Islamic Banking

CAIRO: Luring Islamic funds into the British island, Bermuda has introduced a set of new laws to launch shari`ah-compliant platform amid efforts to become the first western center for the growing global industry, The Royal Gazette reported on Thursday, January 19.

“We are looking at the Shari’ah side of Bermuda’s legislation to become the first Western centre for Islamic finance,” said Peter Hughes, director of Apex Fund Services group.

Hoping to become a western hub for Islamic finance, executives from the Island have been actively reviewing existing laws to launch a Shari’ah-compliant platform for investors.

These efforts began last November when Hughes, along with Business Bermuda CEO Cheryl Packwood, led a group at the 18th World Islamic Banking Conference in Bahrain.

The delegation tried to show the Island was open for businesses and clients from Asia and the Middle East, being capable of handling Shari`ah-compliant financial structures.

“We are looking to launch a Shari’ah platform that will allow us to have Shari`ah vehicles and products that would enable us to become the first one of its kind,” Hughes said.

“We have made a real push into this niche area,” he added. Islamic banks have proved a success because of rules that forbid investing in collateralized debt obligations and other toxic assets that cause financial crises.

Islam forbids Muslims from usury, receiving or paying interest on loans. Islamic banks and finance institutions cannot receive or provide funds for anything involving alcohol, gambling, pornography, tobacco, weapons or pork.

Shari`ah-compliant financing deals resemble lease-to-own arrangements, layaway plans, joint purchase and sale agreements, or partnerships.

Luring Businesses

The new shari`ah complaint rules succeeded in luring new clients from Islamic finance hubs in Asia and Middle East.

“We now have strong links in Bahrain and there is a commonality of wanting to create a niche jurisdiction for Shari`ah compliancy, that is closer to the US timezone,” Packwood, Business Bermuda CEO, said. “We are also focusing on Kuala Lumpur in Malaysia, as it has an enormous sukuk market.

“The process for getting this off the ground may be slow but we have the Bermuda Monetary Authority and the Bermuda Stock Exchange behind us.”

The Islamic banking system is being practiced in 50 countries worldwide, making it one of the fastest growing sectors in the global financial industry.

Starting almost three decades ago, the Islamic banking industry has made substantial growth and attracted the attention of investors and bankers across the world. A long list of international institutions, including Citigroup, HSBC and Deutsche Bank, are going into the Islamic banking business.

Currently, there are nearly 300 Islamic banks and financial institutions worldwide whose assets are predicted to grow to $1 trillion by 2013.-www.onislam.net

Comprehensive change is needed in the Indian banking laws in order to implement interest-free economic system, said famous Islamic banking scholar Mufti Abdul Qader Barkatullah. It is difficult to bring full-fledged Islamic banking in the present conditions in India.

Mufti said that majority of the countries followed economic systems that were about half a century old. But, living conditions and development ideas have moved a lot forward. Change is needed in economic matters also as per the change in the other fields.

India is following the laws of Britain in the banking field. Indian banks cannot invest capital in trade and others as in Britain. At the same time, interest is given to the investors and levied from those who take loans making rupee a good for trade.

Money is not a good for trade in the Islamic banking idea. Islamic banks distribute the profit from re-investing the money of the investors in business activities and the like. And so, investors are responsible to share chance of loss also along with profit. But, the chance of loss is not shared with investors in the traditional banking system.

The global economic downturn has not affected the Islamic banks in Britain much, said Mufti who is the Islamic financial adviser of several famous banks in Britain. The relevance of the Islamic banking system increased in the UK when a good percentage of investments turned to interest-free banking and a considerable share of investments came from the Gulf regions. As a result, the Islamic Bank of Britain was established in 2004. The bank has opened seven branches within five years.

The relevance of such banks is increased by the fact that about 20 percent account-holders are non-Muslims. Mufti added that investing in the real estate field and others, where scope of loss is comparatively less, would be better for those working on the field of Islamic banking in India.

