not all gambling is an abomination. The any trade or transaction should be free from temptation for many states or governments Unfortunately the common attitude that contractual uncertainty. There should be to legalise gambling is often too much as they prevails especially where gambling is legalised no ambiguity in the key terms and subject can earn huge revenues from taxing it. Of is that people should have the freedom to matter of the underlying contract or deal. This course many public servants have argued and decide what they want to do with their money principle has very important implications for struggled against legalising gambling. The and their time even if it leads to disgrace and how business should be conducted. All financial late governor of New York Thomas E. Dewey tragedy. Unlike our governments, Allah’s law and business transactions must be based on declared “The entire history of legalized shows his love for his creation by protecting full transparency and disclosure, so that no gambling in this country and abroad and keeping us safe from that which is not good one party has an unfair advantage over the shows that it has brought nothing for us. other. The aim is to protect all parties from deceit, ignorance and uncertainty. This has but poverty, crime and corruption, Closely related to gambling is speculation. been emphasised in the hadith of the prophet demoralization of moral standards, Speculation needs to be distinguished from (PBUH); “Do not meet the merchant and ultimately lower living standards investing. It is generally characterised by in the way and enter into business and misery for all the people.” However, buying liquid assets for a very short period the lure of easy money though it is built on the with the sole intention of betting on short term transaction with him, and whoever misery and despair of others has in most cases price movements. Speculation in its extreme meets him and buys from him (and triumphed over these arguments. form is the same or sometimes even worse in case it is done, see) that when the than gambling itself i.e. it is possible for the owner of (merchandise) comes into the No country Muslim or otherwise is immune speculator to lose all their capital and in the market (and finds that he has been paid from gambling. However, thanks to clear case of leveraged speculation the losses can less price) he has the option (to declare prohibition and condemnation of gambling in easily exceed the initial capital placed. the Quran at least legalised gambling in Muslim the transaction null and void)” (Muslim). countries is generally not allowed or if allowed Speculation is a huge element of the financial Thus one is not allowed to take advantage of is often restricted to targeting tourists. Casinos markets today and earns huge commission the seller’s ignorance of the market price. In a do exist in Egypt, Lebanon, Malaysia and even and fees for intermediaries. The biggest and modern context, this closely aligns with insider in Palestine (amidst all the trouble!) for a period most liquid market in the world today is foreign trading laws. The financial services industry before being closed down in 2000. Gambling in exchange - $5.3tn changes hands every day loves to innovate and speculate - contracts Israel is illegal, so they used to travel to a casino (FT Nov 2013). According to the economist such as forwards, futures, options, and other in Jericho in Palestine – Palestinians were not Bernard Lietaer, author of The Future of derivatives are rendered invalid because of allowed to gamble, but they did comprise most Money, back in 1975 about 80% of foreign gharar. of the workforce! exchange transactions involved the real trading Of course no matter how fair, balanced and of a product or a service. However, by 1997 the The growth in online gambling is another just a financial system is, there will still be those percentage of foreign exchange which involved who are rich and those who are poor. Zakat huge problem – it now takes gambling into the transactions in the real economy was only home making it easily accessible to anyone which redistributes wealth from the rich to 2.5%! According to the Global Policy Forum, the poor is such an important element that it with internet access and money. According by 2011 only a tiny 0.6% of foreign exchange to a survey of the 5,000 secondary students is obligatory and is one of the 5 pillars of Islam. could be traced to genuine international trade It is mentioned many times in the Quran and conducted by the Gamblers Rehab Centre in goods and services. Of the remainder, a Malaysia indicated that 89% admitted to have is associated with prayers, doing good deeds, minimum of 80% was directly attributable to mercy and forgiveness. been exposed to gambling before they even hit speculation. This of course is just the tip of the the age of 12. speculation iceberg. In all financial markets The Believers men and women, are The ill effects of gambling on individuals, such as the stock market, debts, oil, gold and protectors one of another: they enjoin families and society are well documented. other commodities speculation is pervasive. what is just, and forbid what is evil: Gambling is all consuming, leading to great Speculation causes bubbles to blow up in asset they observe regular prayers, practice stress and anxiety. It takes man away from prices. When the bubble inevitably bursts, it regular charity, and obey Allah and His his prayers and remembrance of Allah unleashes a tsunami of financial hardship and Messenger. On them will Allah pour His leading to a descending spiral of moral decay economic misery as individuals, companies and

9 ISLAMIC FINANCE REVIEW | MARCH 2015 TALKING POINTS mercy: for Allah is Exalted in power, or money. The prophet has defined charity in • building of roads, bridges, and hospitals Wise. (Surah 9 Al-Tawba) broad terms as: • helping the elderly, the traveller, the sick, “Every joint of a person must perform the orphan, the poor and those in debt It is a serious matter. The prophet (PBUH) said a charity each day that the sun rises: to • animal welfare “I have been ordered to fight against judge justly between two people is a An Islamic financial system cannot be the people until they testify that there charity. To help a man with his mount, separated from Islam. Every aspect of the is none worthy of worship except Allah lifting him onto it or hoisting up his financial system should be in harmony with and that Muhammad is the Messenger belongings onto it, is a charity. And the achieving the maqasid al-Shari’a. There are 3 of Allah, and until they establish the good word is a charity. And every step key aspects; Firstly the philosophical aspect or Salah and pay the Zakat. And if they do that you take towards the prayer is a our beliefs which provide the foundations of so then they will have gained protection an Islamic financial system. Allah is the owner charity, and removing a harmful object from me for their lives and property, of all wealth and we are the trustees of this from the road is a charity.” (Bukhari & unless (they commit acts that are wealth. Our wealth is a means to achieve the Muslim) punishable) in accordance to Islam, and pleasure of Allah. The second key aspect, are their reckoning will be with Allah the the practical rules and principles that we should Another charitable concept in Islam is known as follow i.e. Staying away from Riba, Gambling Almighty.” (Al-Bukhari & Muslim) Qard Hasan which means “Benevolent Loan”. and Speculation. Designing a financial and In Arabic, the word Zakat means blessing, This is generally a loan to help those who are monetary system, which is honest, fair and purity, growth and uprightness. In the Shari’a needy, to relieve financial stress, for a good just for all of mankind. Not a system which is (Islamic Law) it denotes the obligatory 2.5% of cause. Hasan means kindness to others and no leveraged so wealth can unfairly accumulate in net wealth Muslims have to pay on an annual interest or any financial gain is expected from the hands of the few. The third key aspect is the basis (lunar year) to recipients as prescribed the loan. Just the principal of the loan is to be huge focus and emphasis on charity. This helps in the holy Quran. It applies to those Muslims returned. Again this act is highly rewarded and to redistribute income and wealth from the rich whose wealth is over a certain minimum level encouraged by Allah. to the poor and create social harmony. Money called the nisab. The nisab is measured in “Who is he that will loan to Allah a is the key ingredient in a financial system. Today reference to gold (85 grams of pure gold) and beautiful loan, which Allah will double money and debt are almost synonymous – 97% silver (595 grams of pure solver). One should of our money is debt. Money should be used as unto his credit and multiply many have absolute possession of the wealth on a tool to serve mankind, not mankind enslaved which Zakat is due. For example, Zakat is times? It is Allah that giveth (you) want to money. not obligatory on money which is out of the or plenty and to Him shall be your In both parts, I have painted a very bleak owners reach for years or on debts owed but return”. (Surah 2Al-Baqara) picture of our current financial landscape which the debtor is insolvent. Certain wealth and continues on a downward trajectory towards assets are excluded from Zakat. These are The whole religion of Islam is infused with its inevitable collapse. However, there are possessions of a personal nature e.g. one’s the mercy of giving charity. In a saying of the reasons we should be optimistic. Firstly, is the private residence, furniture, car, clothes, tools Prophet (PBUH) “When a man dies, all realisation that Allah (SWT) is the creator and of trade. his acts come to an end, but three; owner of the Universe and nothing happens Zakat is a mercy and a blessing from Allah – it recurring charity (sadaqah jariya) or anywhere in his creation unless by his will. gives the poor a right over a portion of the knowledge (by which people benefit), “With Him are the keys of the unseen, wealth of the rich. This is turn promotes social or a pious offspring, who prays for him” the treasures that none knows but He. harmony and brotherly love. It purifies the (Sahih Muslim) He knows whatever there is on the wealth of the rich and increases their wealth in This has led to another noble and long-standing earth and in the sea. Not a leaf falls blessings. Islamic tradition of establishing Awqaf. The but with His knowledge: there is not One of the beautiful aspects of Islam is that singular of Awqaf is Waqf which is a charitable a grain in the darkness (or depths) of it sets basic minimum requirements that all endowment/trust. Monzer Kahf an the earth, nor anything fresh or dry Muslims should adhere to. But it also gives Islamic Economic Expert has defined Waqf as (green or withered), but is (inscribed) in plenty of scope to do much more and achieve “holding a property and preserving it a record clear (to those who can read).” greater blessings. So it is with charity giving. so that its fruits, revenues or usufruct (Surah 6 Al An‘am). Secondly, though vast This brings us to the concept of Sadaqa i.e. is used exclusively for the benefit of amounts of wealth have unfairly accumulated general charity, giving over and above than that in the hands of the global elite – the wealth required of Zakat. It is highly encouraged and an objective of righteousness while prohibiting any use or disposition of it has not disappeared - it is still here on planet Allah promises huge rewards for charity giving. earth! It just needs to be redistributed. Lastly, outside its specific objective” “The likeness of those who spend their Allah (SWT) says he will destroy Riba. Though wealth in Allah’s way is as the likeness It is very similar to an English Trust except the problems of our Riba financial system of a grain which groweth seven ears, in that its purpose is charitable. There is a long seem huge and insurmountable, Allah (SWT) has provided us with the solutions. Finally, every ear a hundred grains. Allah giveth legacy of wealthy Muslims donating property, land, buildings and money to awqaf which have remember Allah (SWT) said “... How often increase manifold to whom He will. played a very important role in supporting the a small group overcame a mighty host Allah is All-Embracing, All-Knowing”. socio-economic needs of society. Awqaf have by Allah’s Leave?” And Allah is with (Surah 2 Al-Baqara) taken care of a myriad of needs: As-Sabirun (the patient).” (Surah 2Al- Charity is not just confined to giving of wealth • provision of mosques, schools, and Baqarah) supporting scholars

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Hasan Shakib Al Jabri is an established leader in the Islamic asset management industry. Winner of the GIFA Islamic Finance Personality Award for 2013, Al Jabri has numerous accolades to his name. He has developed a state of the art Islamic asset management business that fulfils both Shari’a and ESG requirements. It is owing to his leadership role that SEDCO Capital has emerged as a leader player in Islamic asset manager. In the interview below, he shares with us his experiences, which also reflects on his management style.

An Interview With HASAN SHAKIB AL-JABRI CEO Sedco Capital

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Please tell us about Sedco Capital, finance advisory. Among our investment signatory) and we have supported bridging what it is, what it aims for and what solutions, 10 solutions are also ESG compliant the gap between the two industries when we are the different segments within it. (environmentally friendly, socially responsible announced the launch of our first 2 ESG funds and follow corporate governance principles), in February 2013. SEDCO Capital is a leading Shari’a and which is a commitment we have bestowed upon Shari’a finance is ethical by nature, this is an Environmental, Social and Governance (ESG) ourselves moving forward. industry that has evolved for hundreds of year, asset manager in the world. Although we are and it has developed rapidly over the past 30 headquartered in in the Kingdom of Saudi How are you different to other years to reach almost 1.831 trillion dollars. Arabia, we have a global offering covering asset management companies in Responsible investing has been evolving as equities, real estate and private equity. SEDCO investment advice and choices? well especially since the late 1996’s when Kofi Capital currently has the largest set of Shari’a SEDCO Capital has a very strong and solid Anan, UN Secretary General at the time, took a funds registered in Luxembourg than any other track record that spans 28 years since it’s leading role in creating the UNPRI. Today it has asset manager in the World. Our range of inception as a family office in 1976. Our become more than 10 trillion dollar industry. investments spans the globe, from the US all diversification in products offering paired with With our in-house research we recongnised the way to the Far East. our smart and innovative investment solutions the commonalities between both the Islamic Carved out from a family office and formed and processes have promoted SEDCO Capital and ESG industries, as far as the negative an independent Capital Market Authority to be the leader in Shari’a compliant asset screening is concerned and without losing (CMA) licensed company with an initial capital management. Our founders have played a vital focus on creating sustainable economies. We of SAR 50 million in 2010, the journey of role in the development of the Dow Jones added value to their existing practices with SEDCO Capital’s transformation from being Islamic index as well as recently becoming the our prudence approach in investing through a family office into an institutionalised asset first Islamic asset management company to sign our leverage parameter that avoid excessive management firm required enormous and the United Nations Principles of Responsible leverage in investing (which ESG investing dedicated efforts. Investments (UNPRI). As a result of UNPRI, doesn’t consider) and we learned more about SEDCO Capital has opened up the market to active involvement which we started applying Please tell us your ownership conventional, responsible investors as well. to our investment processes and our manager structure and who are your selection processes. shareholders? Socially Responsible Investing has lately become a buzz word for An important element in bridging this gap is to help explain to the world what Shari’a compliant SEDCO Capital is a subsidiary of SEDCO the Islamic banking and finance Holding. The Saudi Economic and Development investing is all about, and its resemblance to Company (SEDCO), is a leading conglomerate industry. Does that mean that responsible investing. Shari’a compliant investments are investing in a number of sectors regionally and Sedco Capital has recently launched internationally. It is considered a major player not socially responsible? What is funds platform in Luxembourg, can in real estate development and management, the difference between the two you please share more details on it. hospitality, wealth management, auto leasing, and how does Socially Responsible and healthcare, all conducted in accordance SEDCO Capital Global Funds (SCGF) is a family with Islamic guidelines widely known as Shari’a. Investments add value? of 14 liquid strategies and 3 illiquid strategies It manages a wide and diversified spectrum of Following our leadership in Shari’a investing, that total to about $1.6 bn of AUM. We saw real estate investments, equities investment, we are very glad to be the pioneers in Socially that Luxembourg is well recognised regulated and other businesses in Saudi Arabia and Responsible Investing in the Shari’a world jurisdiction to ease the access for investors no around the world. (as mentioned earlier, we are the first Shari’a matter their domicile. Please share with us who are your compliant asset manager to become UNPRI clients? And how have you assisted them? Our clients (international, regional and local), range from sovereign wealth funds, pension funds, financial institutions, institutional investors, family offices and UHNWIs. We provide them a range of investment solutions that previously have not been available within a Shari’a investment context. Given our choice of 14 different global equity funds, coupled with our strong real estate and private equity offerings,we can provide a total asset-allocation in a well-diversified portfolio, uniquely for the Shari’a sensitive investor. We also provide white-labelled services to manage funds under third party names. SEDCO Capital also provides bespoke discretionary portfolio management services - in Saudi and GCC equities as well as Saudi real estate, we also offer our KSA clients and corporate-

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to navigate the portfolio alongside different stages of the business cycle in terms of durable versus sustainable strategies (more cyclical). As there was an increase in the money market fund (sukuk murabaha), the main purpose of this extended offering is to allow the clients, which are Shari’a compliant, to protect their wealth during market down side. As far as our offering is concerned, we have added to our portfolio a multi-asset class portfolio called “core diversified fund” which as a strategy allows to enter into different terms of risk adjusted returns, using a cyclical asset allocation process, reviewed on quarterly basis. In 2014, SEDCO Capital’s private equity programme continued its growth streak completing SAR1.4 billion worth of transactions. Exiting about SAR414 million and buying SAR321 million worth of equity deals, in addition to SAR665 million of new fund commitments. The new commitments came from 9 different managers, diversified across 8 regions globally. The private companies exited in 2014 were sold at a healthy multiple of 2.4 times (32% IRR). Mr Al Jabri, you have been a CEO of Sedco Capital for quite some time now, tell us how different Sedco Capital is now from when you started? It’s simple. We were a family office that transformed into a well institutionalised, regulated, highly sophisticated and performance driven asset manager. To reach there, we had to beef up the team and build On the SCGF, we continue to conduct our Index, MSCI Social and S&P 500) we realised up operational, administrative as well as risk thorough due diligence on the selection that both the responsible and Islamic indices management capabilities to be able to provide process of managers as well as have continuous performed better than the conventional with good service to the clients. We also invested monitoring and supervision. The platform also a clear advantage for the Islamic (due to low in compliance & audit, finance, treasury and offers independent performance calculations, leverage). marketing. reporting, administration and custody; it is also We feel responsible towards the industry Today, we handle third party clients, and we plugged into more reputable financial systems and how important these investment have a good number of institutional investors like Bloomberg, Lipper, FundInfo and Morning methodologies are; this is what we as well as SWF and HNW investors. We also Star. The platform has helped introduce communicate to our shareholders, every time developed further our strengths in local strategies not only to Shari’a compliant, but we have an opportunity. equities (as an asset manager), real estate and ethical and responsible investors. agriculture. Also this required us to change the How challenging is it to explain Please share with our readers the mindset to deal with all types of sophisticated benefits of Socially Responsible recent developments at Sedco clients. Capital in terms of acquisition both in Investing to your shareholders and What are the short, medium and long international and local markets. Shari’a sensitive investors? How term plans of Sedco Capital? much aware are the Shari’a sensitive In international real estate, SEDCO Capital Our aim is to beccome the leading Shari’a asset investors of ESG issues? has successfully executed transactions worth $1 billion over the past 3 years. We also management company globally. While we have It is a learning curve for us and for our clients; successfully sold 21 investments in France, achieved this goal to a large extent, we realise we explain what Shari’a is and what ESG is. We Malaysia, Singapore, UK, and Mexico while that this is a dynamic goal and we will continue share our practices and inform them that it not acquiring 19 investments in strategic markets to exert utmost efforts to deliver to our clients only ensures the economic sustainably but also such as USA, UK and KSA. the best opportunities and services. We must leads to good performance. By comparing the be well recognised in the Islamic world. Our three main indices (Dow Jones Islamic Market In liquid strategies, we have decided to launch goal in the medium and long run is to become a fund with the strategy that allows investors

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INTERVIEW the asset manager of choice for Shari’a investors as well as ethical and responsible investors globally. Also we must be able to capture responsible clients who see us as a good investment company that has a superior track record, driven by a strong process and asset management team. What challenges do you face in achieving your goals and working with investors from different backgrounds? And who are your competitors? Market volatility is a constant element that we always have to manage, obviously the increasing regulatory requirements are becoming a major point of focus, as well as attracting and retaining the best talent. Our investors are from different backgrounds, this is a positive challenge. As we have the most diversified group of investment opportunities and fund strategies, we always have to listen to their needs and be able to advise them appropriately rather than be product pushers. Our investments for the past 3 decades have always been global in nature, including developed as well as emerging markets, and through our Luxembourg platform we can deal with investors from all over the world. Big private banks saw our products as being strong and diversified in the Shari’a world and they started distributing them globally through fund platforms of some of the largest international and well regarded banks .In Saudi Arabia, we have a dedicated business development team. We have different competitors for different asset classes and geographies, including GCC asset manager and global international banks. Sedco Capital has been receiving a lot of industry awards, one of the recent one is the Global Islamic Finance Awards (GIFA) 2014 in Dubai, please share your thoughts on it and what it means to you. GIFA has been doing a good job in identifying the market makers in the region and all over the world. We are very proud to receive recognition from GIFA as a socially responsible fund manager. All these great initiatives are in line with Shiekh Mohammad Bin Rashed Al Maktoum’s (Ruler of Dubai) vision to make Dubai the islamic economy capital of the world. We are very proud to have won many awards in the industry including the “Islamic Economy Award” for “Best Islamic Fund” presented to us by Sheikh Mohammad bin Rashed Al Maktoum in 2013 during the GIES.

