ISSUE NO. 172 JULY–SEPTEMBER 2009 RAJAB–RAMADAN 1430 PUBLISHED SINCE 1991 GLOBAL PERSPECTIVE ON ISLAMIC BANKING & INSURANCE SUKUK: WHERE NEXT? ISLAMIC WORKING CAPITAL FINANCING UNDERSTANDING GHARAR SHARI’AH-COMPLIANT ASSET MANAGEMENT: MYTH OR REALITY? TAKAFUL: KEEPING TRUE TO ITS SPIRIT ACADEMIC ARTICLE: SHARE MURABAHA NEWHORIZON Rajab–Ramadan 1430 CONTENTS Features 20 Understanding gharar Although gharar prohibition is a fundamental pillar of Islamic finance (alongside the prohibition of riba), it has not been receiving due attention. NewHorizon attempts 10 At the crossroads to redress the situation. Should the Islamic finance 24 industry concentrate its efforts 24 Islamic working capital financing on Shari’ah-compliant, Shari’ah- based or Shari’ah-tolerated Working capital financing, the lifeline for many businesses across the world, products, asks Dr Humayon has dried up since the start of the financial crisis. Dr Salman Khan from Abu 10 Dar. Dhabi Islamic Bank looks at how Islamic working capital financing can and should be applied. 14 Sukuk: where next? 28 Islamic asset management: 42 NewHorizon asks how the sukuk industry will respond myth or reality? to the dip in 2008. To date, asset management has not been prominent on 19 Interest rate risk: a threat to the the Islamic finance scene. Is it time for it to become mainstream? Islamic banking system? 42 Book review In this recently introduced section, ‘Food for Thought’, NewHorizon continues the debate on the controversial ‘Shari’ah Law: An Introduction’ issue of interest rate risk. by Mohammad Hashim Kamali. Regulars 05 NEWS 34 IIBI WORKSHOP 38 ACADEMIC ARTICLE A round-up of the important stories Review of sukuk workshop Spirit and models of takaful: from the last quarter around the organised by the IIBI. meeting of minds or parting of ways? globe. 34 43 DIARY 16 ACADEMIC ARTICLE Upcoming Islamic finance events Share murabaha: its use and what endorsed by the IIBI. to watch out for. 44 APPOINTMENTS 32 IIBI NEWS Summary of appointments within Poznan University students from the Islamic finance industry. Poland visit IIBI. Representatives of King Fahd University of 45 RATINGS & INDICES Petroleum and Minerals, Saudi MSCI Barra GCC Countries Islamic Arabia, call on IIBI. More students 35 IIBI LECTURES Index. complete the IIBI’s Post Graduate May and June lectures reviewed; Diploma course. July lecture preview. 46 GLOSSARY www.newhorizon-islamicbanking.com IIBI 3 EDITORIAL NEWHORIZON July–September 2009 Deal not unjustly, and ye shall not be Executive Editor’s Note dealt with unjustly. Surat Al Baqara, Holy Quran This quarter has been full of mixed news for Shari’ah-compliant banking and insurance. The sad loss of Lord Eddie George, a former governor of the Bank of England and a prominent figure in the world of finance, has seen a flood of praise sent to NewHorizon from all parts of the industry EXECUTIVE EDITOR Mohammad Ali Qayyum, for Lord George’s valuable contribution to the development of Islamic Director General, IIBI finance. EDITOR Tanya Andreasyan But life goes on and the progress of the industry continues. Banks in Iraq and Indonesia are pushing for regulatory reforms to facilitate the IIBI EDITOR Mohammad Shafique growth of Islamic finance. A number of prominent banks in Pakistan have teamed up to kick start the country’s interbank market for Islamic CONTRIBUTING EDITOR Don Brownlow financial institutions. Countless reports of heightened activity within the Islamic finance industry are coming from across all sectors and NEWS EDITOR geographies. Lawrence Freeborn IIBI EDITORIAL ADVISORY PANEL Having experienced a substantial plunge in 2008, what is the sukuk in- Mohammed Amin Richard T de Belder dustry’s strategy today? NewHorizon puts the question under the spot- Ajmal Bhatty light. This issue of the magazine also discusses in depth the subject of Stella Cox Shari’ah-compliant working capital financing, with the assistance of Dr Dr Humayon Dar Iqbal Khan Salman Khan, head of Shari’ah at Abu Dhabi Islamic Bank in Dubai. Dr Imran Ashraf Usmani DESIGN CONSULTANT When talking about Islamic finance products, the debate on Shari’ah Emily Brown compliance vs Shari’ah basis inevitably crops up. A well-known Islamic PUBLISHED BY finance expert, Dr Humayon Dar, adds his voice to this discussion, with IBS Publishing Ltd the very interesting concept of a third category – Shari’ah tolerance. 