Link

By H. ABDUR RAQEEB

To introduce Islamic Finance and Banking in India, we have to: (1) Undertake regulatory changes in the Indian Banking Acts, and (2) Create awareness among Muslims and Indians as a whole.
While analysing the regulatory changes, two important documents of the government and two important developments from the public-private participation have to be studied in detail and analysed in depth.

WORKING GROUP REPORT OF RBI
This is the only serious attempt by RBI on the feasibility of the Islamic Banking in India. The 51-page report titled “Report of the working group to examine financial instruments used in Islamic Banking” was prepared by Reserve Bank of India, Department of Banking Operations and Development, Central Office, Mumbai in July 2006. The working group was headed by Mr. Anand Sinha, Executive Director, RBI.
According to RBI, this report is an internal research work for their own consumption and done in routine way to enhance the knowledge level within organisation, and report of such groups are generally not placed in the public domain. The group was constituted in June 2005 and within a year in July 2006 it submitted its report. After two years of correspondence with RBI, we were able to get it for the first time in April 2009 through Right to Information Act (RTA) 2005.

LEGAL OPINION
The Group also sought legal opinion from the Legal Department of Reserve Bank of India.
The Legal Department observed that Islamic Banking has different modes of financing and in most of these kinds, the bank involves itself in the trading or business activities of the borrower or will be based on equity participation of the bank, which is very much unlike the conventional banking. In Bai’-Mu’ajjal, the bank resorts to purchase and resale of properties, which is not permissible as per the provisions of Sections 8 and 9 of Banking Regulation Act, 1949. The equity participation in the form of joint venture is one of the major forms of financing (Musharakha) whose permissibility will have to be examined in each case in the light of restrictions contained in Section 19 (2) of Banking Regulation Act, 1949. Further, risk sharing forms the basis of all Islamic financial transactions in the place of charging interests on loan amount.

In terms of provisions of Section 6 of Banking Regulation Act, 1949, in addition to the business of “banking”, banks are permitted to engage in business as prescribed under clauses (a) and (o) thereof. In the case of Islamic banking, the very business of “banking” itself involves the bank in active trading, purchase and resale of properties and investment etc., which is not permissible under the Banking Regulation Act, 1949.

Section 5(b) of the Banking Regulation Act, 1949 defines “banking” to mean “the accepting for the purpose of lending or investment of deposits of money from public, repayable on demand or otherwise”. Thus, “banking”, contemplates inter alia, lending of deposits of money from public, but in Islamic Banking, the bank accepting deposits of money from public is not engaged in lending or the pure financial activity in the conventional manner, but is engaged in equity financing and trade financing (Musharaka and Mudaraba), i.e. taking risk of sharing profits or losses as against lending (where there is no risk of loss and only profit in the form of interest at a specified rate). Therefore, the banks doing Islamic banking would not be doing “banking”, to that extent, as contemplated in Section 5 (b) of Banking Regulation Act, 1949.
As regards the regulatory aspects, there may be constraints as the bank rate, maintenance of CRR and SLR as per the provisions of Banking Regulation Act, 1949 etc., involve the concept of interest. The issues of liquidity shortage or surplus may have to be handled differently in the case of Islamic banking, since ban on interest rules out resort to the money market and the Central Bank.

All these bring out to the fore that the concept of Islamic banking should be dealt with as an absolutely different sector with separate norms to address the specific structure and contents of the financial instruments in Islamic banking.

In view of the above, if the banks in India are to be allowed to do Islamic banking, appropriate amendments are required in Banking Regulation Act, 1949 and separate rules and regulations may have to be framed to permit them to do the business in view of the special characteristics of financing they adopt.

Thus, in the current statutory and regulatory framework, it would not be feasible for banks in India to undertake Islamic banking activities in India or for branches of Indian banks abroad to undertake Islamic banking activities there.” (Page No. 47, 48 & 48A).