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All that Sedco Capital has achieved would not have been possible without the hard work, commitment and support of your team, please share your views on the team and how do you motivate them as their leader. We all work together, we always give positive feedback, we have a great working atmosphere and we base our culture on mutual respect; all these elements have made us an employer of choice in the industry where top talent is approaching us to join SEDCO Capital. All this is in line with our shareholders’ vision and the strong governance by the authority (and trust) given to management. Today SEDCO has been ranked as the 11th best working environment employer in Saudi Arabia. Share with us your journey into Islamic banking and finance? SEDCO Capital was born Shari’a compliant; we started all of our product offerings since inception to be in line with the principles and practices of Shari’a. As we developed over the years, we continuously innovated products and solutions in an industry that is based on interest and hedging; this proved to be very challenging. However our determination, experience of over 20 years and our well rounded team allowed us to develop products that not only lead in the Shari’a world, but also to be at par with conventional offerings from other banks. Moreover, our scale has also contributed in providing very competitive TER’s in the market, which has put us at a clear advantage. personal level. You have contributed to the industry Share with the readers of ISFIRE a What are some of the most exciting in different ways, through speaking typical day of Hasan Al Jabri. How projects you have worked upon? engagements, article contributions does it start and how it ends and etc. How do you balance these with Over the past 2 year, our main focus has been the workload? what is on your must do list? on launching the Luxembourg platform as our To have a clear schedule for the day, week, work in bridging the gap between Shari’a and Thanks to the strong team that I have, they month, and even the year ahead of time is responsible investing. We are also working on a always help me with great ideas and with what you need to deliver and achieve. My few projects to support SMEs that are vital for the day-to-day workload. This gives me work involves a lot of travel since a lot of our sustainable economic development. the opportunity to spend more time on other engagements, which is also helpful in investments are international in nature. Our The US real estate timing was spot-on so it developing our knowledge and network. strong team manages their portfolio, yet I was really quite an interesting opportunity to have to visit our clients and managers globally. work on. Also developing our co-investment One has to try and balance the requirements of Travel takes a lot of my time; nevertheless, we activities where we’re buying into very exciting the day-to-day business and our responsibility must schedule the time way ahead so you can businesses globally. to share our knowledge with the industry. This use it efficiently. I do delegate a lot especially gives us the chance to introduce what we are On the CSR front, the financial literacy to our strong team. I keep an open door policy doing and share our view on the future, on the programme developed by SEDCO holding in to spend time in listening to senior and young investment team and on the industry in general the name of “Riyali” has gained a lot of ground staff. through our innovations and services we offer over the past two years included in the circle of to our clients. I take lunch as an opportunity to have beneficiaries’ are young business owners and discussions with our colleagues; this helped student as at all levels. Another interesting CSR to get to know them better and listen to them initiative that we are involved in is “Foras”, an while keeping me in tune with the whole angel investors programme that helps young organisation on both a professional and Saudis develop their business.

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AND OF A non-academic investigationB into the networks that control Islamic financial institutions BROTHERS Is there a dotted line between Islamic Shari’a scholars are too damn powerful, “We must make Shari’a scholars financial institutions and the global terrorist more accountable,” “Islamic banking industry is hostage to a small group of Shari’a networks? Where are most of the assets under scholars” … management of Islamic financial services located? To understand all these issues, it is These are echoes of conversations many of Al Asad of Syria), Muammar Qaddafi, Saddam important to look into a number of phenomena, those who are involved in Islamic banking Hussain and other leaders in the Muslim world, mechanisms and processes: and finance (IBF) must have heard at various with inclination towards socialism. Interestingly A. Shareholding composition of some of the conferences, seminars and discussion groups. enough, IBF initially failed to get traction from largest Islamic banks in the world; In fact, once there was a serious attempt many other governments in the Muslim world. (hopefully unintended!) By a small consultancy It was only after some heavyweight Western B. Regulatory bodies for Islamic financial company to destroy credibility of Shari’a financial institutions showed their trust in IBF institutions; scholars. The so-called “social network” that some governments in the Muslim world C. Affiliations of the Shari’a scholars involved approach adopted therein certainly managed started accommodating IBF in their regulatory in IBF; to dint the credibility of Shari’a scholars and regimes. D. Attitudes of terrorist groups towards IBF; in fact brought a lot of genuine issues to If it is not Al-Qaeda or its remnants who are and the forefront of the policy debate. But… the controlling IBF, who is it that is behind the E. Involvement of non-Muslims in IBF. question remains. Who controls IBF? For global movement of IBF? Is it Shari’a scholars disappointment of many (the likes of http:// who control IBF or the centre of power lies www.shari’ahfinancewatch.org), “Who WHO OWNS ISLAMIC BANKS? somewhere else? Is it actually a legitimate Controls IBF” is not a who’s who of the people There are three categories of owners of Islamic question to ask after all? on the sanction lists drawn up by America and banks: the EU. It is also not a guide to the so-called If ulama’, or Shari’a scholars, are not central A. Governments; Islamic caliphate that seems to be emerging in to IBF, then who else? Is it the Saudi royal parts of Iraq, Syria and the neighbourhood. family? Are these the ruling families in UAE B. High Net Worth Individuals (HNWIs) and families; and IBF has in fact emerged as an Islamic capitalistic and other countries in the Gulf Cooperation C. General public. movement, which fits well in the Western Council (GCC) area, which are controlling capitalism. This is one of the reasons that it Islamic financial institutions? Are there some A. Governments failed to earn patronage of the likes of Hafiz Al other invisible hands behind the growing There have been a few governments in the Asad (father of the current President Bashar global Islamic financial services industry? Muslim world, which are friendly towards IBF.

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Malaysia is an exception where the government countries are isolated from the global Islamic and financial sector in commensurate with the has taken an unambiguously strong and financial services industry primarily because of Islamic economic doctrine. Similarly, despite favourable approach towards the development the on-going economic sanctions by USA and having captured the market share of about of IBF. Almost all other governments in the other allied countries. 20%, Bangladeshi Islamic banks are growing Muslim world are at best indifferent to IBF and through a market-based approach rather than Iranian banks account for about 40 per cent in some cases hostile towards its development. an explicit government support. The politics of total assets of the world’s top 100 Islamic Admittedly, there are countries that have of IBF in Turkey (with secular constitution) banks. Bank Melli Iran, with assets of $45.5 started showing interest in the development remains complex, despite recent sympathetic billion came first, followed by Saudi Arabia’s of IBF, and the newly elected government in approach by the government. Egypt, despite Al Rajhi Bank, Bank Mellat with $39.7 billion Pakistan is one of them. It must, however, be being the birthplace of modern IBF, has also and Bank Saderat Iran with $39.3 billion. emphasised that there is nothing sinister about been careful in its treatment of IBF. Iran holds the world’s largest level of Islamic this changing attitude of the governments in finance assets valued at US$489 billion, which Malaysia the Muslim world towards IBF. Similarly, it is is US$150 billion more than the next country only recent that the government in Turkey Malaysian government is by far the most in the list, i.e., Saudi Arabia. Six out of ten top has started realising that IBF provides a great committed advocate of IBF in the world. It Islamic banks in the world are Iranian. opportunity for it to attract Islamic capital from is primarily due to the successive Malaysian other parts of the Muslim world. It is also worth mentioning that Bangladesh is governments and the role of a catalyst of Bank perhaps the most under-rated country in the Negara Malaysia that Malaysia enjoys a vibrant Arguably the strongest opponents of IBF in world, although it has over 20% market share Islamic financial system. Some of the royal the Muslim world, the likes of the regimes of for its Islamic banks – double of the comparable families in Malaysia have also been involved in Muammar Qaddafi, Saddam Hussain and Hosni figure for Pakistan, which has been one of the IBF. The most obvious leadership role is being Mubarak, are no more relevant, but still there most talked about and most frequently cited played by HRH Sultan Nazrin Shah of Perak exists strong resistance to the introduction country in the global Islamic financial services (GIFA Laureate 2012) who serves as Financial of IBF in most of the countries included in industry. Although industry observers and Ambassador for Malaysia International Islamic the Organisation of Islamic Cooperation analysts refer to Al Rajhi Bank as the largest Financial Centre (MIFC). The royal family of (OIC). The opposition has largely come from Islamic bank in the world (excluding Iran), Islami Negri Sembilan is also involved in IBF through the authoritarian regimes and, in case of Bank Bangladesh has escaped attention. With its shareholding in the Bahrain-based Ithmaar democratic countries, from the bureaucracy. nearly 300 branches and about 12,000 strong Bank. Two notable countries where government-level staff, it has the largest Islamic banking network The government of Malaysia has direct and support exists for IBF are Iran and Sudan. Both in Southeast Asia. indirect shareholding in a number of Islamic financial institutions. Two notable government It is also worth mentioning that Bangladesh is perhaps the most under-rated investments are as follows: country in the world, although it has over 20% market share for its Islamic banks Tabung Haji: Tabung Haji is the oldest example – double of the comparable figure for Pakistan, which has been one of the most of success of an Islamic financial institution. talked about and most frequently cited country in the global Islamic financial Primarily a savings programme for those who services industry. Although industry observers and analysts refer to Al Rajhi Bank intend to travel to Makkah for pilgrimage, as the largest Islamic bank in the world (excluding Iran), Islami Bank Bangladesh has Tabung Haji has emerged as an influential escaped attention. With nearly 300 branches and about 12,000 strong staff, it has player in the Islamic financial services industry, the largest Islamic banking network in Southeast Asia.

Why government support has not been 4. Kuwait forthcoming for IBF? 5. Qatar Although a number of factors may have Interestingly, all these five countries are very contributed to the lack of support for IBF small in terms of population. Their significance by Muslim governments in the past, it is and influence in the politics of the Muslim however currently by and large a bureaucratic world is rather limited as well. None of the problem. It is no more seen as a political above countries has a population more than threat, which was erroneously the case in the 30 million. While Malaysia has the highest past. Introduction of IBF requires substantial population in the above group, it is notable changes in legal frameworks, taxation laws, that the Muslim population therein is only banking and financial regulation, and property about 60% of the total population in the rights. The bureaucracy in these countries country. The governments of the countries finds it a daunting task, and hence is unwilling to with the largest Muslim populations are at best change the status quo. indifferent if not hostile to IBF. Indonesia, for example, is a secular country constitutionally; If someone has to pick up five governments its government finds it difficult to patronise supporting IBF, weighted by their global IBF officially. In the recent past, changes in significance, the following list will emerge: certain laws have allowed Indonesia to use 1. Malaysia sukuk as a capital market instrument to raise 2. United Arab Emirates funds for the public sector. Pakistan, which is constitutionally an Islamic republic, has for long 3. Bahrain resisted demands for transforming its economy

19 ISLAMIC FINANCE REVIEW | MARCH 2015 TALKING POINTS with significant shareholdings in Bank Islam and two Islamic banks, a number of other Islamic Islamic financial services industry, although a number of other Islamic financial institutions. banks and financial institutions are operating some other players like Malaysia, UAE and now in the UAE. Almost all these initiatives have Qatar are gradually claiming the leadership turf Khazanah: Malaysian sovereign fund, royal patronage, although the Central Bank from it. Khazanah, has been instrumental in promoting of the UAE does not seem to treat Islamic IBF in the country as well as outside Malaysia. It Bahrain has also been influential in terms of banks any different from their conventional has been instrumental in developing an Islamic its advocacy role in the global Islamic financial counterparts. Hence, Islamic banks despite capital market through its various roles in the services industry. Long before any other having shareholdings from the ruling families issuance of sukuk in the country. It also has country, it patronised World Islamic Banking do not enjoy any preferential treatment. This significant shareholding in Fajr Capital, a Dubai- Conference (WIBC), arguably the largest is primarily due to the fact that most of the based Islamic private equity firm, which in turn annual gathering of practitioners of IBF in the conventional banks are also either owned by has 40% shareholding in Bank Islam Brunei world. Through such initiatives, the government the state governments or members of the Darussalam. of Bahrain succeeded in integrating the ruling families. economy of Bahrain with the other economies Furthermore, through MIFC Bank Negara Through these Islamic banks and financial in the GCC region. Malaysia and Securities Commission Malaysia institutions, governments in the federation of are pro-active in promoting and hence Kuwait UAE play an influential role in the global Islamic controlling the Islamic financial services financial services industry. For example, Dubai Kuwait has played a globally visible role in the industry. Islamic Bank now operates as an international Islamic financial services industry, spearheaded Malaysia also hosts Islamic Financial Services conglomerate with its investments in Pakistan by Kuwait Finance House, which has direct Board – the global body set up to develop (Dubai Islamic Bank Pakistan), Jordan and presence in a number of countries, most regulatory and prudential guidelines for the Sudan, etc. notably in Bahrain (KFH-Bahrain), Turkey institutions offering Islamic financial services. (Kuveyt Turk) and Malaysia (KFH-Malaysia). Similarly, ADIB has in the recent years Apart from Kuwait’s role in setting up Islamic United Arab Emirates expanded into Egypt and UK. It has very banks, it has been involved in setting up other aggressive plans to acquire assets around the Although the UAE government has not firms that are now offering their services to world, especially in the MENA region. Al Hilal been involved in official advocacy of IBF, the Islamic banks and financial institutions. Most Bank, another bank owned by the government governments and the ruling families in the notable of such an investment is in International of Abu Dhabi, already has set up a bank in country have invested heavily in Islamic banks Turnkey Systems (ITS), which is a global player Kazakhstan and has potential to become a and financial institutions. It is only recent in the Islamic financial technology. global leader in the Islamic financial services that the government of Dubai has officially industry. The government of Kuwait has brought IBF announced to make Dubai as a centre of into the mainstream by allowing non-ruling excellence for the global Islamic economy. Bahrain families to freely set up Islamic banks and Dubai holds the distinction of hosting the Bahrain government has for long used financial institutions and in some cases by oldest Islamic commercial bank in the world, its financial sector strategy to promote directly investing in the industry. For example, namely Dubai Islamic Bank. Abu Dhabi, the and develop IBF in the country to attract the government of Kuwait holds almost half of more dominating emirate in the federation foreign capital. With the industry-building shares in KFH – one of the oldest Islamic banks has its own flagship Islamic bank, namely Abu organisations like AAOIFI, IIFM, IICRA and in the world – through Kuwait Investment Dhabi Islamic Bank (ADIB). In addition to these LMC, Bahrain remains relevant to the global Authority (24.08%), Public Authority for Minor Affairs (10.48%), Awqaf Public Foundation (8.29%) and Public Institution for Social Security (6.02%). Through such institutions, the government of Kuwait attempts to influence developments in IBF in other major markets. A detailed analysis of such an influence and control is included in the forthcoming Global Islamic Finance Report 2015, to be released by Edbiz Consulting towards the end of the first quarter of the year. Qatar The government of Qatar has in the recent years has aggressively acquired Islamic financial assets around the world. Through Islamic financial institutions, it has made major investments in a number of countries, including Pakistan (e.g., Pak-Qatar Takaful), UK (e.g., Al Rayan Bank, UK), and a number of countries in the MENA region. All Islamic banks in the state of Qatar have direct or indirect patronage of the royal family. Qatar Islamic Bank, Qatar International Islamic Bank and Al Rayan Bank have their presence in multiple jurisdictions