8 Stade Street Hythe, Kent, CT21 6BE United Kingdom The IIBI continues to provide its input to the development of the industry Tel: +44 (0) 1303 262 636 worldwide. To date, professionals from around 80 countries have Fax: +44 (0) 1303 262 646 Email: [email protected] completed its Post Graduate Diploma (PGD) course in Islamic banking Web: www.ibspublishing.com and insurance. The Institute is also exploring the avenues of possible CONTACT co-operation with Saudi Arabia’s King Fahd University of Petroleum Advertising and Minerals. IBS Publishing Ltd Paul Minister Advertising Manager Together with the industry’s leading experts the IIBI is organising and en- Tel: +44 (0) 1303 263 527 dorsing a series of practicum this year, including its 3rd annual three-day Fax: +44 (0) 1303 262 646 Email: [email protected] residential workshop on structuring innovative Islamic financial products and a workshop on managing Shari’ah risk through Shari’ah governance. SUBSCRIPTION IBS Publishing Limited 8 Stade Street, Hythe, Kent, CT21 6BE, United Kingdom Tel: +44 (0) 1303 262 636 Fax: +44 (0) 1303 262 646 Mohammad Ali Qayyum Email: [email protected] Web: newhorizon-islamicbanking.com Director General IIBI ©Institute of Islamic Banking and Insurance ISSN 0955-095X This magazine is published to provide information on developments in Islamic finance, and not to provide professional advice. The views expressed in the articles are those of the authors alone and should not be attributed to the organisations they are associated with or their management. Any errors and Cover photo: © Abawab, Dreamstime.com omissions are the sole responsibility of the authors. The Publishers, Editors and Contributors accept no responsibility to any person who acts, or refrains from acting, based upon any material published in the magazine. The Editorial Advisory Panel exists to provide general advice to the editors regarding matters that may be of interest to readers. All decisions regarding the published content of the magazine are the sole responsibility of the Editors, and the Editorial Advisory Panel accepts no responsibility for the content. 4 IIBI www.newhorizon-islamicbanking.com NEWHORIZON Rajab–Ramadan 1430 NEWS Sad loss of respected governor and renowned proponent of Islamic banking Lord Eddie George, governor surrounding boroughs. From cluded tax and regulatory Lord Eddie George of the Bank of England for ten this, and following parallel changes and also official encour- years between 1993 and 2003, conversations with Dr Pasha, agement in examples such as has passed away after a pro- general secretary of the Union working towards a government- longed battle with cancer. of Muslim Organisations in the issued sukuk. Richard T de Known as ‘Steady Eddie’, he UK and Ireland, the working Belder, partner of international dealt with the aftermath of Black group dedicated to Islamic fi- law firm Denton Wilde Sapte, Wednesday, when Britain exited nance was created. believes that all the progress the the Exchange Rate Mechanism, UK has made in Shari’ah-com- in his first term, and led the bank Praise for Lord George’s efforts pliant finance can be traced into independence in 1997. Lord in the area of Islamic finance has back to Lord George’s early George will also be remembered flooded to NewHorizon from support. De Belder agrees with fondly by many in the Islamic all parts of the industry. Iqbal Wilson on Lord George’s global finance industry in the country, Asaria, managing director of influence, saying that the devel- for his determination over many Islamic advisory firm Afkar Con- opments in the UK, at Lord years in pushing Shari’ah-com- sulting, and a former member of George’s instigation, ‘can be pliant finance forward. the Bank of England working Meanwhile, Professor Rodney seen as providing a template committee, says: ‘On several oc- Wilson of the Faculty of Islamic for other countries, both in the Speaking to NewHorizon in casions he hosted the working Studies, of the Qatar Founda- West and in Muslim states, 2007 (NewHorizon, April–June group’s meetings in his own of- tion, suggests that Lord about what is required to en- 2007) , Lord George had relayed fices at the Bank of England and George’s appreciation of the im- courage Islamic banking’. his particular delight about facilitated dialogue with key de- portance of the Muslim commu- paving the way for Islamic mort- cision makers across government nity in the UK dates back over Mohammad Ali Qayyum, gages. He recounted how he had departments.’ Highlighting par- 20 years. Long ago, he ‘recog- director general of the IIBI, has been touched by the plight of ticularly Lord George’s joy at the nised that many Muslims were added his own praise. ‘Lord one Muslim couple in the UK passing of legislation to remove unhappy with the conventional George was admired for his ex- who had not been able to find double stamp duty on Islamic products offered by banks in the pertise, judgment and wisdom. a mortgage in accordance with home finance, Asaria adds that UK, and that Islamic finance He made immense contributions their religious beliefs, saying ‘I ‘it was his untiring efforts which would enhance community co- in giving Muslims, and others couldn’t think of any rational made the government commit to hesion and help eliminate finan- interested in alternative invest- reason for this’. Under his guid- creating a level playing field for cial exclusion’. Wilson adds that ment products, access to such ance, issues such as standardisa- Islamic banking and finance in Lord George’s influence spread offerings.