RAGHURAM RAJAN COMMITTEE REPORT
Let us turn towards the report of the Committee on Financial Sector Reforms (CFSR) of the Planning Commission, GOI to prepare a report on the next generation of Financial Sector Reforms. The Committee consisted of 12 members, who were called by Dr. Raghuram Rajan, “some of the finest financial and legal minds of the country” and the report was an awesome display of true public-private partnership.
The committee consulted 16 virtual members and 38 relevant players in the financial sector arena. A preliminary draft report was placed in the public domain (website) for comments. The committee received a large number of comments directly and through the press. Several individuals and institutions both within and outside the country placed the comments as well as submitted personally to the committee for including Islamic Finance and Banking in the report. Upon these submissions and representations the following recommendation was included in the final report of the CFSR which is as follows:

“Another area that falls broadly in the ambit of financial infrastructure for inclusion is the provision of interest-free banking. Certain faiths prohibit the use of financial instruments that pay interest. The non-availability of interest-free banking products (where the return to the investor is tied to the bearing of risk, in accordance with the principles of that faith) results in some Indians, including those in the economically disadvantaged strata of society, not being able to access banking products and services due to reasons of faith. This non-availability also denies India access to substantial sources of savings from other countries in the region.
While interest-free banking is provided in a limited manner through NBFCs and cooperatives, the Committee recommends that measures be taken to permit the delivery of interest-free finance on a larger scale, including through the banking system. This is in consonance with the objectives of inclusion and growth through innovation. The Committee believes that it would be possible, through appropriate measures, to create a framework for such products without any adverse systemic risk impact.”
(Chapter 3: Broadening Access to Finance, Page: 35)

SHARI’AH COMPLIANT INVESTMENT PRODUCT FOR HAJJ PILGRIMAGE
The recommendations of a high level committee set up by Prime Minister’s office, chaired by Mr. Rahman Khan, Deputy Chairman, Rajya Sabha is under the consideration of Government of India favouring a Shari’ah-compliant mutual fund to provide investment option to the Muslim community was submitted in July 2006. The PM has constituted a Committee of Secretaries headed by the Cabinet Secretary to look into the suggestion of this high level committee. The Committee had specially recommended a Shari’ah Compliant Investment Scheme to fund Hajj Pilgrimage as in Malaysia. Malaysia had set up a pilgrimage fund and formed a board called TABUNG HAJI.

KERALA SHOWS THE WAY
Recently, the Government of Kerala launched a Shari’ah-compliant financial institution and wished to establish it by 2010 with the objective to grow into a full-fledged Global Islamic Bank. This institution will be started with a share capital of Rs.1000 crores and the Kerala State Industries Corporation will have 11% share and remaining 89% from private investors. Already Ernst & Young has given a feasibility report and the financial institution will be set up on the basis of recommendation of that report. Additional study is being done through Ernst & Young to analyse the implication of the Central, State and Municipal taxes for this Islamic financial institution.

INTERACTION WITH DEPUTY GOVERNOR, RBI
When it was learnt that RBI is considering discussion on a few recommendations of Dr. Raghuram Rajan Committee on Financial Sector Reforms (CFSR), ICIF contacted the Governor RBI and sought an appointment to plead for the case of the recommendation of CFSR regarding Interest-free banking. Accordingly a delegation of ICIF met the Deputy Governor Dr. K.C Chakrabarty on September 11, 2009 and presented a memorandum along with the following important documents. According to the Deputy Governor: RBI, which has plans to increase the reach of banking system to more people, will welcome to introduce interest-free banking, provided the Government takes a decision.

OVERVIEW
The need and necessity of interest-free Islamic finance and banking has to be spread among the Muslims, common people, religious scholars, businessmen, bankers, politicians, and other stakeholders.

Among Muslims, criticism has been raised against the banking approach itself. Some allege that it is nothing but the changes of nomenclature only. Some other question its capability to meet all the financial requirements of modern day economy. Some go further to say that the whole exercise is futile, with the macro level money creation process remaining the same, what is attempted through so-called innovative products is nothing but a cosmetic touch and even in international arena, Islamic banks have to price their investments on Global standards like London Inter-bank Offered Rate (LIBOR) which are essentially interest-based. These issues have to be addressed properly by the Islamic scholars, finance experts and those who campaign for Islamic Finance and Banking.