20 ISLAMIC FINANCE REVIEW | WWW.ISFIRE.ORG TALKING POINTS and are deemed as global players in the Islamic Islamic investment companies are located in Based in Bahrain, Ithmaar Bank is now the financial services industry. Bahrain, Egypt and Pakistan. There are also flagship institution of DMI Trust, which holds associated Islamic insurance companies based interests in a number of banks and non-bank B. HNWIs and Families in Bahrain and Luxembourg, providing services financial institutions in a number of countries. The following HNWIs and families are the to the Islamic communities in the Middle East In February 2013, Ithmaar Bank merged with movers and shakers of the global Islamic and Europe. one of its Bahrain-based associates, First Leasing Bank, increasing its capital to US$758 financial services industry: The Board of Supervisors of DMI Trust directs million. A. Prince Mohammed Al Faisal and oversees the business of the Group. DMI Administrative Services S.A., located in Sheikh Saleh Kamil B. Sheikh Saleh Kamil Geneva, Switzerland, provides assistance to the Another influential C. Sheikh Sulaiman Bin Abdulaziz Al Rajhi Board of Supervisors, in particular in the areas personality in IBF is Looking at the above list, one is inclined to of legal and financial control, audit and risk Sheikh Saleh Kamil, conclude that Saudi Arabia holds key to the management and information technology. founder and Chairman global Islamic financial services industry, as DMI Trust is an institution that creates, of Dallah Al Baraka all the three individuals are in fact Saudis. maintains and promotes Islamic financial Group that owns Al As mentioned earlier, however, IBF is much institutions. Asset management is one of the Baraka Banks in Bahrain, more than just being a Saudi phenomenon. A Group’s core business activities. Primary Pakistan, Bangladesh, number of countries, and the HNW industrial success of the business lies in the strategy with strong presence in other OIC countries families therein, own and control Islamic that it invests clients’ funds prudently along Jordan, Tunisia, Sudan, Turkey, Egypt, Algeria, financial institutions. For example, Randeree with the principal shareholders’ funds with the South Africa, Lebanon, Syria, Iraq, Saudi Arabia, family, a UK-based South African family holds objective of earning secular returns, although Indonesia and Libya. shareholdings (albeit small) in Islamic financial the businesses and transactions are Shari’a institutions in UK, Pakistan, South Africa and Interestingly, like his other peer, Prince compliant. Given the depth of its investors’ the South East Asia. There are numerous other Mohammed Al Faisal, Sheikh Saleh Kamel base, DMI has devised a comprehensive range such families that are influential in the global chose to operate outside his native Saudi of Islamic financial instruments to channel Islamic financial services industry. In this article, Arabia. This was supposedly a deliberate pan- investors’ funds into viable Shari’a compatible we shall restrict our focus to the above three Islamic strategy to benefit from the vast market operations and investments. HNWIs. of the OIC comprising 56 countries. Through DMI Trust, Prince Mohammed Prince Mohammed Sheikh Sulaiman Bin developed a network of Faisal Banks in Al Faisal Abdul Aziz Al Rajhi different parts of the Islamic world, notably If someone has to trace in Pakistan, Egypt and Sudan. After a lot of The largest Islamic banks a royal connection in the restructuring of the group and a series of by size are arguably the global Islamic financial mergers and acquisitions, Faisal Bank brand Iranian state-owned services industry, the has lost its significance in the mainstream IBF, banks. Outside Iran, buck goes back to no although the founding shareholders in the DMI Al Rajhi Bank is the other than the late King Trust continues to hold stake in a number of largest Islamic bank in Faisal Bin Abdul Aziz Islamic banks, most notably Ithmaar Bank of terms of assets under Al Saud whose eldest son Prince Mohammed Bahrain. management and market capitalisation. The Bin Faisal Al Saud played a pioneering role in principal shareholders of the bank are Al Rajhi Although Prince Mohammed Al Faisal’s developing IBF as a pan-Islamic phenomenon. family, which is an influential industrialist family visibility in IBF has decreased following the in the Kingdom of Saudi Arabia. In its first phase of development, IBF benefited restructuring of the DMI Trust, there is no from the support and patronage of the likes of doubt that his vision and strategic thinking Although Sheikh Sulaiman Al Rajhi has now Prince Mohamed Al Faisal, the founder of Dar remain central to the development of retired from all of his businesses after donating Al Maal Al Islami (DMI) Trust - technically a institutions owned by the DMI Trust. He is his personal wealth, Al Rajhi Holding continues trust but in effect a holding company. Founded most widely revered in the Muslim world, and is to play a dominant role through several of his in 1981, it has an extensive network stretching treated with due respect in the Western world. sons. Outside Saudi Arabia, the family owns over four continents, with well-integrated Although after 9/11, there were attempts to Al Rajhi Bank in Malaysia, and a number of regional subsidiaries enabling it to respond to tarnish his image, people like Richard A. Debs, companies (industrial as well as financial) local business needs and conditions. Based on an advisory director at Morgan Stanley and vice throughout the world. this geographic structure, the DMI Group and chairman of the United States-Saudi Arabian associates act as a financial bridge between the Business Council, thinks, “Prince Mohammed C. Regulatory Bodies world’s leading financial centres and Islamic has been unfairly persecuted and attacked. I Although there are a number of regulatory countries. just don’t see the connection between Islamic bodies on a global level to bring discipline to finance and Islamic extremism.” The Group comprises three main business IBF, but none can be considered as controlling sectors: Islamic banking, Islamic investment and The new face of DMI Trust is Prince Amr the Islamic financial services industry. Most Islamic insurance. Mohammed Al Faisal, a son of Prince of the financial regulators treat Islamic banks Mohammed Al Faisal. DMI Trust continues to and financial institutions on a par with the Islamic banking is exercised in different forms: hold interests in 55 Islamic banks and financial conventional banks and financial institutions, commercial and retail banking in the Gulf region institutions around the world, although Ithmaar with no separate regulatory framework and other parts of the world; fund management Bank is now the new face of the businesses for the former. Exceptions do exist, e.g., in and financial services in Switzerland and Jersey. owned by it. Malaysia where separate laws and regulatory

21 ISLAMIC FINANCE REVIEW | MARCH 2015 TALKING POINTS regimes exist for Islamic banks, takaful companies and Islamic capital market players. TABLE 1: OVERLAPPING MEMBERSHIP OF SHARI’A ADVISORY COMMITTEE In other countries like Pakistan, Islamic banks, AND BOARD OF DIRECTORS IN MALAYSIAN ISLAMIC BANKING (SELECTED takaful companies and other Islamic financial institutions are regulated by State Bank of BANKS) Pakistan (SBP) and Securities and Exchange NO. NAME OF BANK MEMBERS OF SHARI’AADVISORY ALSO MEMBERS OF Commission of Pakistan (SECP). COMMITTEE BOARD OF DIRECTORS Nevertheless, there are five global bodies that 1. Affin Islamic Bank 1. Dr Said Bouheraoua (Chairman) 1. Dr Said attempt to influence practices of IBF in the 2. Dr Ahmad Azam Othman Bouheraoua world: 3. Dr Zulkifli Hasan A. Accounting & Auditing Organisation of 4. Dr Yasmin Hanani Mohd Safian Islamic Financial Institutions (AAOIFI) 5. Mr Muhammad Mahbubi Ali B. Islamic Financial Services Board (IFSB) 2. CIMB Islamic Bank 1. Dr Mohamed Azim Mohamedd 1. Dr Mohamed C. International Islamic Financial Market Adil (Chairman) Azim Mohamedd (IIFM) 2. Dr Mohammad Hashim Kamali Adil 3. Sheikh Nedham Yaqoobi D. General Council for Islamic Financial 2. Professor Dato’ Institutions (also known as CIBAFI) 4. Sheikh Dr Haji Mohd Nai’m Haji Dr Sudin Haron E. Islamic Research and Training Institute Mokhtar (IRTI) 5. Dr Shafaai Bin Musa D. Shari’a Scholars 6. Dr Yousef Abdullah Al Shubaily 7. Dr Noor Inayah Yaakub Perhaps the most influential Shari’a scholar in 8. Sheikh Muhamad Taufik Ridlo the global Islamic financial services industry is 9. Professor Dato’ Dr Sudin Haron Sheikh Muhammad Taqi Usmani, a Pakistani 3. Alliance Islamic 1. Dr Abdul Rahman Bin Awang 1. Dr Abdul Rahman cleric who represents the dominant hanfi school of Islamic jurisprudence. There is no Bank (Chairman) Bin Awang 2. Tuan Haji Md Ali Bin Md Sarif denial of the fact that Shari’a compliancy 2. Tuan Haji Md Ali 3. Ustaz Zaharudin Bin remains central to IBF but it is important to Bin Md Sarif underplay any sensationalisation of the power Muhammad of fatwa. There is nothing sinister about the 4. Dr Badaruddin Bin Hj Ibrahim involvement of Shari’a scholars in IBF - they just 5. Dr Muhammad Amanullah happen to provide technical advice on Shari’a 4. Public Islamic 1. Dato’ Dr Mahmood Zuhdi Bin 1. Dato’ Dr matters related with banking and finance. Bank Hj Ab Majid Mahmood Zuhdi In most of the countries where the role of 2. Mr Mohd Ridzuan Bin Awang Bin Hj Ab Majid Shari’a scholars is emphasised upon in IBF, it is restricted to the advisory services on Shari’a 3. Dr Mohd Afandi Bin Awang matters. Hamat 4. Dr Rusnah Muhamad Perhaps Malaysia is the only country where the 5. Dr Abdul Bari Awang banking regulator, BNM, is pushing for a role of Shari’a scholars in the corporate governance 8. Sheikh Muhamad Taufik Ridlo overlapping memberships but it is a trend of Islamic financial institutions. There are a 9. Professor Dato’ Dr Sudin Haron (also an being followed by an increasing number of few Islamic banks in Malaysia, where Shari’a independent director of CIMB Islamic institutions. It is interesting to note that full- scholars sit on the boards of directors of the Bank) fledged standalone Islamic banks like Bank banks as well as being members of the Shari’a Islam, Bank Muamalat and Bank Rakyat have Out of the nine members of Shari’a Advisory advisory committees. However, it is important so far not opted for overlapping memberships, Committee of CIMB Islamic, two are also to note that such scholars in Malaysia do not perhaps because such institutions already independent members of the Board of come from the pure madrasa backgrounds. have a strong commitment to Shari’a assurance Directors of the bank. This is a clear indication For example, the recently restructured Shari’a and that the senior management are already of the growing importance of Shari’a advisory committee of CIMB Islamic comprises deemed fully committed to Islamic banking. The compliance in the Malaysian IBF. CIMB Islamic of the following members: Islamic banking subsidiaries of conventional Bank’s Shari’a Advisory Committee is perhaps banks use overlapping memberships to 1. Dr Mohamed Azim Mohamed Adil the largest such committee of an Islamic indicate to the market that there is strong and (Chairman and also an independent bank anywhere in the world. It comprises full commitment at the shareholders level to director of CIMB Islamic Bank) traditionally trained Shari’a scholars as well as upholding Shari’a principles. 2. Dr Mohammad Hashim Kamali those who attended contemporary universities, 3. Sheikh Nedham Yaqoobi possessing either formal education in or Another interesting feature of appointment of practical experience of IBF and Shari’a. Shari’a Advisory Committees at the bank level 4. Sheikh Dr Haji Mohd Nai’m Haji Mokhtar is that such committees are restructured very Other Malaysian Islamic banks with overlapping 5. Dr Shafaai Bin Musa frequently to ensure that no individual Shari’a membership of Shari’a Advisory Committee 6. Dr Yousef Abdullah Al Shubaily scholars are too strong and influential at the and Board of Directors are given in Table 1. bank level. The influence of individual Shari’a 7. Dr Noor Inayah Yaakub Not all Islamic banks in Malaysia have such

22 ISLAMIC FINANCE REVIEW | WWW.ISFIRE.ORG TALKING POINTS

TABLE 2: TOP 10 SHARI’A SCHOLARS INVOLVED IN IBF

NO. SCHOLAR COUNTRY OF AREAS OF INFLUENCE GEOGRAPHICAL INFLUENCE DOMICILE 1. Sheikh Muhammad Taqi Pakistan Regulatory bodies, banks, takaful companies, asset Global Usmani management 2. Sheikh Nedham Yaqubi Bahrain Banks and asset management Global 3. Dr Mohamed Elgari Saudi Arabia Banks and asset management Global 4. Dr Abdul Sattar Abu Syria Banks, takaful companies and asset management Global Ghuddah 5. Dr Hussein Hamid Hassan Egypt Regulatory bodies, takaful, asset management Global, particularly GCC 6. Dr Mohd Daud Bakar Malaysia Regulatory bodies, takaful, asset management Global, particularly Malaysia 7. Dr Ali Al-Quradaghi Qatar Banks GCC 8. Sheikh Abdullah Al-Manee’ Saudi Arabia Banks Saudi Arabia 9. Sheikh Siddiq Al Dareer Sudan Banks and regulatory bodies Sudan 10. Dr Yousuf Al-Qardwai Sudan/Qatar Banks and government bodies Qatar and Sudan scholars at the bank level is further diluted few charities run by Muslims were put on the 4. Stella Cox by the centralised Shari’a Advisory Council blacklists of the US and European authorities, 5. Neil Miller of Bank Negara Malaysia (BNM), which has no credible links were found suggesting any Professor John the final word in matters related with Islamic systematic associations of such charities Presley banking and takaful in the country. with the Islamic financial institutions. In fact, the scrutiny of Islamic financial institutions Professor John Presley Each country has its own approach to Shari’a helped in understanding the nature of the is the first non-Muslim advisory. For example, the Middle Eastern IBF business, and many Western financial recipient of the countries have right from the beginning institutions started having more confidence in prestigious IDB Prize opted for a market-based approach to Shari’a doing Islamic financial business. in Islamic Finance. As a advisory, allowing individual Islamic banks professor of economics and financial institutions to appoint their own While a number of Western financial and head of economics Shari’a Advisory Committees. It is perhaps institutions decided to start their IBF activities department at Loughborough University, because of this allowance that the individual following the 9/11 attacks, many extremist he played an instrumental role in developing Shari’a scholars are deemed more influential Islamic groups started distancing themselves Islamic economics, banking and finance as an in the Middle East than in other parts of the from IBF. A major reason behind this growing academic discipline in the Western hemisphere. world. distance between extremism and IBF is the He, along with his colleague Humayon Dar, view taken by extremist groups that IBF is not In Indonesia, Majelis Ulama is a body co-founded the first-ever master programme sufficiently Islamic. recognised by the central bank, Bank in Islamic economics, banking and finance ever Indonesia, as a competent authority to issue offered by a university in the Western world. fatwas and Shari’a rulings on Islamic financial WHY NON-MUSLIMS ARE INVOLVED Professor Rodney matters. However, Majelis Ulama retains its IN IBF? Wilson independence from the central bank or any As IBF is purely a business phenomenon, it other government departments to ensure In 2014, Professor is not surprising to see many non-Muslims Shari’a authenticity. Rodney Wilson became involved in it. Conventional financial institutions the second non-Muslim Table 2 lists top 10 Shari’a scholars who have are engaged in IBF purely for opportunistic to receive an IDB Prize great influence in Shari’a matters related with reasons. IBF is a US$2 trillion industry in Islamic Finance. He banking and finance. with huge growth potential, and a number has the distinction of of Western financial institutions want to supervising the largest strategically position themselves in the industry IBF AND TERRORISM number of PhD students in the areas of Islamic for prospective business opportunities. After an analysis of influence of mainstream economics, banking and finance, and has huge institutions, families and individuals in IBF, a Amongst non-Muslim individuals who have following and influence in the Muslim world, brief note on its possible link with terrorism is assumed importance in IBF for their academic especially in the Middle East where his former essential to wrap up the discussion. as well as industry involvement, the following students hold key positions in government persons deserve special mentioning: departments and Islamic financial institutions. Following the terrorist attacks in the New York, After retiring from Durham University, he is there was an extensive scrutiny of the activities 1. Professor John Presley now serving as an Emeritus Professor in Islamic and operations of Islamic banks and financial 2. Professor Rodney Wilson Finance at INCEIF. institutions by the US government as well as 3. Professor Simon Archer other agencies and authorities in Europe and Professor Simon Archer the countries in the OIC block. Although a Professor Simon Archer supervised Professor

23 ISLAMIC FINANCE REVIEW | MARCH 2015 TALKING POINTS

Rifaat Abdul Karim (the also engaged with different government bodies financial services industry for the benefit of any founding Secretary in the UK to advise them on matters related particular stakeholder group. The perception General of AAOIFI with Islamic finance. amongst some cynics that IBF is a religious and IFSB) for his phenomenon that aims at aiding the Islamist Neil Miller PhD research, and movement is not substantiated by facts. There subsequently got Neil Miller is one of are certainly a few shareholders groups who involved in developing an the most recognised have control over the industry to maximise accounting and auditing and awarded legal their profits. This is, however, a legitimate framework for Islamic professionals in the business objective in pursuit of which IBF is not financial institutions Islamic financial services much different from other forms of business. through AAOIFI. He has also been involved in industry. He was a Started as a pan-Islamic phenomenon, IBF is developing a regulatory framework for Islamic member of the UK now seeking business in the markets that have financial institutions through his involvement Treasury Committee not been on the radar of Islamic banks and with IFSB. of Islamic finance experts, a member of the financial institutions. In the UK alone there are FSA committee on Islamic finance and worked Stella Cox six Islamic banks set up by shareholders groups closely with the Muslim Council of Britain and originating from the Middle East. Similarly, Stella Cox is a senior other bodies to promote and develop Islamic there is an ever-increasing presence of Islamic financial expert finance in the UK. In January 2005 Neil was financial institutions in the financial centres who has helped the nominated as one of the “Hot 100” by The around the world. This should clearly show Islamic financial Lawyer in recognition of his work in developing that IBF does not have any hidden agenda services industry the market leading Islamic finance practice. that movers and shakers of the industry may by operationalizing With an over two decades of involvement in otherwise be pursuing. Any institution that commodity murabaha. IBF in different leadership roles, Neil Miller puts forth itself for scrutiny of secular financial Her contribution in is one of the influential opinion-makers in the regulators cannot simply do so. IBF is more than of Islamic financial services industry. a practitioner as she continues to play her advocacy role through her speaking engagements at conferences, CONCLUSIONS seminars, symposia and workshops on IBF in The above discussion demonstrates that there the West as well as in the Muslim world. She is is no systematic effort to control the Islamic

24 Introduction: Islamic Bankers Association (IBA) is a new international industry representative body for practitioners of Islamic banking and finance. It is officially incorporated in United Kingdom, with its registered office in London. The IBA membership is open to individuals and corporates, and aims to become the largest industry representative body for Islamic banking and finance in the world.

Membership categories include: Corporate Membership: For all Islamic banks and the institutions offering Islamic financial services – IIFS (Annual Fee: £3,500) Associate Corporate Membership: For all businesses that offer their services to Islamic banks and IIFS (Annual Fee: £5,000) Individual Membership: For all the employees of Islamic banks and IIFS, with work experience of a period of five years or more (Annual Fee: £100) Young Professional Membership: For all the employees of Islamic banks and IIFS, with work experience of a period of less than five years (Annual Fee: £50) Associate Individual Membership: For any professional whose application is endorsed by at least one existing member of IBA (Annual Fee: £100)

Islamic Bankers Association is a non-profit organisation, registered in England and Wales as a company limited by guarantee, and does not offer any financial products and as such is not regulated by Financial Conduct Authority.

