Islamic Banking

MANAMA: A Bahraini banker has urged the government to set up an information and research centre and a national council for Islamic banks to monitor the growth rate of the Islamic banking sector regionally and internationally.

Al Safwa Islamic Financial Services president Abdullatif Abdul Rahim Janahi told Akhbar Al Khaleej on the sidelines of the 1st International Conference on Islamic Sukuk held in Bahrain recently that the Central bank of Bahrain needs to have a specialised team capable of safeguarding the kingdom’s achievements in the field of Islamic banking, which has to be more creative in order to develop its products.

Bahrain was the first country to issue Islamic sukuk, but has not made any effort to internationalise the product, while many European countries are now depending on this product to finance government projects.

The UK, for example, has recently announced its decision to finance the London development project through Islamic sukuk, he added.

Source: Gulf Daily News

Every cash-strapped company or institution seems to look to the Middle East for extra capital these days. There’s no cheap debt anymore, but the deep pockets of Middle Eastern investors has made sharia-compliant financing mightily attractive. Even the British Government is proposing its own sharia bond, or sukuk.

But Rahail Ali, Lovells’ Dubai-based head of Islamic finance wonders if this seminal moment won’t merely highlight the limitations of the law firms positioning themselves to grab a share of the market. Fresh from chairing an Islamic products conference at the London Stock Exchange, Ali warns that "the pool of specialists is very limited". Conventional finance lawyers can’t just be turned into sharia experts by reading a few textbooks, he says. "Until lawyers have the interaction with sharia scholars and spend a considerable amount of time satisfying Islamic jurisprudence there is going to be a reactive approach to Islamic financing."

A moderate Muslim, Ali is able to empathise with the subject more than most of his ilk. For an Islamic financing to proceed, it must be endorsed by sharia scholars. As one City finance partner puts it: "They like nothing more than debating various interpretations of the Koran." Sharia deals are not standardised like other, conventional transactions and no one transaction follows another. In terms of complexity, Ali says, it makes conventional loans seem as easy as "ordering a pizza".

It was in 2001, after the "horrendous" events of 9/11, that Islamic finance took off. The attacks forced Islamic investors to reconsider the make-up of their portfolios with their money suddenly not so welcome in some parts of the West. "9/11 was the seminal moment for the Islamic finance industry," Ali says. "One of the repercussions of it was the huge repatriation of liquidity back into the [Gulf Cooperation Council (GCC)] states, coupled with the GCC states being re-enlightened about retaining domestic liquidity and having investments compatible with their religious beliefs. It led to an upsurge in Islamic finance transactions."

The challenge over the next ten years for the sharia finance lawyers will be to ensure that the legal profession is not found wanting as the demand for Islamic financing mounts. The proposal by the British Government to issue its own sukuk merely confirms its potential in the global arena. With oil prices at over $100 a barrel, the wealth of Arab states can no longer be overlooked. "It displays at the very least the higher profile that Islamic financing has achieved and the need for financial centres to take a serious look at Islamic financing," Ali says. "It goes with the domain of London as major international financial centre that there needs to be a focal point for Islamic finance, and London has pushed that agenda."

 Source: Times on-line

Related article: As Islamic banks boom, scholars are hard to find

Lloyds TSB has launched a new bank account that enables Muslims to transfer money around the world without breaking the rules of Islam.

The group claimed its Islamic Nostro Account was the first of its kind to be offered by a mainstream Western bank. When individuals and businesses send money to other countries the funds are passed through a Nostro account.

The Lloyds TSB account is designed to comply with the principles of Shariah law, and it does not pay interest on any money held in the account and does not offer an overdraft facility.

It also guarantees that funds will not be invested in certain industries, such as those involved in alcohol or gambling, which are prohibited under Islam.

There are around two million Muslims in the UK and around 100,000 Muslim firms, many of which regularly make or receive international payments through the 250 Islamic banks worldwide.

Diana Brightmore-Armour, chief executive of corporate banking at Lloyds TSB, said: "Lloyds TSB has established itself as one of the leading providers of Islamic finance across the UK. But we are now seeing a rising demand, from Muslim businesses and personal customers, for Islamic banking across borders.

"We’ve designed this account to help the growing number of Islamic banks across the world, which deal with our customers’ transactions.

"We’re providing the missing link in the chain, so now any person or business receiving payments from abroad into their own Islamic account knows the money will be dealt with according to Islamic law, from start to finish."

The new account is the latest in a series of Shariah compliant products launched by Lloyds TSB in the past two years, including a current account, business and corporate account, a mortgage product and an investment fund.

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THE Islamic Bank of Britain has joined the world of internet banking, making Islamic banking more accessible to its customers, writes Sara Black The bank, which has a branch on South Road, Southall, has also launched a Sharia’a compliant direct savings account, making it the only British bank to offer Sharia’a compliant savings.