Justice Mufti Muhammed Taqi Usmani mentions in An introduction to Islamic Finance: “Islam, being a practical way of life, has two sets of rules: one is based on the ideal objectives of Shari’ah which is applicable in normal conditions, and the other is based on some relaxations given in abnormal situations. The real Islamic order is based on the former set of principles, while the latter is a concession which can be availed at times of need, but it does not reflect the true picture of the real economic order.

“Living under constraints, the Islamic banks are mostly relying on the second set of rules; therefore, their activities could not bring a visible change even in the limited circle of their operations. However, if the whole financing system is based on the ideal Islamic principles, it will certainly bring a discernible impact on the economy”. (Page 24)

In the plural and secular country, misunderstanding among majority community has to be addressed; Islamic banking is not just for Muslims. It is only a mechanism for financing business without providing debt. It is also to be focused that it is based on ethics and Socially Responsible Investment (SRI). It has to be showcased that 40% customers in Islamic banks in Malaysia are Chinese of other communities and also in UK, 20% customers are Non-Muslims.

Even Vatican has offered Islamic Finance principles to Western banks as a solution for worldwide economic crisis. “The ethical principles on which Islamic Finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service,” the Vatican’s official newspaper, L’ Osservatore Romano said.

Recently, France has amended its laws to issue SUKUK of one Billion Euro. Post 9/11, oil money has stopped being invested in U.S and is looking for a safe investment destination, and India could well be that destination given its safe economic scenario, huge market, skill and educated labour and good growth rate. Modern, secular and industrialised countries like Britain, Singapore, Hong Kong and Japan have become hub of Islamic finance and banking. If London, Tokyo, Singapore and Hong Kong can become hub and house of Interest-free Islamic finance and banking, why not Mumbai and Cochin?

Link

The government is considering changing banking law to introduce an interest-free Islamic banking system in the country, sources said.

The Shariat prohibits the collection and payment of interest, so many Muslims now avoid opening bank accounts or refuse to claim the interest, which goes to a suspended account.

Under the Islamic banking system, banks don’t pay interests on deposits; nor do they charge interest on loans. The money deposited is used to finance projects on ownership basis. The depositors share in the profit or loss of the projects financed through their deposits instead of getting interest.

For instance, in case of a housing loan, the bank buys the property and rents it out to the borrower for a specified period of time. The rent is calculated on the basis of the cost of the property plus a profit margin. After the lease term is over, the tenant gets ownership of the property.

Under the existing banking system, only current accounts comply with Islamic banking since these accounts don’t give any interest.

An Islamic bank, however, cannot invest the money just anywhere: the Shariat prohibits investment in businesses considered haraam, such as those related to alcohol, pork or pornography.

An Islamic banking system will benefit India’s 15 crore Muslims, and also the economy by helping unlock the huge sums that remain uninvested by the community.

Islamic banking is currently not allowed under India’s banking act, but it is allowed through the non-banking financial institution route.

The Centre plans to amend the act, adding to it a chapter exclusively dealing with all aspects of Islamic banking, sources said. It’s not clear if the amendment bill would be tabled in the current session of Parliament. The sources said the government would form a Shariat Supervisory Board to monitor the functioning of the Islamic banking system.

Finance minister Pranab Mukherjee has had discussions with the Reserve Bank of India on the subject and obtained its approval, they said.

Although an RBI study group had earlier rejected the concept of Islamic banking, the Raghuram Rajan Committee on banking reforms later gave a positive report on “interest-free banking”. The minority ministry too is understood to be in favour.

There has been a strong demand for Islamic banking in India from various groups and even the Gulf countries. The Muslim League has handed a memorandum to the Planning Commission urging it to promote interest-free, profit-based banking.