If interested in becoming a member, please get in touch with Khuram Shehzad on: +44 (0) 20 3617 1089 or [email protected] TALKING POINTS

Do Young Muslims Subscribe to

Dr Sofiza Azmi, Director Islamic Financial of Strategy, Policy Development & Research at Products? Asian Institute of Finance 26 ISLAMIC FINANCE REVIEW | WWW.ISFIRE.ORG TALKING POINTS

For the past 30 years of its existence, the Islamic Financial Services Industry (IFSI) Figure 1: Muslims as a Share of World Population, 1990-2030 has been successful in providing an array of financial products. We have also seen a 10 billion steady double-digit growth. According to the forthcoming Global Islamic Finance Report 2015, Islamic banking and finance (IBF) 8 assets grew at an annual rate of about 17.82% between 2008 and 2014. And if it continues to grow like this, global Islamic financial services 6 6.1 B industry is expected to reach US$5.3 trillion 5.8 B by the end of 2020. While it is an impressive Non Muslims 5.3 B growth in its own right, it is however important 4 4.8 B to investigate what future holds for the 4.2 B industry vis-à-vis new generation of Muslims who are fast changing in terms of lifestyle and 2 26.4% financial choices. 2.2 B 1.9 B of world 1.3 B 1.6 B population With only about 12% of the world’s Muslims Muslims 1.1 B 19.9% 21.6% 23.4% 24.9% is muslim currently subscribing to IBF, the potential for 0 further growth is significant, an expectation 1990 2000 2010 2020 2030 that is reinforced by the fact that Muslims make up about a fifth of the world’s population. Percentages are calculated from unrounded numbers. Cross hatching denotes prjected figures According to Pew Research Center, Muslims Pew Research Center’s Forum on Religion & Public Life - The Future of the Global Muslim Population, are forecasted to comprise of nearly 25% of the January 2011 world’s total projected population of 7.7 billion by 2020 (Figure 1). years ranging from the early 1980s to the early The spectacular acceptance and demand for 2000s. Generation X, on the other hand, are Islamic finance means that within the next The question that arises: how can Islamic banks those who were born before the 1980s. decade, the industry is likely to capture half the tap into growing market, especially unbanked savings of the 1.6 billion-strong Muslim world segment of Muslims? Understanding the PwC calls them powerhouse of the global over. It is tempting to assume that the growth financial behaviour of this segment is important economy. Some refer them as the “Futurist” is being fuelled by the Gen X of Muslims keen for Islamic banks to formulate a more effective or the “New Muslim Consumer” as this to take advantage of an offering that complies marketing strategy. Most importantly, it is young Muslim population is seen as more with their traditional way of life. Not so: the imperative that Islamic banks understand the individualistic, ambitious than the mainstream vast majority of the uptake comes from the financial behaviour of Generation Y or better Muslim consumer. They also have tastes and under-30 segment of the Islamic world, and it known as Gen Y (under 30s) as they are the preferences that are very much distinctive is this segment that holds the key to success next generation of customers. from their parents. Studies have shown that for more than 250 Islamic banks and financial they are more tied to their Muslim identity than It is estimated that about 30% of the world’s institutions that now operate in more than previous generations and want to associate Muslim population consists of young people 75 countries worldwide. The popularity of with brands that can elaborate this identity. under the age of 30, which implies that the Muslim community is a relatively young group. As Figure 2 depicts, over 60% of the population Figure 2: Percentage of Population of Muslim-Majority Countries in is under 30 years of age in Muslim-majority countries. In Malaysia, the below 30% segment Selected Age Groups, 1990-2030 1990 2010 2030 makes up nearly 40% the population. 40.9% 40% IBF is considered by many to be driving a new Islamic financial lifestyle, and it is assumed 31.9% that the young Muslims will by default opt for 30% 28.5% Islamic financial services. Despite the growing 26.0% 27.5% 24.4% perceived importance of young Muslim 21.4% 20.2% consumers in fuelling the next stage of growth 20% in Islamic finance, financial behaviour of Gen Y 16.3% 16.3% is not yet well established. 12.1% 11.9% 10% 9.3% GEN Y – WHO ARE THEY? 6.0% 7.3% Generation Y (or Gen Y) for the purpose of this article are the segment of population 0% which is below 30 years of age. Millennials Ages 0-14 15-29 30-44 45-59 60+ (another name for Gen Y) are the demographic Source: Pew Forum analysis of U.N data, weighted by country populations so that more populous countries affect the average cohort following Gen X. There are no precise more than smaller countries. Percentages may not add to 100 due to rounding. Cross hatching denotes projected figures. dates when the generation starts and ends. Pew Research Center’s Forum on Religion & Public Life - The Future of the Global Muslim Population, Researchers and commentators use birth January 2011

27 ISLAMIC FINANCE REVIEW | MARCH 2015 TALKING POINTS

To have a more effective marketing strategy Figure 3 to target Gen Y Muslim customers, Islamic financial institutions must understand their financial behaviour and financial knowledge. The working Gen Y For example, the respondents were asked, patronising IBF “What are the sources of financial information 34% they used to get advice on financial matters?” Interestingly, 67% of respondents said that they seek information on financial matters from family, friends and co-workers. Hence, word of mouth plays an important role in reaching out to this young segment. This finding also validates other research on consumer behaviour of Muslims, which showed that The percentage of Muslim communities tend to score highly on those from Gen X Hofstede’s collectivism score. This implies that 64% who are patronising IBF Muslims value word-of-mouth and in-group recommendations. And for young connected Muslims today, this is done at the click of a mouse. 40% The Percentage of the less Naturally, as a tech savvy generation, Internet than 30 years (Gen Y) in the is the most used source of information. A (12 million total population total of 64% of Gen Y Muslims used this in number) channel as their main source of information to obtain advice on financial matters. Here lies an opportunity for Islamic banks to ramp up their business to serve this untapped segment. Developing Apps that allow these young consumer segments easy access to information on Islamic financial products and services offered, may be the key to attract new 60% The percentage of Gen X consumers. in total population (1% million The third most popular source of information is the bank officers themselves. Nearly 40% in number) said they sought advice from their banks on financial products and services. Islamic finance professionals can then be looked as brand Islamic finance among these young Muslims assumption to make. The lack of rigour in ambassadors for Islamic finance. But less than responds to a resurgence of interest in their understanding market behaviour and customer half of respondents said bank officers were cultural and religious identity. This ‘baby boom’ psychology may be an impediment to growth in able to answer most of their inquiries about the of customers makes up the backbone of the the long run. product with proof. Furthermore, in a survey industry. conducted by Edbiz Consulting and published In a recent survey conducted by the Asian in the November 2014 issue of ISFIRE, it was However, due caution must be exercised Institute of Finance (AIF) on financial behaviour reported that Malaysian banks do not rank when interpreting such anecdotal evidence of Gen Y working professionals in Malaysia, high when it comes to loyalty amongst their as conclusive. More often than not, demand it was found that only 34% of young Muslims employees. for Islamic banking products and services is subscribed to Islamic financial products (see anchored on the size of the growing Muslim Figure 3). And of those who did, majority This raises another question: whether population, which may not be the best had only basic banking products – 46% of professionals in the Islamic finance industry predictor of demand. The growth of the Islamic respondents had savings account and less than have the relevant skills and competencies finance industry has been largely fuelled by the 20% had a current account with Islamic banks. needed to perform their job effectively. In demand for Shari’a-compliant financial services Another 22% of young Muslims financed their another study conducted by AIF, skills gaps from segments of the population that are property purchase with Islamic home financing amongst Islamic finance professionals were a consistent with their religious beliefs. Although or mortgage. Although this may reflect the prominent feature in the talent landscape in it is tempting to assume that the industry’s market share of Islamic banking in the country, Islamic banking. Skills that had the widest gaps growth will continue in tandem with growth it has long-term implication for further growth. (between an organisation’s skill needs and of young Muslims, this may be a perilous the current capabilities of its workforce) are strategic thinking and problem solving. These are skills that are categorised as highly urgent It happens to be the case that the largest portion of demand for Islamic and need immediate intervention. Product financial services in Malaysia still comes from the old generation – Gen X, as 64% knowledge, on the other hand, had a gap score of those who are already patronising IBF come from the population segment of 30+ of 22 – which falls under the category of “very years. important” gap to close.

28 ISLAMIC FINANCE REVIEW | WWW.ISFIRE.ORG TALKING POINTS

Figure 4:

Out of 5 million, 1 million Out of 5 million, 1.868 million people (20%) patronise IBF: people (18.68%) patronise IBF:

2015 2015

Gen X patronsing IBF Gen Y patronsing IBF Gen X patronsing IBF Gen Y patronsing IBF 340,000 660,000 680,000 1,868,000

20% of the Gen Y 33% of the Gen Y enters 33% new population 0.5% of the Gen X exit Phase Out of IBF when the Gen Xsegment enters Gen Y segment entering Gen X

AIF’s survey of Gen Y’s financial behaviour also on building consumer confidence through on a monthly basis on savings, investment, pointed to some disturbing findings. Only half service excellence especially in cross selling. loan repayment, living expenses and lifestyle. of Gen Y who subscribed to Islamic financial If Islamic banks can do this successfully, the Some interesting findings emerged. About products said they understood how profit rates market share of Islamic banks is estimated to 57% said they allocated between 10% and are calculated and less than half (42%) said they increase by 40% from this segment of young 20% of their income for savings purposes have full knowledge of the financial products consumers. On the other hand, if 20% of the whilst 24% allocated more than 30%. Only they had purchased. When asked to assess Gen Y are disillusioned by IBF by the time 32% of Gen Y Muslims set aside money for their overall financial knowledge, 61% said it they enter the relevant cohort of Gen X (in investments. And of these young Muslims, 56% was only average, i.e., having limited knowledge. future), it is expected to pull down the market said they allocated between 10% and 20% for These findings imply that majority of Gen Y still share of Islamic banking in the country by investment purposes while only 2% allocated have low understandings of Islamic financial 1.32%, if all other things are kept constant more than 30%. Unsurprisingly, 66% of young products and services. (see Figure 4). This is what may be called Muslims allocated between 10% and 20% of retardation effect. This is an alarming situation their income for lifestyle purposes such as The survey’s findings also show that the requiring Islamic banks and financial institutions clothing, accessories and holidays. average number of Islamic banking products to devise individually as well as collectively to per Gen Y customers is just two, mainly The key to gaining greater market share consistently increase their share in the market. deposits and home financing. While for the lies in the ability of Islamic banks to attract conventional banks, they normally have an The survey also looked at the financial the growing middle class of young Muslim average of 5 products per customer. Hence, behaviour of Gen Y Muslims. They were asked consumers. The above findings provide Islamic banks would need to focus more efforts how much did they allocate of their money an understanding of young Muslims’ financial behaviour in a more predictive and comprehensive manner. While Islamic banks are reinventing their business models to provide differentiated customer service and scaling up to meet global competition, the banks that are catering to young Muslims are certainly poised for the next wave of growth. More importantly, Islamic banks as individual players and as part of the Islamic financial services industry have to devise a comprehensive strategy for competition and growth. Assuming that the younger generation will follow the religious sentiments of their parents and hence will continue to patronise IBF may prove fatal. In the world of cut throat competition, complacency has no place.

29 ISFIRE REPORT

Challenges & Opportunities

An ISFIRE Report to which Fouzia in Islamic Finance Hassan Abdullah contributed significantly, along with research Education team of Edbiz Consulting 30 ISLAMIC FINANCE REVIEW | WWW.ISFIRE.ORG ISFIRE REPORT

stands today; IBF is fast assuming mainstream An associate professor specialising in Islamic banking and finance (IBF) relevance in a number of countries comprising resigned from his current position at a university in Pakistan to join another the Organisation of Islamic Cooperation to receive a salary almost double of what he was earning at that time. The (OIC). At the same time, new Islamic financial university in question had to find a replacement on an emergency basis, as markets are taking roots in the countries that development of its IBF programmes was in jeopardy due to the movement have historically been unwelcoming to IBF. of that particular staff. Similarly in the UK, a university hired two professors With this, a dire need is emerging for Islamic of Islamic finance, who left their jobs at two other universities that are now finance education, both academically and facing difficulties in finding their replacements. These are not isolated cases professionally. of shortage of human resources in IBF. In fact, in some cases the problems are This is in particular true in the countries with even more acute. Another institution was in serious trouble a couple of years recent interest in IBF. Libya, Nigeria and Kenya back when its sole professor of Islamic finance left to start a new job in Saudi are a few countries where qualified personnel Arabia. Facing the short notice, the institution had to arrange for temporary in IBF are difficult to find. Hence, a number of resources to supervise five PhD students the professor in question left behind training providers from other parts of the world unsupervised. It proved to be an extremely difficult and painful process for the are targeting these countries for providing trainings in IBF. management as well as the students. Even in countries like Pakistan where share of Islamic banking is merely 10 per cent of the Lured by the rhetoric of limited human resources in the global Islamic financial total banking sector, there are huge growth services industry, a British youth embarked upon his journey of education in IBF prospects in terms of deposit growth and by leaving his country of birth – UK – and enrolling himself at an undergraduate resource mobilisation through Islamic modes course at International Islamic University Malaysia. The young man was intelligent, of financing. Islamic banks are expanding rather quickly with new branches being opened very hardworking and on top of that possessed excellent English language skills. He finished frequently. This is creating a resource gap in his undergraduate studies with distinction and won a scholarship to study for a master terms of demand and supply of bank staff who degree in Islamic finance at INCEIF. He spent six months as an intern with London- have relevant qualifications in IBF. based Edbiz Consulting (under HD Placements), as a partial requirement for his degree programme at INCEIF. He, however, had to spend more than one year at Edbiz before Impressed by this, State Bank of succeeding in procuring a full-time position with a Middle East based Islamic bank. This Pakistan (SBP) - the central bank - has particular person was lucky to have exposure to the global Islamic financial services launched a major initiative in offering industry by working with a world leader in Islamic financial consultancy and intelligence. financial support to universities and There are scores of other able graduates of IBF, who find it hard to procure a meaningful other institutions of higher learning in position with an Islamic financial institution in a reasonably short span of time. Pakistan in setting up specialised chairs in IBF. Although an Islamic seminary HD Placements is an Islamic finance internship University, Wijdan Tariq joined BMB Islamic run by Mufti Rafi Usmani and Mufti Taqi programme that was founded by Professor as an intern under HD Placements. He spent a Usmani – called Darul Uloom Karachi Humayon Dar when he was the CEO of Dar Al lot of time on different research projects the – has produced almost all the Shari’a Istithamar, subsidiary of Deutsche Bank. Since team at BMB Islamic was involved in during his advisors working in the IBF market in then, it has helped numerous young graduates four months stay in London. Later, he decided Pakistan, there has also been growing to enter global Islamic financial services to join an organisation involved in research & interest in other seminaries to expose industry, many of whom are now serving at key development in Islamic finance. He is currently their students to this field. positions. Two glaring examples are as follows: serving as a Senior Researcher at Centre for Islamic Economics and Finance at Qatar Faculty After finishing his MSc Islamic However, IBF education in the country is led Mehdi Popotte: of Islamic Studies. Finance at Durham University, Mehdi Popotte by International Islamic University Islamabad joined BMB Islamic as an intern for three These success stories must highlight the (IIUI), which has fed human resources into months under HD Placements. He was keen to importance of mentoring in nurturing talent Islamic financial services industry locally learn Shari’a structuring but the programme and development of human resources in the as well as globally (please see Box 1 for a assessed him to be suitable for a sales and Islamic financial services industry. While there representative example of the kind of talent marketing role. He was exposed to various is huge interest in spending time, money and IIUI has produced for the global Islamic tasks in structuring, stock screening and resources on education, very few people financial services industry). In addition, a marketing. Within three months, he found a are willing to pay for mentoring. If proper number of universities and institutions of job with Amiri Capital, a London-based Islamic awareness is created about this opportunity, higher learning have in recent years embarked financial firm that at the time was developing this is a viable business in its own right. upon different projects related with teaching an Islamic alternative investments platform. and research in IBF. The prestigious seats of Within the next three months while he was INTRODUCTION learning like Lahore University of Management with Amiri Capital, he was offered an even Sciences (LUMS) have also started showing better opportunity with Abu Dhabi Islamic Demand for qualified and experienced interest in this field, primarily due to growing Bank where he is currently serving as a senior human resources is set to rise with the ever- visibility of Islamic banking in the country and fixed income and equity trader. increasing number and size of Islamic financial subsequent increase in demand for qualified institutions. This is having a positive effect on personnel. Institute of Business Administration Wijdan Tariq: After finishing MSc Accounting the demand for Islamic financial education and (IBA) - the oldest business school in Pakistan and Financial Management at Lancaster qualifications. A US$2 trillion industry as it - has been offering modules in IBF for some

31 ISLAMIC FINANCE REVIEW | MARCH 2015 ISFIRE REPORT time. New entrants like COMSATS Institute of Information Technology Lahore, and PAF Karachi Institute of Economics and Technology (PAF-KEIT) have also recognised an opportunity in Islamic finance education and have embarked upon serious efforts to promote teaching and research & development (R&D) in this area. COMSATS has been organising an annual conference in IBF – branded as Global Forum on Islamic Finance (GFIF) – in Lahore since the year 2013, and the 2015 event is being organised on March 10th - 11th, 2015. Most notable recent development in this respect is perhaps the setting up of International Institute of Islamic Bankers (IIIB) by Meezan Bank. With all these efforts, it is expected that Pakistan will emerge as a vital player in Islamic finance education.