Sharia’a is the principles of Islamic law and the IBB is the only totally Islamic British bank in the UK.

Although designed to cater for Mulslims, the bank welcomes customers of all religions.

It has been voted best provider of Islamic finance in Europe.

Ashraf Piranie, IBB’s finance director, said: "Since 2004, when the FSA gave us permission to launch, we have grown to become a leading provider of Islamic financial services in the UK.

"The launch of our internet banking facility means that our unique service is now available to a much broader range of customers.

"We see the launch of our internet banking as a major milestone in the development of Islamic finance in the UK, which will make it accessible and appealing to many more of the UK Muslim population."

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Gordon Brown, England’s chancellor of the exchequer, has stated that he wants to make Britain the global center for Islamic finance. The chancellor said the Labour government will continue to implement the "tax and regulatory reform to support the development of Shari’a-compliant finance."

Addressing business leader at a conference organised by the Muslim Council of Britain on Tuesday, Brown said, "Entrepreneurial vibrancy and dynamism of Britain’s Muslims, combined with Britain’s openness to the world and the historic ties with Muslim countries, that makes the ambition to make Britain the gateway to Islamic finance and trade a realistic and realisable ambition."

Ahmed Mohammed Ali, president of the Islamic Development Bank, also present in London, welcomed the chancellor’s openness to Islamic finance.

"London has traditionally been a major center for structuring and arranging Islamic finance since the 1980s," said Mohammed Ali. The president of the IDB underlined the important support of the Financial Service Authority, Britain’s banking watchdog, which authorized in 2004 the complete inclusiveness of the Islamic Bank of Britain in the UK banking system.

Analysts in the city of London appreciated Brown’s move to grab a slice of the Islamic financial market, which is estimated to be around $400-$500 billion.

"Brown’s position and reform implementation is good news for the banking sector," said Amy Waldron, spokesperson for Lloyds TSB, a British bank that will launch on Wednesday a range of Islamic financial services in all its UK branches.

Muslims and non-Muslims living in Britain will have the possibility of opening current accounts and get mortgages for their house in compliance with their religious faith. According to Shari’a law "interest" or "usury," known as riba, is banned.

"As a matter of faith, a Muslim cannot lend money to, or receive money from someone and expect to benefit," states the Islamic Bank of Britain on its website. "To make money from money is forbidden — wealth can only be generated through legitimate trade and investment in assets."

A bank which offers Islamic current accounts cannot charge interest and savings will not be invested in industries and stock markets. For Islamic mortgage, banks pay up to 90 percent of the house cost and then charge the customer a monthly rent to repay the money borrowed.

"Instead of lending money the bank buys the property for the customer," said Paul Sherrin, head of Islamic Financial Services at Lloyds TSB. The interest rate is embedded in the "rent payback system" said Waldron, but in this way the client of Muslim faith is not going against the financial laws set by his religion.

The total Muslim population in Britain is over 1.6 million according to the Office for National Statistics and recent research led by Lloyds TSB show that over 75 percent of British Muslims would prefer a banking system that conforms with Islamic laws rather than adopting Western financial services.

Sherrin said, "Having spoken to Muslims across the country we know that more than three-quarters want current accounts and mortgages that fit with their faith. By making these products available nationwide we’re bringing Islamic banking into the mainstream and we’re giving the Muslim community access to financial services that meet their needs without compromising their religion."

However, to satisfy the growing demand for Islamic finance in Britain, banks have started a talent battle to hire internationally renowned and financially literate Muslim scholars as advisors to the emerging Islamic banking business.

Humayon Dar, managing director of the London-based shari’a consultancy Dar Al Istithmar insitute, told the Financial Times that there is a real shortage of qualified Imams and scholars who can issue fatwas (religious edicts) that are trusted by Muslim citizens. "There are perhaps 150 [such scholars] worldwide who are involved with Islamic finance but only 20 are internationally recognized," says Dar.

In the UK several prominent banks, including HSBC, Citigroup, Barclays Capital, Lloyds TSB, Deutsche bank, BNP Paribas and Standard Chartered, have hired Imams and Muslim scholars as consultants for their Islamic financing branches.

Ekmeleddin Ihsanoglu, secretary general of the Organisation of the Islamic conference, which represents over 1.2 million in the world, commented positively the effort of Western banks in addressing financial concerns of Muslim devotees. "The OIC would be more than happy if Islamic finance products became available outside the borders of the [57] member states," he said.

The secretary general of OIC added that the increased economic and trade commitments between the West and OIC member states "will open a whole new avenue for the cooperation and engagement of the West with the Muslim world to promote peace and dialogue at the time when misunderstandings, misrepresentation and defamation of Islam is on the rise."