The concept is popular in West Asia and predominantly Muslim nations such as Malaysia and Indonesia. Leading international banks such as HSBC and Standard Chartered have exclusive Islamic banking windows.

The Kerala Industrial Development Corporation recently launched an Islamic banking company of sorts, which has been registered as a non-banking finance company and will be transformed into a full-fledged Shariat-compliant bank once the banking regulations allow it.

Link

French president Sarkozy seems to be in a dilemma!

With more than five million Muslims, France is home to Western Europe’s largest Islamic community. However, the concept of secularism is more important for France than being adaptive to multicultures. The separation of church and state is jealously guarded by everyone. The Nation has an unapologetic approach towards its religious minorities. Residents who belongs to minority groups must adapt to French culture, not the other way round.

The President himself caused a stir recently with his remarks on ‘burka’, the dress code for Muslim women. He expressed his strong distaste for the Islamic veil, calling it not a sign of religion but a sign of subservience. “It will not be welcome on French soil,” he declared.

So far so good! But, then comes the lure of Islamic finance!

Islamic finance represents one of the more interesting niche markets, and it is growing rapidly too. It is so attractive and so irresistible, especially during the global recession. French officials fret that Paris is missing out on its share, particularly to London, whose multicultural approach gives an open-arms welcome to Islamic investors.
To catch up the bandwagon, the French have decided to accommodate the shariah requirements of Islamic finance to the extent of making changes to their economic and legal framework. While talking to a group of Gulf investors last year, the Finance Minister Christine Lagarde has pledged to take steps “to make (Islamic banking) activities as welcome in Paris as they are in London and elsewhere.” For her, it is a matter of keeping Paris a competitive financial centre. The French financiers also welcome this move. Considering the 5 million or so Muslim population in the country, it is estimated that France could take upto 10% of the global market by 2020. Not bad!

An amendment was introduced on a draft bill on the financing of small firms that gives legal rights to holders of sukuks, or Islamic bonds, “to conform with the ethical principles of Muslim law or sharia.” However, the constitutional council, France’s highest court, didn’t agree to this amendment, albeit on technical grounds. Officials are now trying to incorporate the legal changes into a new draft bill, and are confident that they will get them through this time.

These governmental efforts to accommodate Sharia have prompted a political backlash. For the Socialists it was nothing less than “the introduction of sharia into French law!”. Some traditionalist members of Nicolas Sarkozy’s party were also seems to be upset. For the opponents the idea of incorporating sharia, even if only technically, is a breach of France’s secular principles.

So, Secular values or Economic interest? Which path will France take?

An alternative view is also presented by some analysts. For them, these two paths are not opposing each other; ‘the fact that the interest free loans stem from the sharia doesn’t mean that accepting them is equating to incorporating the sharia law in the french one’ they claim. To reinforce their view they quote Christmas which is typically a christian celebration and yet it is accepted as a bank holiday in secular France. It doesn’t mean that Christian calendar prevails over the secular one.

Therefore, the question is whether France want to maintain its image as a rigid guardian of secularism or be accommodative yet secular. Which one will prevail?

Link

Islamic finance, which borrowed features such as products from conventional banks, can now return the favor by lending its set of principles for good governance and responsibility, the Raja Muda of Perak, Raja Dr Nazrin Shah said on Tuesday.

“To date, Islamic banks have borrowed from conventional finance in terms of products.But, I think, the time has come where the flow of information and knowledge can and should flow the other way as well,” he said in his keynote address at the second day of the World Capital Markets Symposium, here.

He said Islamic finance could also help the global finance industry to be more aware of following the rules and curtailing excess as well as create an infrastructure of honesty, fairness and integrity.

“But, I also believe Islamic finance can offer much more than this,” Raja Nazrin, who is also the financial ambassador for the Malaysia International Islamic Financial Centre, said.

“At its heart, Islamic finance is an ispiration towards good finance.As we have seen, good finance is about trust, and trust is a cornerstone of stability.