Needless to say that Malaysia remains on the forefront of Islamic finance education, with scores of universities and institutions of higher university and degree awarding institution has Islamic Finance Education Providers learning offering different certificates, diplomas yet to work. and degree programmes from bachelors to In the Western world, Durham University has PhD levels. The most notable development in There is a need to consolidate various efforts emerged as a premier institution of higher Malaysia in the last couple of years has been to develop a comprehensive model of Islamic learning offering postgraduate courses establishment of Finance Accreditation Agency finance education. To start with, it is worth (masters as well as doctorate) in IBF. Although (FAA), which has developed a comprehensive to consider merging IIUM Institute of Islamic a number of other universities are engaged in framework for accreditation of Islamic finance Banking & Finance (IIiBF) and INCEIF (and teaching and PhD supervision in IBF, Durham qualifications. FAA has already received its sister organisation International Shari’ah University leads by a significant margin. recognition on a global level, and it is expected Research Academy (ISRA) for Islamic Finance) Loughborough University in the UK, however, to play an important role in standardising to form a bigger entity specialising in teaching was a pioneering institution that started first Islamic finance educational and training and R&D in IBF. It may also be worth to ever MSc in Islamic Economics, Banking and programmes. consider bringing IBFIM under the same entity. Finance in the Western hemisphere. Professor The year 2015 will bring additional There is no denial of the fact that INCEIF has John Presley and Dr Humayon Dar jointly opportunities in the Islamic finance education emerged as a global brand in IBF; whether started this MSc programme – which although market, as the global Islamic financial services on an operational level it is as successful as short-lived – but produced some of the most industry has already reached the mark of expected is a different question. Putting all celebrated and able personnel in IBF. Whether US$2 trillion. There is a need to explore cost the teaching and training resources under one it is Senator Dato’ Asyraf Wajdi Dusuki (from effective ways of developing and delivering strong brand - INCEIF - and attempting to Malaysia) or Rashid Alkhan (from Bahrain), globally recognised qualifications in IBF. The create an Islamic INSEAD in Malaysia will be a all the graduates of this programme went on best model for developing and delivering huge achievement. to become established leaders in the global Islamic finance education is in the form Islamic financial services industry. There are Other markets for Islamic finance education of International Islamic Universities, e.g., numerous other distinguished graduates of the include Indonesia, UAE, Qatar, Bahrain, Saudi International Islamic University Islamabad (IIIU) programme, notably Azmat Rafique (Head of Arabia and the UK. and International Islamic University Malaysia Islamic Banking at Oman Arab Bank), Madzlan (IIUM) (Box 2 represents just one out of 100s Mohamed (Islamic Finance Partner at ZICO, of examples of success stories in IBF, which ISLAMIC FINANCE EDUCATION AND Malaysia), and Akif Shaikh (Head of Retail IIUM has contributed to). These universities TRAININGS Business and Innovation at Al Rajhi Bank Saudi offer courses in Islamic economics, banking Arabia). and finance, and Shari’a and law as part of For the purpose of this report, we differentiate mainstream disciplines. While setting up of between Islamic finance education and Table 1 lists top 10 providers of Islamic dedicated Islamic finance training providers is trainings by referring the former as the finance education in the world. The understandable, having a full-fledged university academic courses offered by universities and table suggests, IBF has emerged as a engaged in nothing but Islamic banking and institutions of higher learning and the latter globally recognised academic discipline finance is at best premature. Many industry as the courses offered by non-academic in universities in the Muslim world as training institutions, leading to professional analysts believe that the initial idea of setting well as in the West. It is, however, fair qualifications. up International Centre for Education in Islamic to state that the discipline still lacks Finance (INCEIF) was an excellent approach academic rigour and depth of analyses. but its subsequent elevation to the status of a

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A number of leading publishers are now regularly publishing textbooks in Islamic TABLE 1: TOP 10 ISLAMIC FINANCE EDUCATION PROVIDERS economics, banking and finance. The most active publishers in this field include Edward COUNTRY INSTITUTION FOCUS / SIZE Elgar, Wiley, McGraw-Hill and Edinburgh Pakistan International Islamic University Global / Medium University Press. Islamabad Islamic Finance Training Providers Malaysia International Islamic University Malaysia Global / Medium Amongst the Islamic finance-training providers, United Kingdom Durham University Global / Small IBFIM in Malaysia tops the list. Although United Arab Cass Business School (DIFC Executive Global / Small Institute of Islamic Banking and Insurance Emirates / United MBA) (IIBI) in London has already seen past its glory Kingdom days, it would be unfair not to mention its role Malaysia International Centre for Education in Global /Medium in pioneering role in Islamic finance training. Islamic Finance (INCEIF) The Diploma in Islamic Banking and Insurance offered by IIBI was perhaps the first global Qatar Qatar Faculty of Islamic Studies, Qatar Global / Small qualification offered by any non-university Foundation institution in the world. Another notable Islamic Bahrain Bahrain Institute of Banking and Finance National / Medium finance qualification provider for affiliated United Arab Hamdan Bin Mohamed Smart University National / Small trainers around the world is Chartered Emirates Institute of Securities and Investment (CISI), which has developed arguably the most Saudi Arabia King Fahad University of Petroleum and National / Small comprehensive entry-level qualification in Minerals Islamic finance, aptly named as Islamic Finance Malaysia Universiti Teknologi MARA National / Large Qualification (IFQ). Chartered Institute of Malaysia Universiti Utara Malaysia National / Medium Management Accountants (CIMA) has also developed a comprehensive range of Islamic education. Table 2 lists the top 10 providers of Islamic finance qualifications. finance training in the world. Although IBFIM stands out in the Islamic Edbiz Consulting has also been involved in finance trainings, Pakistan has developed offering one/two day introductory workshops some of the most impressive training modules CASE STUDIES in Islamic banking and finance under its flagship for Islamic bankers. In this respect, the role Boxes 1-5 present five interesting Islamic Finance Access Programme (IFAP) in of National Institute of Banking and Finance UK, Luxembourg, Switzerland, Pakistan and cases of successful careers in IBF. (NIBAF) is noteworthy. Another new player in Two examples are drawn from IIUI, UAE. Islamic finance trainings is Meezan Bank’s IIIB, one from IIUM and another two from which is fast emerging as a premier centre of All these initiatives and a long history of Islamic Loughborough University. finance education and training makes UK as a Islamic finance trainings. global centre of excellence for Islamic finance There is one common denominator in all these cases, and that is of the role of Western universities in career development of the successful personnel in IBF. Global Islamic Finance Report 2014 reported top 10 CEOs of Islamic banks in Malaysia. Almost all the CEOs have foreign qualifications obtained from the Western universities. This should sufficiently indicate that studying at an institution of higher learning outside the home countries contributes to accomplishment in an IBF related career. Therefore, while a solid foundation in IBF is a pre-requisite for a successful career in IBF, it is absolutely important that a formal qualification from a top Western university is sought to have access to a job in an institution of national significance or of international repute. One benefit of attending an institution of higher learning for a successful career in any field, including IBF, is the higher level of English language proficiency that studying at a Western university brings. While the likes of Sheikh Saleh Kamil, founder of Dalla Albaraka Group, put a heavy emphasis on Arabic language in

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working with one of the prominent Shari’a TABLE 2: TOP 10 ISLAMIC FINANCE EDUCATION PROVIDERS scholars of the present times, Sheikh Hussein Hamid Hassan, paved Mian Nazir’s entry into COUNTRY INSTITUTION FOCUS / SIZE the Shari’a advisory. At present Mian Nazir is Malaysia IBFIM Regional / Small a member of the Shari’a Advisory Boards of a number of Islamic financial institutions, in Pakistan National Institute of Banking and Finance National / Small addition to playing a senior level role in Dar Al United Kingdom Chartered Institute of Securities and Global / Small Shari’a – a leading Shari’a advisory firm based Investment in Dubai. United Kingdom Chartered Institute of Management Global / Small Mansoor Shakil has a similar background to Accountants Mian Muhammad Nazir but the former chose Malaysia International Centre for Education in Global / Small to pursue a career in hard-core banking, and is Islamic Finance (INCEIF) now an experienced Islamic banker specialising United Arab Dar Al Shari’a Global / Small in private equity. Emirates In Rashid Alkhan’s academic progression Bahrain Accounting and Auditing Organisation for Global / Small Loughborough University featured prominent, Islamic Financial Institutions as his MSc in Islamic Economics, Banking and United Kingdom Institute of Islamic Banking and Insurance Global / Small Finance therein is the only formal qualification in IBF. After finishing his postgraduate studies Pakistan Alhuda Centre of Islamic Banking and Global / Small at Loughborough University Rashid Alkhan Economics joined KFH-Bahrain and has remained there United Arab Alhuda Centre of Islamic Banking and Global / Small since then. He took examinations of Chartered Emirates Economics Alternative Investment Analyst Association Pakistan International Institute of Islamic Bankers National / Small (CAIA) and became CAIA in 2008. Rashid was a member of the transaction advisory team developing IBF as a phenomenon for promotion Shari’a Advisory Committee of Affin Islamic which led the first three way merger between of an Islamic culture and identity, there is no Bank, and consequently be recognised as 3 Islamic financial institutions. Rashid currently denial of the fact that English language has a Shari’a advisor. In the case of the latter, serves on the board and audit committee of a emerged as the de facto language of legal number of the bank’s investments. Rashid is the documentation, especially if the transaction happens to be a cross-border one. Box 1: Value Addition Chain for Mansoor Shakil Because of that national talent development programmes (i.e., Emiratisation and Saudisation etc.) adopted by the countries in GCC and increasing preference for the local leadership in other countries, it is also vital that proficiency in local language is also sought. Gone are the days when foreign personnel used to lead as CEOs of Islamic banks in the GCC countries and in Malaysia. While still there are some Islamic banks in the GCC, which have non-Arab 35% CEOs, the local leadership has gradually taken over these roles. In Malaysia, one out of every fourth CEO of an Islamic bank was a foreign LLM in International Financial System from harvard national, but now all the CEOs are Malaysian 35% University (2003-04) national. When Islamic banks were set up in the UK, all the CEOs were from the mainstream, LLM in Commercial law from now these positions are being filled with the 30% Cambridge University Muslims – the local as well as the Arab. (2000-01)

It is interesting to note that a strong foundation LLB (Hons) in Shari’a and Law in Shari’a and law is a pre-requisite for serving from International Islamic as a Shari’a advisor in IBF. Zulkifli Hasan and University Islamabad (1996 - Mian Muhammad Nazir are the two scholars 2000) who had solid academic backgrounds in Shari’a and law. In the case of the former, attendance Mansoor Shakil is an accomplished young Islamic investment banker. As an Islamic of a traditional Islamic seminary – Madrasah banker with now special interest and expertise in private equity, and extensive Idrisiah – provided the required foundation on experience of working with international banks and financial institutions like HSBC which Zulkifli Hasan built further by studying and Fajr Capital, he provides an excellent example of success in IBF. Looking into his Shari’a and law at IIUM. This, along with academic records, it is clear that his undergraduate studies at International Islamic mentoring from the likes of Dato’ Asyraf Wajdi University Islamabad provided him a solid foundation to build his success later at Dusuki, allowed him to serve as a member of Cambridge and Harvard.

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author of the book “Islamic Securitization: A Box 2: Value Addition Chain for Zulkifli Hasan Revolution in the Banking Industry”, published in 2006. Like Rashid Alkhan, Mufti Talha Ahmed Azami attended Loughborough University but after having been to a completely different set of institutions. His religious background, although impressive in its own right, was not helpful in 30% entering an otherwise very competitive UK Islamic financial market. His MA in Islamic 20% PhD in Islamic Banking Finance and Management provided Finance from him the modern education that is deemed as an Durham absolute requirement for a successful career Master of University 10% Comparative (2008-11) in IBF. Laws: Shari’a and Bachelor of Law from These five are interesting cases of successful 20% Shari’a from International careers in IBF and those who are considering international Islamic a career in this field must study such career University LLB from Islamic progressions to decide for themselves what 20% International University Malaysia Islamic Malaysia (2003-04) qualifications they must seek to be successful Religious University (2001-02) in IBF. Education Malaysia Madrasa Idrisiah (1997-2001) (1994) CHALLENGES IN ISLAMIC FINANCE Zulkifli Hasan is an emerging Shari’a scholar in Malaysia. As an upcoming EDUCATION AND TRAINING MARKET personality in IBF and a potential leader of future, it is interesting to look at the Challenges academic and professional institutions that have contributed to his success. He 1. Lack of Human Resources received sound academic training at International Islamic University Malaysia, which provided a strong foundation on which he built his analytical skills that he Availability of high quality educationalists and acquired during his PhD at Durham University. His religious education at Madrasah trainers is perhaps the biggest challenge facing the Islamic finance education and training Idrisiah played a vital role in his academic development and later his recognition as market. While the Western institutions (both a Shari’a advisor. universities and other training providers) are excellent managers of general quality Box 3: Value Addition Chain for Rashid Alkhan controls and mechanisms, they are light in terms of human resources to offer in-depth education and training in IBF. There are simply not enough highly qualified academicians at the Western universities, who have strong interest in IBF. This is primarily the case, as the Western universities have so far not been entirely convinced that there is large enough market for Islamic finance education. Even 15% the universities like Harvard and Cambridge where IBF has shown some kind of visibility, the 35% Executive Education academic communities do not give it the kind of from INSEAD, respect they have given to other disciplines like attending Corporate Financial Strategy in microfinance and development studies. Chartered Global Markets 35% Alternative (CFSGM) in 2008 and In the whole Western world, there are no Investment Analyst Management more than 10 committed senior academicians from Chartered Acceleration MSc in Islamic involved in teaching and research in Islamic Alternative Programme (MAP) in 15% Economics, Banking Investment Analyst 2009 economics, banking and finance. The veterans and Finance from Association like Simon Archer, Rodney Wilson and John Loughborough (2007-08) B.Com with Unversity (2002-03) Presley have retired and some others (like specialism in Finance Volker Nienhaus) are although active in from Concordia University, Canada research and training but are approaching the (1998-2002) age of full retirement. Rashid Alkhan is an Islamic banker of huge potential. He joined KFH-Bahrain after 2. Too Many Too Small finishing an MSc in Islamic Economics, Banking and Finance at Loughborough There are a number of IBF training providers University. Looking at his academic background, it is clear that his postgraduate with small operations. During and after studies at Loughborough University were a turning point in his career in IBF. the recent financial crisis, a number of IBF Although a Bahraini national, all his studies have been in Europe and Canada. professionals lost their jobs and many of

35 ISLAMIC FINANCE REVIEW | MARCH 2015 ISFIRE REPORT them opted to start offering trainings in IBF. Ironically, this was not only wrong timing Box 4: Value Addition Chain for Mian Muhammad Nazir for these individuals, it also had an adverse effect on the incumbent training providers who started to struggle in maintaining their numbers. Given the limited absorptive capacity of the Islamic financial services industry, there is no scope for more than one training provider 15% throughout the world. Too many small players (with “technically” unemployed part time so- On-job training with called trainers) are inflicting more harm than 35% Sheikh Hussein actually developing human resources for the Hamid Hassan at industry. Dubai Islamic Bank LLM Commercial Law and Dar Al Shari’a 35% from Cambridge (2005) 3. Lack of Public Sector Funding and University (1997-98) Support BA, LLB with In most countries where IBF is significant 15% specialism in Shari’a government support for developing Islamic and Law from finance education and training programmes has International Islamic Traditional schooling University Islamabad either been completely missing or inadequate. and informal religious (1993-97) As mentioned earlier, Malaysian government studies at home with grandfather (a local has supported development of education and ‘aalim) training in IBF. Similarly, the government of Dubai has formulated a policy to develop Dubai Mian Muhammad Nazir is one of the ablest Shari’a scholars of the new breed as a global hub for Islamic economy, and Islamic graduated from faculties of Shari’a and law at modern universities rather than old banking and finance features significantly in Islamic seminaries or madrasas. Since he joined Dubai Islamic Bank about 10 years this vision. The establishment of Dubai Centre back, he has worked closely with Sheikh Hussein Hamid Hassan, one of the most of Islamic Banking and Finance (DCIBF) at influential Shari’a scholars of present times. From the above Value Addition Chain, Hamdan Bin Mohamed Smart University it is clear that the turning point in his academic career was attendance at (HBMSU) is a step in that direction. In other countries, an explicit public sector policy in this International Islamic University Islamabad. respect has yet to emerge. are no such requirements for other staff. where it came from. The people who were Consequently, Islamic banks and financial brought in as advisors possessed very shallow 4. Language Barriers institutions are not obliged to seek new staff background in IBF, and hence were not able There are some excellent academic and with specific Islamic finance qualifications. This to play a significant role in the development professional programmes available in a few poses a serious threat to the sustainability of of the centre. The University of East London Arabic-speaking countries (e.g., Saudi Arabia, a number of Islamic finance educations and continues to offer MSc in Islamic Banking and Bahrain and Jordon) but they are taught only in training providers who face serious challenges Finance, a course that has attracted only a Arabic, which creates a barrier to entry for non- in recruiting students. limited number of students, consistent with the Arabic speaking students and professionals. general trend at the British universities. For example, General Council for Islamic Banks Opportunities London School of Business and Finance (LSBF) and Financial Institutions (commonly known 1. Developing London as a Centre of has been offering a master programme in as CIBAFI) has been offering certificates and Excellence for Islamic Finance Education Islamic banking and finance for quite a few other bespoke trainings in Islamic banking and years now. However, the number of students finance in the Arabic speaking countries for a There are about 16 universities and scores enrolled on this programme over the years has number of years. Their language of instruction of colleges and other institutions of higher been limited and in fact diminishing every year. has mainly been in Arabic, although in some learning in London. These institutions have cases it has arranged for delivery of such for long shown interest and engagement in Some other universities in London like Kingston courses in English as well. However, developing IBF. However, none of them has been able University, School of Oriental & African such programmes as English language offerings to develop a centre of excellence in Islamic Studies at the University of London, Queen remains a challenge. finance. There have been some half-hearted Mary University of London, and University of attempts by a few universities in London to Westminster offer single modules in IBF as 5. Absence of Regulatory Requirements develop relevant resources but they have not options for their postgraduate degree courses. for Recruitment of Staff by Islamic been meaningfully successful. For example, The registrations at these modules range from Financial Institutions University of East London established a Centre 10 to 25 students. Apart from Malaysia, the regulators do not of Islamic Banking & Finance in 2011 to offer Given the relative limited success of the require Islamic banks and financial institutions education, training and consultancy services IBF degree programmes and the individual to recruit staff with specific professional related with IBF. Nearly four years on and modules, it makes sense to develop a portable qualifications and skills. Even in Malaysia where the centre has failed to make a mark on the modular programme in IBF to be offered the central bank requires Islamic banks and industry. In fact, the founding management of through participating (possibly all) universities takaful companies to employ Shari’a personnel the centre came from nowhere in the Islamic and colleges in London. For example, a single with specific qualifications and skills, there financial services industry and went back to module in IBF can be offered as an optional

