HiNew nortzonGlobal Perspective on Islamic Banking & Insurance No. 108. April 2001 / Muharram - Safar 1422 Zakat: Concept of Social Security Ijara Leasing as a Shariah Compliant Investment Islamic Banking and UK Regulations Problems Facing Islamic Investment Funds in the UK Takaful Industry: Global Profile and Trends 2001 Institute of Islamic Banking Et Insurance • London LEASING Islamic Asset Management As the demand for Sharia'a compKant investments in hard asset classes continues to grow there develops an increasing need to understand the risks and rewards associated with those investments. Equipment leasing meets the Islamic market's demand for capital investment in tangible and productive assets that are used in many busi• nesses to generate income and profits for the company using those assets. Capital equipment can be almost any physical item with a useful life of three or more years, with some equipment types staying in productive service for many decades. The basis of the leasing industry is the knowledge and professional management of the equip• ment being leased, the company and industry it is being used in, and the legal contract that ties the end-user (lessee], owner (lessor) and leased assets together. ABCIB Islamic Asset Management ('LAM' for short) apphes high levels of professional due diligence and direct market experience, gained over many years in the leasing industry, to provide investors with sound investment advice on opportunities in the equipment leasing markets. The LAM team specialises in the US market and provides a range of leasing-related services, catering to the profes• sional non resident investor, and draws together the four main issues which face non resident Islamic investors when evaluating opportunities: • How to structure investments in accordance with • The appropriate asset analysis Sharia'a • The means of identiiying attractive lease assets • How to plan for tax efficiencyM Investment Management Sharia'a Compliance LAM actively advises on equipment leasing investments LAM is able to call on the advice and direction of five in the United States, visiting with many people and experienced Sharia'a Scholars form the lAM's Sharia'a companies involved in the industry. In such a large Supervisory Committee and diversified market it is necessary to understand fully the operational mechanics of equipment leasing Asset Analysis and significant issues such as taxation, legal consider• Our fundamental approach to leasing is to understand ations and credit quality. LAM possesses the necessary the pricing of lease assets relative to lease tenor, expertise to assess properly the many leasing business lessee quality and asset quality. This then needs to be opportunities that arise, analyse transactions in terms considered in a corporate context to ensure efficient of the risks, mitigants, and residual economics, and tax planning. LAM applies a disciplined methodology recognise when to decline leases that do not meet our to its analysis of equipment leases, and follows an investment criteria. Hand-on management of the independent valuation policy that is endorsed by its leased assets after they have been purchased is also auditors. Once lAM makes an investment it continues vital in translating good potential into results the due diligence process by reviewing each lease on achieved. an ongoing basis, to ensure that the expected financial performance is realised. Moving into 2001 it is clear Structuring Appropriate Investment Vehicles that economic conditions are changing in the world's LAM specialises in advising professional investors main equipment leasing market, the United States. who are entering the leasing markets. This can be the These changes will throw up new, profitable and preferred option for those who wish to exercise greater different opportunities for Sharia'a compliant lease control over their investment strategy and lAM can investments, and those opportunities are now being assist from acquisition through to disposition. developed by lAM. Contact Arab Banking Corporation House 1-5 Moorgate, London, EC2R 6AB Telephone: +44 (0) 20 7776 4000 • Facsimile: +44 (0) 20 7600 7569 An appointed representative of ABC International Bank pic, regulated by the Securities and Futures Authority Limited, for the purposes of carrying on investment business activities CONTENTS New HORIZON. 