“Therefore, I believe that Islamic finance can help break the vicious cycle of boom and bust that has come to characterise global finance,” he said.

Islamic finance is now a truly global market, participating across borders with a vast range of investment alternatives including sukuk, mutual funds, commodity funds, equity traded funds, real estate investment trusts, shariah compliant derivatives and hedge funds.

Recent developments also included the possibility of an Islamic bank in France, the publishing of a book on Islamic finance in Italian and shariah compliant real estate funds in Australia.

There is also news of expected sukuk issuances from the United Kingdom, Australia and Korea.

There have also been a diverse range of issuers of shariah compliant products including the World Bank, the Islamic Financial Centre, the German state of Anhalt-Saxony, Aston-Martin and Shell, which pioneered the sukuk.

“The world is interested and I believe Islamic finance to be up to the challenge,” Raja Nazrin said, adding that the industry is growing with more demand seen from non-Muslim investors, not only in Malaysia but also abroad.

He stressed that one of the most important goals of the Islamic finance industry should be to integrate into the global financial system.

–BERNAMA

The global market for sukuk (Sharia-compliant bonds) has grown tremendously in recent years. Total outstanding sukuk rose from $8 billion in 2003 to around $100 billion in 2008. Sukuk provides companies and governments with access to financing and liquidity and offer a much needed Sharia-compliant instrument to investors. While the growth of the fixed income market in the Kingdom has been dwarfed by that of the equity market, we think that conditions are in place for strong growth in sukuk issuance and trading.

An important step was the launch by Tadawul of an automated order-driven secondary market for sukuk in mid-June. Previously, sukuk transactions were in an over-the-counter market, meaning that they were executed through bank treasuries and settled by Tadawul. Liquidity was very low, as most sukuk issues were held until maturity. The introduction of the new platform is intended to encourage investors to more actively trade sukuk. With the new system, investors can buy and sell sukuk through their brokers.

With the new trading platform in place, we think the following factors will stimulate supply from issuers and demand from investors in Saudi Arabia:

* Predictability and portfolio diversification: The collapse in the stock market last year has encouraged investor interest in more predictable assets such as sukuk. Given the very limited investment channels open to investors in the Kingdom, sukuk could also play in important role in portfolio diversification.
* Problems raising finance from traditional sources: Companies needing to raise finance have generally used a combination of bank loans and IPOs. With banks reluctant to lend and low valuations making IPOs unattractive, sukuk issuance should emerge as an important source of funding.
* Balance sheet mismatches: Little long-term bank lending is available, meaning that companies borrowing to finance long-term projects face an asset-liability mismatch on their balance sheets. Long-term sukuk would ease this problem.
* Healthy sukuk pipeline: Following two successful sukuk issues earlier this year, other local companies have announced their intention to issue sukuk, in addition to some GCC governments.

Notwithstanding the bright future for sukuk, there are still formidable challenges may impede growth. Liquidity is very low; there were only 50 transactions in the first two months of trading on the sukuk market. In addition, the local market lacks breadth and depth (there are only five listed sukuk) and there are no indications that the government will begin actively issuing sukuk (government support is generally a key factor in the development of debt markets). Furthermore, the lack of skilled human resources, Sharia-compliance standardization and innovative product development remain serious issues.

Background

The use of sukuk has become increasingly popular in recent years both for governments and companies. In part this has stemmed from the dramatic growth in Islamic banking that has been the result of the large inflows of liquidity (primarily oil revenues) into the Islamic world and a greater appetite among businesses and individuals to conduct their finances in a Sharia-complaint way. As the take up of Islamic financial services grew, demand from issuers for a product that performs a similar function to a bond leapt. Demand from investors has also surged as growing wealth within the Islamic world has made regional credit risk more attractive and greater understanding of the instrument and clarity of documentation, supported by credit ratings from international agencies, has enhanced investor comfort with sukuk.