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Box 5: Value Addition Chain for Mufti Talha Ahmed Azami departments at IIUI and IIUM have in fact been the most successful academic departments that have supplied the most distinguished personnel to the global Islamic financial services industry. It has been attempted to engage some top law schools in the world (e.g., Harvard Law School) with the Islamic financial services industry but this has either failed or has yet to bring real 30% benefits to the industry. 3. Developing IBF Curricula to Achieve 20% MA in Islamic Banking Finance Socio-economic and Political Objectives and Management MA in Hadith from In the politically troubled countries facing 20% Studies from Loughborough real or potential security threats (e.g., Iraq, Deoband Islamic University Afghanistan, Pakistan, Libya, Egypt and MA in Islamic University India (2006-07) even Saudi Arabia etc.), it is important to 20% Law from Nadwa (2004-05) Islamic bring curriculum reforms to feature IBF BA in Arabic and University India education as a tool for modernisation of juristic 10% Islamic Studies (2002-04) thoughts. The governments may consider from Nadwa investing in business and finance education, Religious Islamic education at University India with an emphasis on the relevance of Islamic home with his (1998-2002) commercial law. In this respect, emulating father who is a the International Islamic University models great scholar of present times developed in Pakistan and Malaysia. Mufti Talha Azami is an emerging Shari’a scholar in the UK and GCC. Given the huge SUMMARY & CONCLUSIONS potential and impeccable academic career (including studies at some of the top Islamic finance education and training is an area Islamic seminaries in the Indian sub-continent) he was presented with the fast developing, with a number of academic Upcoming Shari’a Scholar of the Year Award at the inaugural Global Islamic Finance and professional institutions now offering a Awards at Muscat in 2011. Mufti Azami combines the finest of traditional Islamic range of qualifications. The market is inundated education with the modern university education, and brings a value addition that with a number of small training providers and very few other young scholars may otherwise be able to do so. The traditional the quality and standardisation remain among scholars from an Indian background have faced difficulties in recognition in IBF the challenges the industry is facing. There is outside India, but Mufti Azami is one shining example of success, as he currently a need to develop a large institution of higher heads Shari’a Compliance & Audit Department at Bank Sohar, Oman. He is also a learning for Islamic finance education. This can member of Shari’a Advisory Board of European Islamic Investment Bank in London. be created through investing more resources In his success, a master degree from Loughborough University (which he received by into the likes of IIUI and IIUM. Alternatively, studying at Markfield Institute of Higher Education in UK) played a vital role. there are some institutions in Malaysia (notably INCEIF), which can be developed into a large module to the postgraduate students Agency (FAA) by banking and financial global centre of Islamic finance education, if registered in banking and finance related regulators in Malaysia, there was a huge proper consolidation of resources and mergers degree programmes at the participating gap in the accreditation of Islamic finance with other institutions is achieved as part of a universities. The participating universities qualifications. FAA, however, has successfully strategic plan. should pay a fixed amount per student (e.g., implemented first phase of its plan to develop £400) to the developer-organiser company/ a comprehensive quality and learning For those who are looking for a career in institution. The participating universities will regime for accreditation of Islamic finance IBF must consider studying at a high-ranked have the benefit of offering an additional qualifications. Nevertheless, this area by and university in the Western hemisphere. The module in a cost effective way, without having large remains untapped and there is a need Western universities, however, are not to hire full-time or part-time faculty and to develop a globally accepted specialized sufficiently incentivised to commit resources committing other resources. The developer- body for accreditation of Islamic finance to the IBF education, which despite being a organiser institution will benefit from the qualifications. This is expected to bring the growth area remains a marginal area of interest accumulated number of students. For example, required standardization of curricula of the in Europe and USA. Professional bodies 10 students from each of say 10 participating Islamic finance academic and professional like CIMA and CISI have already developed universities will fetch enrolment of 100 qualifications. qualifications in IBF, which are expected to students to the module. This will ensure receive global recognition if they apply for the offering of the module on a sustainable Opportunity for Law Schools accreditation from the likes of FAA. IBFIM is another institution that has potential to become basis. Increasing the number of modules thus IBF has emerged as a legalistic phenomenon, a global centre of excellence for Islamic finance offered may also allow the developer-organiser necessitating strong legal skills for the trainings. It will, however, have to continuously institution to offer its own degree programme personnel involved in product development innovate to maintain its leadership role, given (e.g., an MBA programme in IBF) in due course. and structuring. However, law schools and the new competition from the institutions in departments around the world have so far 2. Need for a Global Islamic Finance the GCC region. failed to recognise this opportunity, although Accreditation Body there is clear evidence that Shari’a and law Before the setting up of Finance Accreditation

37 INTERVIEW

MALAYSIAN RATING CORPORATION BERHAD

An Interview With MOHD RAZLAN MOHAMED CEO of MARC Rating Islamic Financial Structures and Institutions Malaysian Rating Corporation Berhad (MARC) is a pioneering Islamic rating agency, which has been at the helm of Islamic business for about 18 years. Winner of the Best Islamic Rating Agency 2014 by the prestigious Global Islamic Finance Awards (GIFA), MARC is a truly global Islamic rating agency with an impressive track record. Its CEO, Mohd Razlan Mohamed, is considered a key player in the Malaysian Islamic financial services industry. In this interview, we ask him to share with us his experiences and the success story of his business.

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INTERVIEW

Please tell us about MARC, what it is, what it aims for and what are the different segments within it. Malaysian Rating Corporation Berhad (MARC) is a Malaysian domestic credit rating agency. The agency commenced operations in 1997 as the country’s second domestic credit rating agency to provide local bond issuers and investors an alternative for their credit rating requirements. As Malaysia continued to stay on its high economic and industrial growth path during the mid-nineties, demand for debt capital market funding also grew in tandem with the banking system to satisfy our country’s developmental and corporate funding needs. While issuers sought credit ratings to improve the marketability and pricing of their securities, institutional investors relied on rating agencies’ independent assessments of credit risks to augment their own credit analyses. MARC was established to meet the increasing supply of and demand for rated debt securities in tandem with the growth in Malaysia’s local- currency Ringgit bond market. Local financial institutions from the insurance and investment banking sectors became shareholders of MARC. The Malaysian sukuk market took off from 2002 onwards. These Shari’a-compliant instruments continued to gain prominence as can be seen from the increasing size and diversity of sukuk structures in the market, providing MARC the opportunity to provide its expertise in the rating of asset-based sukuk. We are proud of the fact that our hard work and perseverance have rewarded MARC with the recognition of being the ‘Best Islamic Rating Agency for 2014” by Global Islamic Finance Awards- GIFA. MARC’s rating coverage extends to corporate finance, including financial institutions and insurance, structured finance, public finance, and infrastructure and project finance. MARC also publishes independent assessments of the creditworthiness of securities and issuers, providing investors with an independent source of opinion and research. MARC’s vision statement, “Provider of Trusted Insights on Risk”, encapsulates our primary aim, focus and objective as a key information MARC is capitalised at RM20 million. We have Ringgit-denominated sukuk market. MARC’s intermediary in the capital markets. Our a fairly diverse shareholder base comprising 29 rating coverage extends to corporate and passion to deliver our vision keeps us ticking. institutions from major insurance companies, structured finance sukuk, project finance sukuk We take pride in delivering independent views stockbrokers, and some investment banks in and Shari’a-compliant banking and insurance and value-added insights on credit risk, which Malaysia. institutions. helps to reduce information asymmetry in a debt market context. Insightful credit opinions Please share with us who are your MARC has completed 721 ratings, accounting have a particularly important function in the clients? And how have you assisted for about USD140.6 billion (RM450 billion) in current age of information overload. issuance value as of 30 November 2014. Over them? the years, MARC has rated many innovative Please tell us your ownership MARC has provided ratings on a wide sukuk instruments and structures. Among the structure and who are your range of Shari’a-compliant issuances by notable sukuk that are rated by MARC include: shareholders? both domestic and foreign companies in the

39 ISLAMIC FINANCE REVIEW | MARCH 2015

INTERVIEW

• Projek Lebuhraya Usahasama Berhad’s Programme, an acquisition financing of a Papers and Islamic Medium Term Notes (PLUS) USD7.3 billion (RM23.35 billion) portfolio of independent power producers Programme Sukuk Musharaka Programme, an in Malaysia. How are you different to other rating acquisition financing of a portfolio of toll • CIMB Islamic Bank Berhad’s USD1.6 agencies like Moody’s etc., do you roads in Malaysia, issued in 2012 remains billion (RM5.0 billion) Basel III-compliant to date the largest rated sukuk issuance by Tier 2 Junior Sukuk Programme have an edge over them and how? a single entity in the world. • Sime Darby Berhad’s USD1.4 billion We are a full-service rating agency like the • Aman Sukuk Berhad’s USD3.1 billion (RM4.5 billion) Islamic Medium Term global rating agencies. However, our focus is (RM10.0 billion) Islamic Medium Term Notes Programme on our home market and the ratings that we Notes Programme, an innovative public- • TNB Western Energy Berhad’s USD1.3 provide are strictly confined to the Malaysian private partnership (PPP) finance initiative billion (RM4.0 billion) Sukuk national rating scale. The international rating for the development of the Malaysian agencies have a dominant presence in the police force facilities. • Petronas Dagangan Berhad’s RM2.0 billion international market and assign ratings on an Sukuk Murabaha Islamic Commercial • Malakoff Power Berhad’s USD1.7 international rating scale, in addition to local billion (RM5.4 billion) Sukuk Murabaha and regional scales in certain markets. Since its inception, MARC has accumulated over 18 years of experience in rating domestic entities and issues. Over the years, we have acquired a strong understanding of the local market and the industry dynamics and trends, which helps us to incorporate credit-related information from many sources into cohesive and forward- looking credit opinions. This gives us a home ground advantage in local corporate ratings. You have worked on more than USD140 billion of issuances in oil and gas, plantation, infrastructure, power generation, construction, banking and finance, please share with us what are the most exciting projects MARC has worked on? Our mandate to rate Projek Lebuhraya Usahasama Berhad’s (PLUS) USD7.3 billion (RM23.35 billion) Sukuk Musharaka Programme, issued in 2012 for the purpose of part-funding the acquisition of the selected Malaysian tolled expressways concessions and the Penang Bridge concession as well as to fund a planned capital spending, has to be one of the frontrunners in our list of most exciting projects we have worked on. Indeed, this programme remains to date the largest rated sukuk issuance by a single entity in the world. We are also proud to have rated various high-profile power-related issuances in 2013, including Malakoff Power Berhad’s RM5.58 billion Sukuk Murabaha Programme for refinancing and working capital, TNB Northern Energy Berhad’s RM1.625 billion issue of Islamic securities to finance the development of a greenfield 1,071.43-megawatt combined- cycle gas turbine power plant in Seberang Tengah, Pulau Pinang, and Kapar Energy Ventures Sdn Bhd’s RM2.0 billion Sukuk Ijarah for working capital and to refinance the Issuer’s outstanding Bai’ Bithaman Ajil Islamic Debt Securities. You have also rated some of the sovereigns. Please share your

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INTERVIEW experiences. Further, how rating a scales and rating the world’s first global sukuk, sovereign is different? Share how you Kumpulan Guthrie Bhd’s USD150 million Sukuk would rate a sovereign and what are Ijara in 2002. The world’s first sukuk using the Musharaka structure valued at USD694 million the important factors. (RM2.5 billion) by Musyarakah One Capital MARC has assigned sovereign ratings to India Bhd in 2005 was also rated by MARC. Since (AA), Malaysia (AAA), South Korea (AAA), then, MARC has provided insights on sukuk Indonesia (AA-), Singapore (AAA), Kuwait rating through our publication entitled Rating (AAA) and Hong Kong (AAA) since 2012. Approach to Sukuk: A MARC Perspective which has become a key reference for sukuk The assignment of sovereign ratings entails investors and issuers. going through the usual mill of soliciting feedback from the relevant authorities. Additionally, MARC’s rating offering introduced However, given the potentially sensitive in 2010 called “Islamic Financial Institution nature of this category of rating, government Governance Ratings”, provides a structured authorities would understandably be cautious assessment of the quality of institutional in scrutinising our rating findings, with some governance, acknowledging the significant role taking considerably more time than others for played by governance in an Islamic financial this endeavour. institution. In support of Islamic Development Bank’s (IDB) initiative to create a sustainable The rating of sovereign governments involves and dedicated Islamic credit rating institution, an analysis of relevant quantitative and MARC has remained, since 2011, a committed qualitative factors. The quantitative analysis technical partner to IDB-initiated Bahrain- structured, project finance, sovereign, financial is dominated by macroeconomic analysis, based Islamic International Rating Agency. institution) since I came on board in 2007. which includes an analysis of the country’s These changes reflect the deepening and economic strength and prospects, its fiscal Personally, a memorable issuance to me would maturing of Malaysia’s debt capital markets sustainability and the sovereign’s debt be CIMB Islamic Bank’s Tier-2 Junior Sukuk over the years and MARC’s efforts to move burden. Data for this analysis is often readily Programme of up to RM2.0 billion in nominal with the times, adapt and innovate. As a rating available from the relevant central bank and/ value, which was admitted to the main market agency that is committed to providing timely or government entities such as the Ministry of of Bursa Malaysia in December 2009 under and reliable credit opinions, it is crucial to Finance or the entity responsible for collating an exempt regime. This listing was touted as stay abreast of such changes by purposefully and disseminating official statistics. Where a potential precursor to the development of a implementing capacity development efforts. readily available, MARC also obtains data and vibrant retail sukuk market tradeable on Bursa Over the years, MARC has made its rating information from credible international entities Malaysia, and MARC is pleased to have been process more transparent, refined and such as the International Monetary Fund, the a part of that milestone by assigning an initial fine-tuned its rating methodology to ensure World Bank and the Asian Development Bank. rating of AAIS, which is one notch lower than consistency in its application and more robust MARC’s assigned long-term financial institution outcomes. Going forward, MARC will continue Qualitative analysis, on the other hand, is rating on CIMB Islamic of AA+. to undertake these efforts; in addition, plans far more complex. It requires an in-depth are afoot to launch new rating products such as understanding of the sovereign’s history, During the recent financial crisis a lot corporate governance ratings, fund ratings and demographics, political and international of sovereigns as well as companies SME ratings. environment and socio-economic trends. were affected, please share with us A sovereign credit rating is not only an What are the short-, medium- and how did MARC deal with this difficult assessment of the sovereign’s ability to pay, long-term plans of MARC? Are there period. which is covered by the quantitative analysis, any plans to open offices outside but it is also an assessment of a sovereign We kept our communication lines open Malaysia? government’s willingness to repay in a full and and interacted heavily with investors and timely manner. Ascertaining the willingness regulators, elaborating on and clarifying In light of the government’s move to liberalise to pay would require drawing inferences to a our rating methodologies to yield greater the local credit rating industry (removal of sovereign government’s motivations, which can appreciation for the value we create as a rating mandatory credit ratings for tradeable bonds/ be influenced by multiple factors that at times agency. sukuk from 1 Jan 2017), our priority is to may not be readily determined. continue promoting the relevance of credit Aside from actively marketing our latest ratings. At MARC, we do believe that there Receiving credit rating is vital for a products, our non-rating activities like will still be demand for independent credit company to raise funds effectively, subscriptions and public training contributed to assessments post-2017, especially in times of please share with us some of the income for the year. increasing volatility in the global economy and most exciting issuances you have Razlan, you have been CEO of MARC financial markets. In addition, we will continue worked on in Islamic banking and since 2007, tell us how different boosting revenue generation from non-rating activities like public training and subscriptions. finance and how much of your MARC is now from when you We will also enhance the skill levels of our quant portfolio is Shari’a compliant. started? team to enable MARC to take on technical advisory jobs. We are also open to explore Among MARC’s key initiatives to support the Our rating universe has become more diverse opportunities to extend our expertise abroad. growth and development of Islamic finance are in terms of client/entity mix, types of securities introducing the first set of Shari’a-based rating and transactions and ratings (corporate,

41 Higher Institutions’ Centre of Excellence (HICOE)

AWAR D W INNER

Global Accounting Research Encourages Innovation and Good Governance in Islamic Finance The Accounting Research Institute (ARI) of Universiti Teknologi MARA, won the GIFA Award 2014 under the category "Best Islamic Finance Education Provider". This is a global recognition of ARI’s initiative in leading research in the niche area of Islamic Finance and Financial Criminology. Speci cally, the award is directly linked to ARI's three research projects namely Islamic Micro nance, Islamic Corporate Social Responsibility (iCSR) and Integrity & Syariah Audit. ARI which was rst formed in 2002 as a special interest group has further evolved to a research centre in 2005 and later recognised in 2009 by the Ministry of Education of Malaysia as a National Higher Institution’s Centre of Excellence (HICoE). As a HiCOE, ARI aspires to become a leading international research center focusing on its niche research in Islamic Financial Criminology (IFC). Whilst Islamic Finance research focuses on developing new products in Islamic Finance; research in nancial criminology explores on techniques to mitigate nancial fraud. IFC centres on the belief that the healthy growth of the Islamic Finance sector is ensured when new Islamic Finance products continued to be developed and the sector is protected against the possibility of nancial leakages.

Website: ari.uitm.edu.my | Blog: accounting-research-institute.blogspot.com/ TALKING POINTS

Higher Institutions’ Centre of Excellence (HICOE) Islamic AWAR D W INNER Exchange Traded Funds (ETF) A Financial Innovation Dr. Nafis Alam, Associate Professor, Nottingham Global Accounting Research Encourages Unversity Business School (NUBS) Innovation and Good Governance in Islamic Exchange Traded Funds (ETFs) emerged as ETFs are listed and therefore their units can paid to brokerage firms and impacted by Finance one of the most innovative financial market be bought and sold anytime during stock the bid-ask spread effect. Bernstein (2002) instruments of the 20th century and have exchange trading hours. Investors buy and sell contradicts Dellva (2001) by claiming that the The Accounting Research Institute (ARI) of Universiti Teknologi MARA, won the GIFA provided investors the advantage of risk ETF units through their stockbroker rather cost advantage of ETFs are diminished by the Award 2014 under the category "Best Islamic Finance Education Provider". This is a diversification, index tracking, all-day trading, than through unit trust agents. Most ETFs are trend of investors who liquid their shares very strategic trading capability, tax efficiency, passively managed index funds although there frequent. global recognition of ARI’s initiative in leading research in the niche area of Islamic lowest fees, and transparent holdings (Carty, is ongoing work being done to create enhanced With the rapid growth of Islamic finance, there Finance and Financial Criminology. Speci cally, the award is directly linked to ARI's 2001). According to Ferri (2008), ETFs marked and actively managed ETFs. In the managing has been an emergence of Shari’a compliant an imperative investment revolution that began of index funds passively, managers do not pick three research projects namely Islamic Micro nance, Islamic Corporate Social ETFs which seek to provide investment in 1924 with the first open-end mutual fund stocks based on fundamental analysis. Instead, opportunities beyond the existing pool of Responsibility (iCSR) and Integrity & Syariah Audit. offering. In the wake of the market crash of managers aim to track the performance of a investment for Muslim investors and ethical 1987, and by request of the law firm of Leland, benchmark index. investors as part of its integration process ARI which was rst formed in 2002 as a special interest group has further evolved to a O’Brien and Rubinstein, the U.S. Securities and ETFs are assumed to be more cost efficient into the international financial system. While Exchange Commission started reviewing and research centre in 2005 and later recognised in 2009 by the Ministry of Education of than actively managed mutual funds due to there had been unprecedented growth of the rewriting securities regulations to facilitate a their passive investing character. They are conventional ETFs, Shari’a compliant ETFs Malaysia as a National Higher Institution’s Centre of Excellence (HICoE). As a HiCOE, novel kind of exchange-traded vehicle. In 1990, also more cost efficient compared to many found their rightful place only in February the SEC issued the Investment Company Act ARI aspires to become a leading international research center focusing on its niche open-ended index mutual funds. In a study 2006 when the Dow Jones Islamic Market Release No. 17809, which ultimately paved research in Islamic Financial Criminology (IFC). Whilst Islamic Finance research focuses conducted by Dellva (2001) , compared the (DJIM) Turkey ETF was listed on the Istanbul the way for the formation of mutual funds that expense components of Standard & Poor’s Stock Exchange to track the performance on developing new products in Islamic Finance; research in nancial criminology allowed for share creation and redemption Depositary Receipts (SPDRs) and Barclay’s of the DJIM Turkey Index. IShares one of during the day (Ferri, 2008). In 1993, ETFs explores on techniques to mitigate nancial fraud. IFC centres on the belief that the iShares S&P 500 from the bundle of ETFs and the dominant force in global ETFs, with over were first introduced in the U.S. by State Street the Vanguard index mutual fund. The author $620bn invested in 474 funds which account healthy growth of the Islamic Finance sector is ensured when new Islamic Finance Global Advisors to track the S&P 500 index exhibits a significant advantage of ETFs with for 43.0% of the world’s total ETFs assets (Carrel, 2008). products continued to be developed and the sector is protected against the respect to annual expenses, even though they (Blackrock, 2011), launched three Islamic possibility of nancial leakages. experience transaction costs, commissions funds in December 2007 on the London Stock