2 Comment: Zakat - Concept of Social Security Chairman of Editorial Board Muazzam All 3 Ijara Leasing as a Shariah compliant Investment Richard Thomas, Executive Director and Mark Mortimore, Leasing International Editors Dr Rifaat Ahmed A. Karim Manager at ABCIB Islamic Asset Management Ltd (JAM), review and Manama demystify the Ijarah leasing contract and the US equipment leasing Dato' Fadzli Yusof industry and explore its growing potential for Shariah compliant Kuala Lampur investment Yusuf Talal DeLorenzo United States Dr Alireza Rahimi Brougerdi 5 Islamic Financial Market Indices Tehran Suleiman Dualeh United Kingdom 6 Stella Cox Explains the problems facing Islamic Investment funds in the UK Prof Murat Cizacka Istanbul Editor y Islamic Financial Market Indices - The Dow Jones Islamic Rakiya Ibrahim-Sanusi Market Index a The International Investor FJSE Global Islamic Indices Editorial Assistant Hussain Rizvi Executive Editor 8 Islamic banking and UK Regulatory controls S.Ghazanfar Ali Research Associate Daphne Buckmaster 10 Takaful Industry: Global profile and Trends 2001 by Design ft Production Ajmal Bhatty Imtyaz Ahmed CONTACT Editorial 16 Grosvenor Crescent 1 3 Capital Intelligence ratings of Islamic financial institutions London SWIX 7EP, UK Tel+44 (020) 7245 0404 Fax+44 (020) 7245 9769 IIBI @ islamic-banking.com 1 4 Corporate profile Subscription £t Advertising 2nd Floor Abu Dhabi Islamic Bank, and Bank Muamalat Indonesia 16 Grosvenor Crescent London SWlX 7EP, UK 1 6 News Monitor Tel+44 (020) 7245 0404 Fax+44 (020) 7245 9769 Recent developments within the Islamic financial world [email protected] URL http://www. 20 Currency Exchange Rates for Islamic countries islamic-banking.com Annual Subscription Rates UK £45; Europe ft Rest of the World £55 includes pp Price per copy UK £4.00; Europe ft Rest of the World £5.00 Published Monthly by Institute of Islamic Banking and Insurance 16 Grosvenor Crescent London SWIX 7EP, UK ®1999 institute of Islamic Banking and Insurance ISSN 0955-095X Views expressed in this magazine are not necessarily those of the Publisher or of the IIBI. NewHORIZON April 2001 Muharram - Safar 1422 1 COMMENT Zakat: Concept of Social Security The concept of social security was introduced by Islam Caliph Abu Bakr waged war against the Arab tribes 14 centuries ago, thus ushering in an era of a welfare who refused to pay Zakat. Saying that, "By Allah, I shall state. This revolutionary socio-economic system changed fight those who differentiate between Salat and Zakat. the lives of human beings and gave them dignity and a By Allah if they refuse to give me one baby goat that sense of security which was unknown till then. Islam for they used to give the Messenger of Allah, I shall fight the first time in history guaranteed that the basic needs them for it." of man were met. Today the West takes pride in provid• Collection and distribution of Zakat must be properly ing social security to its people not realising that it was done. In so doing, the great social benefits of Zakat will Islam that introduced the system centuries ago. be realised. It is a means of security for the poor and the The system of welfare state is implemented through more that is given poverty will be reduced. The unem• Zakat - a system that aims at building a social order in ployment, deprivation and starvation that afflicts devel• which basic human needs are met adequately. Our Holy oping countries would be alleviated, as the monies col• Prophet (SAW) was the first head of state to take upon lected for Zakat will be used to rehabilitate the poor and himself the onerous responsibility of meeting the the destitute. requirements of all the needy in the State through Zakat Sheikh Saleh Abdullah Kamel, founder of the Islamic and Baitul Mai. banking group, Al Baraka highlighted the many positive Zakat is an economic instrument, which serves as a economic and social effects of Zakat: great equilibrium in the Islamic society. Without Zakat a) The relatively high rate of Zakat on liquid assets this balance would not be achieved and an Islamic econ• encourages people paying Zakat to employ their wealth omy would not be fully functional. The essence of Zakat in a profitable manner, such as business ventures. is twofold - to cleanse and purify one's wealth; and to b) The principle of taking Zakat from capital gains, or provide for the poor, needy and other persons that qual• from yield will lead to the selection of better or more ify for Zakat. In a Hadith the Prophet (SAW) said, "Zakat profitable projects and greater efforts to ensure that the is to be collected from the rich amongst you and to be management remains cost effective, thereby resulting in distributed among the poor of you". a higher rate of profit. In Islamic countries, the responsibilify of collection c) Variation in the amount of Zakat from one field of and distribution of Zakat falls on the State to ensure that economic activity to another inspires people to invest the necessary machinery and legislation is in place to their money where Zakat is taken from the returns only. ensure the proper implementation of the Zakat fund. Accordingly, the wealth is invested in medium and long- MusUms in non-Islamic countries, find ways in which term projects, where it gives more yield and contributes they pay Zakat and set up Zakat funds through small to overall development. organisations and local mosques for onward distribution d) The banks may give their depositors opportunity to to the needy in their communities. benefit from this difference in the rates of Zakat through Regrettably, nowadays, there is a lack of trust and the establishment of different types of investment instru• loss of confidence amongst us especially when it relates ments to provide short-medium and long term options.