Malaysia accounts for around 47 percent of global sukuk issuance by market value, followed by the GCC, which is the source of a further 46 percent. Sukuk issuance is not limited to Islamic countries and there have been issues from institutions in Singapore, Sri Lanka, Canada, Thailand, the UK and US. Recently, the second largest bank in Russia, VTB, indicated that it is considering a sukuk. The growing interest in sukuk worldwide reflects the spread of Islamic banking and the desire of foreign issuers to tap the liquidity within the GCC. As it is the structure of the instrument that has to be Sharia-compliant, rather than the issuer or the purchaser, the supply and demand for sukuk is set to grow in nontraditional markets.

Sukuk are generally built around one of six main contracts: Ijara, Mudaraba, Musharaka, Murabaha, Istisina and Istithmar. Ijara accounts for around 32 percent of global sukuk issuance followed by Musharaka and Mudaraba. The Saudi sukuk market is dominated by the Istithmar. The variation in the dominance of structures is explained by the lack of Sharia-compliance standardization. It is the responsibility of Sharia boards to determine what structures are Sharia-compliant and given that there are no universally agreed standards, boards across countries exercise considerable discretion in arriving at their opinions. Some countries adopt a conservative interpretation of Sharia, while others are more flexible, leading to an inconsistency about what is considered Sharia complaint. For instance, most Ijara structures that have been issued in other countries do not meet Sharia-compliance requirements in Saudi Arabia. This lack of Sharia standardization poses a great challenge to growth of sukuk.

Source

MALAYSIA must look at developing other areas of Islamic finance beyond just Islamic bonds, or sukuk, experts said.

“Malaysia has all the right ingredients to trailblaze in Islamic finance, but it must go beyond sukuk. We need to develop other new products as well,” said Ali Abbas Zaidi, Maybank Investment Bank’s head of Islamic markets.

Ali was a panellist in a discussion yesterday on the future of Asia’s Islamic investment industry at the IFN Issuers and Investors forum in Kuala Lumpur.

Malaysia is an international Islamic hub and widely known for having the world’s largest sukuk market. It also houses some 145 syariah investment funds.

Securities Commission managing director Datuk Nik Ramlah Nik Mahmood, who chaired the session, agreed with Ali on the need for product innovation in other areas.

“From our perspective, sukuk is very important. But there’s also a whole host of petro-market products that can be (introduced),” she said.

Ali said that new products could be developed in all areas, such as private equity, infrastructure, liquidity, asset and project financing.

“It could underpin any type of economic activity,” he remarked.

Ali said there was much that could be learned and leveraged on from the conventional finance industry.

What makes a difference is the way the products are used, he pointed out.

Mohamad Nedal Alchaar, secretary-general of standard setter Accounting and Auditing Organisation for Islamic Financial Institutions, highlighted that there was no such thing as “toxic products” in the industry, only “toxic practices”.

To a question by Nik Ramlah on whether Islamic finance should take advantage of the recent failures in conventional finance to become more prominent, Nedal said he did not think it was appropriate to do so.

“I recognise the opportunities that we have today after the global financial crisis, but … I don’t think it’s appropriate for us to ride on ailing bodies.

“I think we have our own merits. Islamic finance has a lot to offer and should rise independently from this crisis.

“We should detach ourselves from the crisis and sell what we have on ethics, governance,” he said.

An estimated 1,200 delegates attended the three-day IFN forum, an annual event said to be the world’s largest gathering of industry experts and practitioners.

BY: Adeline Paul Raj

The Securities & Investment Institute (SII) has signed an agreement with the Institute of Islamic Banking and Insurance (IIBI) to promote the UK as the hub of Islamic finance.

The London-based IIBI is one of the world’s leading independent organisations dedicated to the development and implementation of Islamic finance, achieved through education, training, research and publications.

The SII and IIBI will share their expertise and advocate the services of each other. As part of the deal, the IIBI will encourage its members to study for the SII’s ground-breaking Islamic Finance Qualification (IFQ) as an entry level exam in the field. The SII will promote the IIBI’s Diploma and post graduate Diploma in Islamic finance as qualifications for further progression for students following achievement of the IFQ. IIBI and the SII may choose to also develop a long-term strategy to include market research and demand relating to specialist Islamic Finance modules such as Sukuk (Islamic bonds).