43 Website: ari.uitm.edu.my | Blog: accounting-research-institute.blogspot.com/ ISLAMIC FINANCE REVIEW | MARCH 2015 TALKING POINTS

Exchange amid an increasing shift by ETFs assets. While, the iShares MSCI Emerging up with conventional ETF. providers to offer alternative investment Markets Islamic UCITS ETF was the best- Dr. Nafis Alam is an Associate Professor at products. The three funds were primarily aimed performing fund in the last quarter of 2014, the Nottingham University Business School at European investors with share classes in delivered a 10 percent return, according to (NUBS) in the University of Nottingham - sterling and US dollars. data compiled by Bloomberg. The iShares Malaysia Campus (UNMC) and Director for MSCI USA Islamic UCITS ETF was second best Islamic ETFs and conventional ETFs share the Centre for Islamic Business and Finance at 9 percent. (http://www.bloomberg.com/ common characteristics. The main difference Research (CIBFR). He has published quite news/2014-10-21/etfs-lag-2-3-trillion-market- between a conventional ETF and an Islamic extensively in the area of finance and his as-options-scarce-islamic-finance.html) ETF is the benchmark index that the Islamic scholarly research has featured in leading ETF tracks. An Islamic ETF tracks a benchmark In a recent study conducted by Alam (2013) journals like Emerging Markets Review, Journal index comprised wholly of constituent to look into the comparative performance of Asset Management, Journal of Banking securities which are Shari’a compliant whereas of Islamic and conventional ETF By making Regulation, Journal of International Banking a conventional ETF may track any benchmark use of 85 ETFs from UK iShares between law & Regulation, Review of Islamic Economics; index regardless of the Shari’a status of its 2008 and 2011, it was found that Islamic Journal of Internet Banking and Commerce constituents. In addition, an Islamic ETF is ETFs can beat both the conventional ETFs and Journal of Financial Services Marketing managed under the Shari’a principle and and market benchmark index based on risk- among others. He also coauthored three books guidelines, and overseen by an appointed adjusted performance measures. Overall in Islamic Finance among them is Encyclopedia Shari’a committee. The Shari’a committee both ETFs were able to outperform the of Islamic Finance which is first of its kind and conducts regular reviews and audits on the market benchmark index. It was also evident has sold over 1000 copies worldwide. Dr. Alam Islamic ETF to ensure strict compliance with that a portfolio of Islamic ETFs shows less is also Visiting Lecturer for Durham Islamic the Shari’a principles and practices. variability and hence is less risky compared to Finance Summer School, Durham University, their conventional counterpart. (http://www. UK. He is reviewer for leading finance & Islamic The following diagram depicts the general palgrave-journals.com/jam/journal/v14/n1/ finance journals. He has also participated in structure of an Islamic ETF: abs/jam201223a.html) leading Islamic finance conferences worldwide Islamic ETF can be the next big thing for Islamic among them significant was participation in For Islamic ETFs to catch up with conventional capital market after the sukuk which has made Harvard Islamic Finance forum at Harvard ETFs, it needs to be fully cost-effective and inroads in the global Islamic capital market Law School and Gulf Research Meeting at needs to reach an optimal size but none of the landscape. One of the most developed Islamic Cambridge University, UK. current Islamic ETFs have assets of more than capital market, Malaysia has two Islamic ETFs $100 million whereas bigger conventional ETFs Recently Nafis was featured as Professor of the with a market value of $98.8 million, taking the control funds of few hundred billion. Islamic Month by Financial times. nation’s total ETF to six which is worth $320 ETF is an innovative financial product which has million. In Malaysia, Islamic ETF covers 31.5% an appetite in a GCC , Europe and Malaysian of the total EYF market. (http://www.sc.com. market but it needs a long way before it catches my/data-statistics/islamic-capital-market- statistics/) MyETF-DJIM25, Malaysia’s first Shari’a compliant ETF launched in January 2008, tracks the Dow Jones Islamic Market Malaysia Stock Exchange Titans 25 Index as a benchmark index which is a market capitalisation weighted and free-float Buyer Seller adjusted index provided by S&P Dow Jones ETF through the License Agreement. Shares The Benchmark Index consists of 25 Shari’ah- compliant securities of companies listed on Bursa Malaysia Securities Berhad, weighted by market capitalisation. The universe for selection of the components of the Dow Jones Islamic Market Malaysia Titans 25 Index includes all equities in the Dow Jones Islamic Market Malaysia Index, and index comprised of Malaysia-based companies that comply with Secondary the methodology established by S&P Dow Authorized Participants Jones for screening stocks to comply with the Primary Market Shari’a principles. (www.myetf.com.my) Globally, Islamic ETF even after almost a ETF Shares Securities decade in service, assets account for less than one percent of the total $2.3 trillion ETF market. Recently, Islamic ETF got a big Islamic ETF Provider Shari’a Advisory boost when the U.S. fund management firm Committee Falah Capital LLC set up its inaugural Shari’a- compliant ETF to tap growth in Islamic banking Shari’a Advisory Matters

44 ISLAMIC FINANCE REVIEW | WWW.ISFIRE.ORG

PERSONALITY

What kind of education did What is the greatest you have when you were achievement of your life so growing up? far? I spent 11 years of my primary and Being a pioneer staff and spearheading secondary education at the Convent Amundi’s Malaysian office at the Bukit Nanas primary and secondary start of its operations in 2008 and schools in Kuala Lumpur. After my growing, both conventional and SPM examination (equivalent to Shari’a-compliant, into one of the the ‘O’ levels), I left for the USA and largest foreign owned asset managers completed my BBA degree from Loyola in Malaysia. Marymount University in Los Angeles. I returned to Malaysia to work for a What has been your greatest few years and then proceeded to do disappointment? MBA at the Australia Graduate School In the development of Shari’a- of Management in Sydney in 2000. compliant investments, I have been Who was your mentor? disappointed by the slow speed of some large institutions in Muslim I do not have any specific individual majority countries to invest in Shari’a- mentor. During the span of my 22 compliant investments. year career, I have been fortunate to work under some very good What do you do in your spare and enterprising companies and time? bosses in the business. The different experiences have provided me I read to keep up to date with the with very good foundation for my current events in the world and leadership role. financial markets. If you had to rate your satisfaction with How would you describe your your life so far, out of 10 what would managerial style? you score? Consultative. I believe in teamwork I am blessed to live a comfortable and will seek the views of the relevant life surrounded with good friends parties involved before making the and caring family. There’s more I can appropriate decisions. achieve career wise so I guess that’s Ambition or talent: which matters where the dissatisfaction lies. more for success? If your 20 year’s old self could Ambition. I have seen talented people’s see you now, what would she careers stall as they were not driven or think? hungry enough to work hard and push themselves to succeed. Someone once She would be very impressed with said to me “It’s not where you start, how I have progressed in my career. I but where you end that matters” and wasn’t a particularly ambitious 20 year there’s a lot of truth in that statement. old and only became career-driven when I started working and seeing the What was your earliest successful results of my work. ambition? How committed are you to To be a lawyer Islamic banking and finance? In what place are you the happiest? As I said earlier, one of my ambitions Surrounded by family and good friends is to see Amundi’s Shari’a-compliant asset management business grow into What ambitions do you still a global leader and asset manager have? of choice. Amundi Islamic Malaysia Roslina Abdul is Amundi’s global hub for Shari’a- To grow Amundi Islamic to be a leading compliant asset management and and preferred Shari’a-compliant asset global sukuk investments, so it has the manager globally. support of the Amundi group to grow What drives you on? it into a leading global player. Being the country head responsible for the Rahman To be successful at a given task or goal growth of this business, I am very Managing Director, committed. Amundi Malaysia Sdn Bhd

45 ISLAMIC FINANCE REVIEW | MARCH 2015 TALKINGCURRENT POINTSARTICLE

Specific Risks Facing Islamic

Banks and Financial Yousuf Siddiqui, Senior Manager Shari’a Structuring, Emirates Institutions (IBFIs) Islamic 46 ISLAMIC FINANCE REVIEW | WWW.ISFIRE.ORG TALKING POINTS

Besides standard risks that Islamic as well as personal financing), Islamic bank is exposed to dues of murabaha, istisna’ and salam, etc.), conventional banks face and manage, there high degree of price risk in case the customer the customer has to settle the outstanding are other risks that are specific to Islamic rejects or defaults in signing the murabaha or financial obligation irrespective of availability or banks. Some of these risks are entirely new musharaka of shares. Such kind of risk could non-existence of the underlying asset. Hence, (like commercial displacement risk) and others be mitigated through various risk minimisation if a car sold on a murabaha basis is destroyed, are new yet fall under existing categorization methods. The most common risk mitigation even then the due price has to be paid by the of risk (like credit risk, market risk and interest in this respect is to ensure that the Islamic customer. However, on the downside, Islamic rate risk etc.). These risks are specific to Islamic bank (as seller) executes sale of the underlying bank cannot claim any extra returns over the banks with respect to the Shari’a compliancy asset to the customer (as buyer) in the fastest contracted sale price or the outstanding debt. requirements. Hence, these could be treated possible time. Obtaining customer’s acceptance For example, during financial crises, Islamic as specific operations risks faced by IBFIs. through implied consent would facilitate Islamic banks in Dubai had to stick to the capped profit Although these risks may prove fatal in some bank to transfer such kind of risk at the fastest amount agreed upon at the time of executing extreme cases, the management of IBFIs possible way. murabaha. This incurred heavy losses to and their consultants so far have failed to a number of Islamic banks that financed As per Shari’a rulings, deferment of risk emphasise sufficiently on their importance. properties under construction, which got transfer for a specific asset is not permissible. delayed on delivery. This is a major risk facing Islamic banks would be exposed to these For example Islamic bank cannot agree to IBFIs using murabaha as a dominant tool of specific risks due to a number of reasons, sell a specific asset today where the risk will financing in their business. including the issuance of certain Shari’a be transferred after one month. This could resolutions by its own Shari’a supervisory be addressed through timing of risk where This is one of the reasons that an increasing committee and/or that of a national Shari’a execution of the sale of the underlying asset is number of IBFIs have now started preferring advisory body (or even an individual Shari’a scheduled only when the seller is willing to part other modes of financing, which offer flexibility scholar), issuance of new guidelines by a central away from the underlying asset. in the wake of an adverse event. One solution bank or another financial regulator, or due to that has been in practice in some countries As per Shari’a rulings, once risk of the issuance of unfavourable decisions by a court is the use of periodic purchases and sales underlying asset is transferred to the customer of law. In such a scenario, one must expect an contracts. Ijara-based leasing is another risk (as buyer) then the Islamic bank (as seller) has adverse impact on profits and revenues of the mitigation tool. In cases of periodic sales and no Shari’a right of reselling it to other party or concerned Islamic bank. leases, returns for the coming periods can be the same buyer at profit. Hence many Islamic adjusted to compensate the Islamic bank for On the other hand, on a lighter note, an bank face losses when murabaha customers loss due to customer’s default or changing Islamic bank may be exposed to a specific delay in settling their payments by few months. financial conditions. For example, in case of risk due to customer defection or customer Islamic banks do not wish to qualify such delay ijara, it is possible to increase the rent of the dissatisfaction. If such a situation arises then as events of default but still they suffer losses subsequent months, followed by a default this might result in negative marketing (i.e., due to fixing the price of murabaha. This could on part of a customer. Similarly, in case of a word of mouth) and if remained unchecked for be mitigated through appropriate pricing of periodic sale contract, the sale price can be a long period then it could lead to permanent risk whereby the Islamic bank (as seller) has to increased in subsequent sales if a regular loss in the market share. agree on the best rate of return/yield at the customer happens to default on a particular time of transferring the risk to the customer (as We focus on some of the most important risks obligation. buyer). specific to IBFIs. However, it should be noted that there is a FACTOR 2: SPECIFIC CREDIT RISK possibility of trade-off between specific credit FACTOR 1: RISK OF UNDERLYING risks and the specific risks arising from the ASSET Credit risk specific to Islamic banks can be ownership of the underlying assets. While defined as the financial loss that an IBFI suffers moving to ijara-based products may help in Most of the financing transactions in IBF are when a customer defaults. In conventional reducing credit risk, it is expected to increase based on selling or leasing of an underlying banking, when a customer is late on payments, the risks associated with the underlying assets. asset. In fact, bearing the risk of ownership the lender benefits in terms of default penalty Similarly, moving to multiple and periodic of an underlying asset entitles an IBFI to and the additional interest that the customer sales to mitigate credit risk is also expected to claim revenues generated from the sale of has to pay to bring their account in order. In increase likelihood of operational risk (in terms the underlying asset. The specific risk that an some cases, delay in payment is expected and of mistakes, errors and omissions by the bank’s IBFI faces is a possible or potential loss of the welcomed, as it brings additional benefits to personnel). underlying asset prior to execution of sale/ the lender (as is the case in the credit card lease contract. According to Shari’a, an IBFI can business wherein credit card provider actually Given this trade-off, care must be exercised claim any amount of profit provided it bears the awaits a transactor to become a revolver). As to decide on the contract choice, and other risk of the underlying asset at the time of selling default penalty is not allowed in IBF, and where factors like price volatility, customer’s credit or leasing the same. it is imposed, the finance provider cannot history, and the expertise level of the bank staff benefit from it except to the extent of the direct must also be taken into account. If, for example, As per Shari’a rulings, Islamic banks cannot administrative costs associated with it, the downward price volatility is the dominant sell an asset before getting the risk of the credit risk for IBFIs includes additional loss of factor, then one-off murabaha transaction underlying asset transferred to itself. For income due to default. may be a better choice. If, however, customer’s example, if an Islamic bank buys a car from default is likely (and is still within the acceptable a dealer and if anything goes wrong with Generally, customers of Islamic banks have risk threshold), then periodic sales and ijara the car prior to executing an auto murabaha two kinds of financial obligations: a) debt contracts may be more feasible. If, on the contract then Islamic bank has to bear the loss. settlement; and b) periodic purchase or lease. other hand, an IBFI faces excessive incidence Similarly, in shares financing (as a substitute to In debt settlements (for example settling

47 ISLAMIC FINANCE REVIEW | MARCH 2015 TALKING POINTS of operational risk, simple one-off murabaha transactions may be preferred.

FACTOR 3: RISK OF HUMAN CAPITAL All banks and financial institutions face people risk, which is categorized under operational risks. In case of IBFIs, this risk has an additional dimension, given the Shari’a compliancy requirements. After all, IBF is driven by Shari’a sensitivity of customers. If IBFI customers perceive employees of such institutions less than committed to IBF, this will adversely affect their patronage and custom. In recent times, a number of Islamic banks in the Middle East have suffered losses due to irregularities in operations and inadequacy of policies adopted by the top management that was not particularly committed to Islamic banking. Similarly, all the Islamic banks set up in UK had CEOs who came from non-Islamic background. These CEOs were gradually replaced with Muslim CEOs who are seen more favourably by the users of Islamic financial branding. banks due to improper marketing efforts, services. A number of Shari’a boards advise serious thoughts should be given by the As a general remedy to human resource their banks to choose pious Muslims to lead marketing departments of Islamic banks to related specific risks faced by Islamic bank, their businesses, an advice that has not been give a positive and vibrant image of the Islamic HR departments of Islamic banks should make taken seriously in many cases though. In South banks, which can attract a larger market share. more serious efforts to raise the standards Africa, there has been at least one case where Moreover engaging Islamic banks in sponsoring for those who are willing to join Islamic a top manager of Islamic banking operations Islamic conferences and charitable causes have banking through recruitment, localization was found to be involved in activities that were proven to be a positive step to mitigate any risk and continuous learning and development questionable from a regulatory perspective. of negative marketing. Consequently, shareholders of IBFIs in Africa initiatives. In a study on top Islamic banking have now adopted a cautious approach in brands, Meezan Bank’s employees were found deciding top leadership of such institutions. to be most loyal to their bank and its brand (see FACTOR 5: STATUTORY AND LEGAL the previous issue of ISFIRE for further details), RISK In Malaysia, now there is an implicit and there is a need to study Meezan Bank’s understanding that the central bank will approach to human resource development. Specific risk of statutory and legal risk faced by approve only Malay Muslims to lead Islamic an IFBI is the risk of financial loss due to being banks and takaful companies as CEOs. This subjected to certain regulatory frameworks or is, however, not so far the case when it comes FACTOR 4: MARKETING RISK unfavourable decision in a court of law. to appointments in the Islamic capital market Specific risk of marketing faced by Islamic Except in a few countries (notably Malaysia), wherein Securities Commission Malaysia banks is related to the possible financial the laws of land do not recognize Shari’a has yet to adopt such an implicit approach to and reputational suffered due to following principles and rulings as acceptable and manage risk of human capital specific to IBFIs. inappropriate marketing tools in promoting applicable governing law for commercial and Islamic financial products. This includes usage In the wake of Islamic banking making financial transactions. This means that Islamic of conventional terminology in verbal and its route to new markets like East Africa financial transactions become subject to written communication. where local expertise in Shari’a structuring, conventional in the event of a dispute. This is development and audit is highly uncommon, Legal documentation and marketing material particularly true when the legal documentation IBFIs are expected to this specific risk, at with conventional terminology might lead clearly stipulates a conventional law, e.g., least at the initial stage of development of to shaking Shari’a Board’s confidence in the the English law, as the governing law of the IBF therein. This is a real challenge faced by true essence of products offered by Islamic transaction. IBFIs in the new jurisdictions where they banks. Also, the personnel using conventional Furthermore, many Islamic financial face acute pressure from their conventional terminology will add doubts to the customers’ transactions are governed by complex counterparts. Incapable, inadequately minds about Shari’a credibility of Islamic banks lengthy documentations, which may in many qualified or less committed human resources and the products offered by them. instances be not understood by judges (who in such instances find it difficult to overcome Similarly using inappropriate means of are not well-versed in the Shari’a law) in the competition pressure through structuring promoting Islamic financial products (like conventional courts. It may also be the case innovative products and adopting processes through music channels or cinema halls) that legal documentation may have gaps and and procedures that favour IBF. Many industry could force Shari’a boards to take severe and important exclusions, especially if they are observers believe that credibility of Islamic unfavourable measures. prepared by law firms not fully exposed to the banks with less committed workforce will Shari’a requirements, or those documentations adversely impact their Shari’a identity and As a general remedy to risk faced by Islamic that are not properly vetted by qualified

48 ISLAMIC FINANCE REVIEW | WWW.ISFIRE.ORG

Shari’a advisors. If so, it is very likely that the transaction would be deemed null and void from a Shari’a viewpoint, in case of a dispute going into a law of court and the judge requires an independent Shari’a opinion on the transaction. In such a case, the court will have no option but to adjudge the case from a pure conventional viewpoint. IBFIs in this circumstance are likely to incur financial losses. Specific risk facing an IBFI in the context of regulatory framework may be understood in the context of liquidity management. In many jurisdictions, Islamic banks do not have access to Shari’a compliant instruments to manage their liquidity requirements. While conventional banks may have access to a variety of instruments like repos and T-bills, ISFIRE Magazine Subscription IBFIs may have to resort to expensive bespoke arrangements for liquidity management. This is certainly a risk specific to IBFIs. As a general remedy to the risks faced by Islamic banks due to statutory and legal factors, ISFIRE it should be ensured that documentation by www.isfire.org Islamic banks’ legal departments are thorough and lean in order to cover all the Shari’a requirements to avoid being subjected to conventional rulings that are not in line with Shari’a principles. Also, Islamic banks should work more proactively on Shari’a compliant alternatives to the existing central bank’s conventional products to avoid any financial or liquidity risk.

CONCLUSION Risk management in IBFIs is a trick area, which is fast evolving with the increase in size and scope of the Islamic financial services industry. So far, however, risk managers and policy and strategy personnel of IBFIs have taken into account only secular views of risks. Consequently, the risk mitigation and management endeavour by IBFIs have resulted in bringing product development in IBF Mobile #: Fax: closer to the conventional practices. A proper consideration of risks specific to IBF must result in product development and structuring in favour of genuinely Shari’a compliant products that fulfil Islamic requirements in letter and spirit.

Edbiz Consulting Limited

49 PAUSE FOR THOUGHT

Lahore as a Global Centre of Excellence for Islamic Finance? Professor Humayon Dar

COMSATS Institute of Information Technology There is more to GFIF than just creating keynote speaker. Dr Akram Laldin, Executive (CIIT) Lahore organized its third Global a marketing gimmick. With the active Director of International Shari’a Research Forum on Islamic Finance (GFIF) at Pearl engagement of COMSATS in IBF, the Academy for Islamic Finance (ISRA) also spoke Continental Hotel Lahore on March 10-11, Institute has gained a central position in IBF at the conference. Ijlal Ahmed Alvi, CEO of 2015. Delegates and speakers from around on a national level. The likes of International International Islamic Financial Market (IIFM) the world, including from UK, USA, Malaysia, Islamic University Islamabad (IIUI), which have also joined the speakers from Bahrain. Dr Imran Bahrain, Saudi Arabia, Germany, Lebanon, traditionally been considered as torch-bearers Usmani and Mufti Zubair Usmani represented Canada and many more, attended the event. of the movement of Islamic economics, banking Darul Uloom Karachi. In this way, COMSATS It was a well-organised conference for which and finance, have been eclipsed by this new succeeded in engaging major stakeholders in the organisers must be congratulated. The leadership role of COMSATS. the third GFIF. rector of the university, Professor S. M. Junaid The Forum was attended by Saeed Ahmed, Unlike Karachi, which hosts the financial Zaidi, and Director COMSATS Lahore Campus, Deputy Governor of State Bank of Pakistan, district of Pakistan, Lahore is a more secure, Professor Mahmood Ahmed Bodla, were who is also responsible for development of less volatile and culturally richer city. A number instrumental in making the third Forum a huge Islamic banking in the country as part of his of banks and financial institutions (e.g., Muslim success. The university’s top management leadership role at the central bank. There Commercial Bank, Allied Bank, the Bank of should be appreciated for their strategic vision was active participation and support from Punjab, FINCA Microfinance Bank, and the and spotting an opportunity in Islamic banking Islamic Research and Training Institute (IRTI), Punjab Provincial Cooperative Bank) have and finance (IBF) for developing a centre of a member of the Islamic Development Bank their headquarters in Lahore. Lahore Stock excellence in a niche market like this. There is Group. Dr Zamir Iqbal, CEO of the World Exchange provides a perfect substitute to the no doubt that COMSATS has put Lahore on the Bank Global Centre of Islamic Finance, was a more vibrant and better-known Karachi Stock global map of IBF.

50 ISLAMIC FINANCE REVIEW | WWW.ISFIRE.ORG PAUSE FOR THOUGHTS

Exchange. Being capital of the largest province Market (IIFM) and the Islamic International 1. The government of Punjab should start of Punjab, with population of nearly 100 million, Rating Agency (IIRA), Manama remains sponsoring GFIF as a premier conference Lahore can be developed as a global centre of central to the global developments in IBF. The in the global calendar of IBF; excellence for IBF. government’s commitment to IBF is crucial 2. State Bank of Pakistan should establish for the leadership role of Bahrain in the global In Karachi, Darul Uloom Karachi has played an endowed Chair in Islamic Finance at Islamic financial services industry. a lead role in developing the requisite human COMSATS to further strengthen Centre resources for the Islamic banking industry. In The fourth centre of excellence for IBF is of Islamic Finance; Lahore, COMSATS can play a similar role by London. With numerous industry-building 3. The provincial government should set up developing its newly established Centre of initiatives like Institute of Islamic Banking and a task force headed by an Islamic finance Islamic Finance as a centre of excellence for the Insurance, Islamic Bankers Association and expert of international repute, with an research and talent development for the Islamic UKTI’s lead role in the promotion of London objective to identify opportunities in IBF, financial services industry. as a hub of IBF, London remains central to which could be exploited to attract Islamic developments in the global Islamic financial financial capital to the province in general Undoubtedly, Kuala Lumpur is the global services industry. and Lahore in particular; capital of IBF, with numerous industry- building institutions like Islamic Financial Istanbul is also fast emerging on the global 4. Through a university like COMSATS, Services Board (IFSB), International Islamic map of IBF. The government of Kazakhstan is international linkages should be developed Liquidity Management Corporation (IILMC), also promoting Almaty as a regional centre of with other centres of excellence for IBF, International Centre for Education in Islamic excellence for IBF. notably Kuala Lumpur, Dubai, London and Finance (INCEIF), International Islamic Bahrain; and In this background, Lahore has a long way University Malaysia (IIUM) and International 5. The provincial government should choose to claim to be a global centre of excellence Shari’a Research Academy for Islamic Finance the crucial area of Islamic microfinance to for IBF. However, it has all the ingredients to (ISRA). The key to success of Kuala Lumpur develop Lahore as its global hub. become one such centre if the government as a global centre of excellence for IBF is the of Punjab starts owning IBF and devises a staunch support of the government and the strategy to attract Islamic financial capital from role that the central bank – Bank Negara around the world. Issuance of sukuk can bring Malaysia – has played in the promotion and a lot of attention to Lahore, as the provincial development of IBF nationally as well as government needs significant sums of money internationally. to develop infrastructure in the city and Dubai is aggressively pitching itself as a global the province at large. The government capital of Islamic economy. It boasts having the of Punjab should study the issuance of best infrastructure for the financial services sukuk by the German state of Saxony industry and linkages to the global Islamic Anhalt that issued a 100 million euro economic routes. It has established a number sukuk in 2004. This landmark sukuk of industry-level bodies like Dubai Islamic instantaneously put the state on the Economy Development Centre and Dubai global map of IBF. Centre of Islamic Banking and Finance. Like in Although there is a need to look Malaysia, the key support to Dubai as a centre into this proposition in great detail of excellence for Islamic finance and economy but the following steps should comes from the government. be considered as a general Bahrain – once the unchallenged leader in guideline to make Lahore IBF – has slipped to third position in terms of as a global centre of its global standing as a centre of excellence excellence for IBF: in IBF. With the likes of Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), General Council for Islamic Banks and Financial Institutions (CIBAFI), International Islamic Financial

51 TALKING POINTS

Mezbah Uddin Independant Scholar Romzie Rosman Financial Reporting International Shari’ah Research for Islamic Academy for Islamic Finance Financial Issues and Institutions in Malaysia: Challenges Malaysia pioneered the Islamic finance industry enactment of Islamic Financial Services Act In recent years, there have been significant in many ways. Islamic banking, takaful, or 2013 (IFSA) is a great leap ahead for Malaysian initiatives taken towards international sukuk, the country perpetuates to maintain its Islamic financial industry. Malaysia is among convergence of a single set of financial leading position in terms of market share and the countries that have well developed reporting standards. The single set of market growth. According to the forthcoming Islamic financial system that promotes the standards aims to enhance comparability and Global Islamic Finance Report 2015, Malaysia development of the industry. To be the global understandability of the financial statements, is maintaining its second position on the Islamic hub and the leader of Islamic finance is in its and increase cross-border investments. The Finance Country Index (IFCI), second to Iran. national agenda. Malaysia frequently hosts convergence initiatives are being steered With US$249 billion Islamic financial assets international events welcoming leading primarily by the International Accounting (both in the formal and informal sectors) at Shari’a scholars and industry practitioners. Standards Board (IASB) – the issuing body of the end of 2014, the country has grown its The country is also the founding member and International Financial Reporting Standards Islamic banking and finance market with an the host country of Islamic Financial Services (IFRS). Many international organisations, average annual rate of over 20% between Board (IFSB) that sets international prudential including the G20, World Bank, IMF, Basel 2007 and 2014. The same report forecasts, standards and guiding principles to promote Committee, International Organization Islamic banking assets of Malaysia will reach US and enhance the soundness and stability of of Securities Commissions (IOSCO), and $643 billion in 2019. Bank Negara Malaysia, Islamic financial services industry. International Federation of Accountants (IFAC) the central bank of the country, aims to boost has been publicly supported the convergence Nonetheless, amidst all of the achievements, Islamic banking market share in local market to projects. At present, 114 jurisdictions in the challenge remains on adoption of unanimously 40% by 2020, currently which stands at 20.7%. world require IFRS-based financial reporting accepted financial reporting standards that In takaful sector, Malaysia emerged as the for all or most of their listed companies and must address the unique nature of Islamic world’s largest family takaful market. In terms financial institutions. financial instruments. of gross takaful contribution, however, Malaysia Effective from 1st January 2012, non-private comes in the second position, only lagging Islamic finance refers to a system that complies entities in Malaysia are required to apply behind Saudi Arabia, by representing 21.55% with the rules of Shari’a, also known as Islamic Malaysian Financial Reporting Standards of forecasted total gross takaful contributions law. The underlying philosophy of Islamic (MFRS), which is identical to IFRS, in preparing for 2014. The prospects for takaful industry financial instruments is fundamentally different their financial statements. This brings Islamic in Malaysia are bright, with 22% growth rate. than the traditional financial instruments. financial institutions in Malaysia under In sukuk issuance, Malaysia is the unparalleled For instance, Islamic banking instruments provisos of IFRS. Alongside Malaysia, the global leader. Since 2012, the country’s share of are entrepreneurship and trade driven which biggest Islamic finance markets, such as Saudi new sukuk issuance has consistently been more results risk and profit sharing between the Arabia and Dubai, also require or permit IFRS than 60%. MIFC Insights reported in 2013 provider of fund (investor) and the user of fund based financial reporting for Islamic financial that Malaysia’s market share of global sukuk (entrepreneur). In contrast, traditional banking institutions. issuance was 69%. instruments are purely lending and borrowing arrangements whereby the borrower pays IASB adopted principle based approach in The rapid growth and the optimistic outlook interest to the lender based on the amount developing its financial reporting standards. of the Islamic finance industry in Malaysia and duration of borrowing. The differences in The Malaysian Accounting Standard Board have been made possible because of its philosophies raise the question whether it is (MASB) is of the opinion that MFRS can comprehensive Islamic financial system that appropriate for Islamic financial institutions to be applied for Islamic financial instruments is supported by strong regulatory, legal, apply the same set of accounting standards that without entailing any difficulty, and the and Shari’a governance frameworks. The also apply for traditional financial institutions. application of MFRS in financial reporting

52 ISLAMIC FINANCE REVIEW | WWW.ISFIRE.ORG TALKING POINTS of Islamic financial institutions does not reporting can reflect the true nature of Islamic apply AAOIFI accounting standards. In UAE, sanctify or nullify the Shari’a validity of Islamic financial instruments. though, where IFRS is mandatory, Islamic financial transactions as financial reporting is financial institutions can still apply AAOIFI a recording function only. Therefore, MASB ii. Time value of money accounting standards based on permission argues, development of a separate framework The notion of effective interest rate applies in from regulators. for Islamic financial institutions is not essential IFRS-based financial reporting even when a An earlier survey conducted by AOSSG in (AOSSG, 2010). On the other hand, the financial arrangement is interest-free; this is 2011, where twenty-four standard-setters Bahrain based accounting standard setter for due to the traditional wisdom of time value of from around the world participated, reveals Islamic financial institutions – the Accounting money. For example, in IFRS-based reporting, that the Islamic accounting standards applied and Auditing Organisation for Islamic Financial at initial recognition, receivables from a by Islamic financial institutions globally are Institutions (AAOIFI) – established differences murabaha deferred payment sale is recorded not homogenous set of standards. Islamic in objectives of financial reporting between after discounting future cash flows to present accounting standards in some jurisdictions are an Islamic bank and a traditional “Western value; the difference between the discounted similar to IFRS, whereas in some others similar model” bank, and reasons that the accounting amount and the nominal value is recorded as to AAOIFI standards. Some jurisdictions have standards developed for traditional banks interest revenue over the period receivables locally-developed Islamic accounting standards may not be relevant for Islamic banks. AAOIFI amount pays back (IAS 18: 11). The concept that may or may not be based on AAOIFI states in its objectives and concepts of financial of time value of money and application of standards. Pakistan, for example, developed accounting standards: effective interest rate raises two concerns for standard on murabaha independently, but i. Islamic banks were developed on a Islamic financial institutions. First, unwinding taking AAOIFI standards as a base; whereas foundation that does not permit the of receivables discounting imitates traditional it developed the standard on ijara based separation between temporal and religious interest-based financial arrangements and on IAS 17 Leases. Indonesia, as another matters. results recognition of notional interest revenue. example, develops its own Islamic accounting Second, according to Shari’a, money does ii. Those who deal with Islamic banks are standards, and do not use AAOIFI as a base. not have a time value aside from the value of concerned, in the first place, with obeying The different Islamic accounting standards goods; thus assigning a notional time value for and satisfying Allah in their financial and practiced in different jurisdictions may result deferred cash flows conflicts the requisites of other dealings. So, the information need markedly different requirements for similar Shari’a. differs from the traditional banks. Islamic finance transactions. Hence, the key challenge remains as to concur on a single set iii. Islamic banks must comply with the MASB has had a project on Islamic financial of high quality financial reporting standards to principles and rules of Shari’a in all their reporting and geared towards formulation of a present increasingly complex Islamic financial financial and other dealings. separate set of standards for Islamic financial institutions, but subsequently distanced itself instruments that give a true and fair view by iv. The functions of Islamic banks are from that objective. taking account of Shari’a precepts, as well as significantly different from those of meet the information needs of the users who traditional banks. Taking account of the concerns, IASB has set are particularly acute on disclosures pertaining v. The relationship between Islamic banks up an Islamic finance consultation group in Shari’a aspects of the instruments and the and the parties that deal with them differ 2013 to find ways to address financial reporting Islamic financial institution operation. from the relationship of those who deal issues related to Islamic financial instruments. The government of Malaysia have been taking with traditional banks. However, IASB has yet to come-up with a work plan and timeline addressing its agenda in this initiatives to boost investments in country’s Islamic Finance Working Group of the Asian- regard. Shari’a complainant financial instruments. This Oceanian Standard-Setters Group (AOSSG), advances the issue of addressing the peculiarity which is led by the MASB, in its 2010 research AAOIFI issued twenty-six accounting of Islamic financial instruments in financial paper identified two key accounting principles standards pertaining a number of Islamic reporting. A complete and sole adoption of that challenge IFRS-based financial reporting financial instruments. The accounting IFRS is not the widely-accepted solution as for Islamic financial instruments: (i) the standards developed by AAOIFI are driven by many argues against its compatibility for Islamic substance over form; (ii) and the notion of time principles of Shari’a and addresse the disparate financial instruments. Developing a complete value of money. nature of Islamic financial instruments. separate set of standards for Islamic financial The disclosure requirements stipulated by institutions will require a long span of time, i. Substance over form AAOIFI standards are unique to Islamic therefore not a practical alternative in the In IFRS-based financial reporting, transactions financial institutions and its instruments, short run. The approach of Bahrain can be a are recorded based on their substance and which is absent in IFRS. Nevertheless, AAOIFI convenient solution at the initial stage; that is economic reality. The Conceptual Framework standards are not robust and comprehensive to apply AAOIFI accounting standards as the of IASB explains, “in assessing whether an enough to deal with every aspect of Islamic primary set of standards for financial reporting item meets the definition of an asset, liability banking transactions. Consequently, a recent of Islamic financial instruments, and apply or equity, attention needs to be given to its (2013) survey conducted by Islamic Finance IFRS where AAOIFI standards are silent. An underlying substance and economic reality Working Group of AOSSG reveals that in some alternative way ahead can be development and and not merely its legal form” (Para 4.6). If jurisdictions where Islamic financial institutions inclusion of dedicated IFRS implementation substance over form applies in recording of apply AAOIFI accounting standards as primary guidelines and disclosure requirements for Islamic financial transactions, there will be no standards, they also apply IFRS in financial Islamic financial instruments and Islamic likely difference in the recording of a Shari’a reporting in cases where AAOIFI is silent. financial institutions, so that the financial compliant trade or equity-based financing Survey respondents from Bahrain, Lebanon, statements remain convergent to IFRS, but and a traditional loan financing; hence, raises and Oman commented that the traditional at the same time avoids criticisms pertaining question whether IFRS-based financial financial institutions in their jurisdictions apply Shari’a precepts. IFRS, whereas the Islamic financial institutions

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