The SII managing director, Ruth Martin, said: “We are delighted to work with the IIBI to promote our common goals for the development of Islamic finance skills within the UK.”

Mohammad A. Qayyum, director general, IIBI, said: “We are looking forward very much to working closely with SII in strengthening the UK’s position as the leading centre for Islamic finance qualifications. The agreement with SII will undoubtedly afford greater scope of advancement of competent persons in the Islamic financial services industry.”

Link

This week saw the meeting of the World Islamic Economic Forum (WIEF), the equivalent of the Muslim world’s Davos, held this year in Jakarta. In attendance were heads of states and senior government figures from across the Muslim world, including Indonesia, Malaysia, Morocco, UAE and Qatar, with delegates from 38 countries.

The purpose of the WIEF is to increase trade and business activity among Muslim countries and beyond. I had the privilege of chairing one of the sessions. Fazil Irwan, director at the WIEF Foundation explained to me that WIEF’s central pillar is to develop itself as a networking conduit between the Muslim and non-Muslim world, as they believe business collaboration can generate greater prosperity and mutual understanding. Established in 2004, WIEF gives particular focus on investing in women and the young; understandable given the high levels of unemployment among these two categories in Muslim countries.

The Muslim world’s economic performance is generally dire. Despite making up one-fifth of the world’s population, it produces a measly 7% of its output. Much of the discussion at the WIEF revolved around the global economic meltdown and its impact on Muslim countries that are now facing economic contraction, job losses and greater poverty due to the reckless model of unfettered market liberalism. With the interconnectivity that comes with globalisation, no state is immune. The systemic failure of the current banking model has generated much more official interest in Islamic finance. Shariah-compliant finance is based on financing secured against underlying tangible assets and involves risk-sharing between the parties in the pursuit of genuine commercial activities, rather than profiteering from paper instruments whose trail often led back to highly leveraged low-quality debt (better known now as toxic debt). There was a widespread view among those attending (including non-Muslims) that Islamic finance could provide one possible way out of the current malaise and become an important foundation in a new, more stable world economic order.

One official pointed out that it is not the labeling of products as “Islamic” that is the solution, as it is perfectly possible for a shariah-compliant bank to create sophisticated financial products that end up mirroring the conventional system. What is needed is ethical standards for the financial system based on transparent risk assessments and controlled debt levels. Whether such a model of greater fairness and integrity should be necessarily labelled with the exclusive term “Islamic” is a separate debate. Gordon Brown yesterday, in his speech to Congress, spoke in similar terms when he said that “markets should be free but never values-free, that the risks people take should never be separated from the responsibilities they meet”.

The conference showed the efforts the Muslim world is making to help pull the world out of recession. Indonesia itself is home to the world’s largest Muslim population, the third largest democracy and the fourth largest population, at 230 million. It is also a member of the G20. Its stable democracy and impressive economic growth over the last decade has marked Indonesia out as a front-line state in the west’s greater desire for a more respectful engagement with the Muslim world after the Bush years.

Indonesia is seen as a possible template of how to deal with Muslim democracies and markets, new and old. In her recent visit to Jakarta in February, Hillary Clinton asked colleagues whether Indonesia held lessons for Pakistan, a state with the sixth largest population but far less stable. Given the different role Islam plays in Pakistani and Javanese culture and public life it is not immediately clear what those lessons might be. Indonesia is also strategically important given its commanding presence over the narrow Strait of Malacca, through which supertankers transport Middle Eastern oil to the Pacific Rim. There is great excitement here that President Obama may choose Jakarta to deliver his promised address to the Muslim world from a Muslim capital, the home of his childhood school.

The way out of the current economic crisis will require innovative thinking and a meeting of minds. The WIEF provides one such forum.

By: Asim Siddiqui - guardian.co.uk