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By Shahli Akram

Addressing a conference in London recently, Britain’s Chancellor of the Exchequer Gordon Brown said he wanted London to become the global centre of Islamic finance. The statement assumes special significance considering that several UK banks are now offering Sharia-compliant products and services.

What is it that draws so much attention to Islamic finance these days? It is not an exaggeration to say that the one aspect of Islam that wins universal admiration and attention these days is the Islamic vision of finance and economy.

Islamic finance is a nascent model, in the sense that it began operating as a system parallel, but not strictly counter to, conventional banking only recently. However, the giant strides it has made in a matter of two decades have been phenomenal. Although it is nowhere near posing a threat to the dominance of conventional banking, more and more people are being attracted to it, Muslims and non-Muslims alike.

Despite growing at a much faster pace than conventional banking, at up to 35 per cent in some countries, its volume is comparatively negligible at the global level. Yet economic pundits these days seem to lavish attention on the Islamic model of finance. At least, none is neutral on the subject.

 What are the distinctive features of Islamic finance? One primary characteristic that distinguishes Islamic finance is the conditional linkage between real economy and finance. It leaves absolutely no room for the proliferation of speculative economic projections which render the whole economic domain vulnerable to sinister manipulations.

Islamic finance is rooted in the ground realities and is guided by a sense of ‘here and now’ coupled with certain strong ethical foundations. It is by principle asset-based, in the sense that it does not grant any intrinsic value to money. Money, Islamic finance maintains, cannot create profit, but only usury, except when it is converted into real assets. Besides, Islamic finance puts the pre-condition on some element of risk on both parties involved in a transaction.

In providing finance, for instance, it is the productivity of a project under consideration that concerns an Islamic financial institution rather than the creditworthiness of the borrower. This is because any financial transaction in an Islamic framework is a partnership, based on a combination of trust and viability, unlike conventional systems in which one-sided profit motives determine the whole deal. The solid linkage between the borrower’s payment obligation and the actual revenue accrual turns a transaction in the Islamic framework into a concrete and transparent partnership which is entirely devoid of exploitation.

The psycho-social factors that constitute econ-omic behaviour in the Islamic construct are strikingly different from conventional ones. They stipulate that human beings must care for others, without necessarily putting self-interest in jeopardy. This in turn means that any financial transaction is morally inspired and transcendentally conceived. It is not a move to take advantage of the needy by vested interests for self-aggrandisement, rather it aims at serving a commendable social function within the structural framework of business, not that of charity. Let us examine it in more detail: An Islamic financial transaction results from an agreement between two parties for instance, between a financier and an entrepre-neur that an opportunity for generating additional value exists. They come together to explore that opportunity and share the gains. Needless to say, they ought to share the losses too. The accent is on ensuring that the relationship between both parties is far from that between a predator and its prey.

Of course, there are non-sharing modes of Islamic finance too. But in those as in other Islamic transactions, the linkage with real economic activities aimed at the generation of additional wealth is the underlying factor. For example, in Islamic modes of finance such as murabaha (cost-plus), salam and istithna (prepaid orders) and ijara (leasing), which involve pre-determined returns on investments, real economic activity is at the core of the transaction.

As Mohammad Nejatullah Seddiqi, an eminent scholar of Islamic economics, has rightly noted, the demand and supply of goods and services whose exchange is financed through the above-mentioned contracts ensure that financial activity is the servant, not the master, of real economic activity.

Islamic financial institutions have shown that all market activities can be financed by using the various Islamic modes such as musharaka, mudaraba, murabaha, salam, istithna and ijara, without resorting to any stratagems.

It has also been established beyond any shadow of doubt that Islamic financial transactions are of immense comparative advantages to their beneficiaries while making good business sense for the financiers. In short, it is a non-exploitative, additional value-generating business marked by transparency, integrity and efficiency.

While acknowledging that the excessive reliance on non-sharing modes of finance in the current practice of Islamic banking is bringing a good deal of criticism to the system, I would like to affirm that it is too new to be subjected to any kind of conclusive judgment.

Islamic finance continues to evolve and, as it evolves, it demonstrates much more flexibility and resilience than conventional systems of banking and finance. Therefore, Islamic financial institutions are able to better tailor their products in consonance with the requirements of the customers and the changing rhythms of the different markets.

Last, let me state the obvious by way of conclusion: Islamic finance is opposed to the system of interest that defines conventional banking.

Many reasons are attributed to Islam’s uncompromising rejection of interest and usury, but in my view the most important of them is that Islam aims at confining and restoring money to its essential functions. In the absence of hard economic activity, money ceases to be money and becomes a source of economic tyranny and misery, precisely the villains that money is supposed to eradicate.

The writer (above) is the deputy CEO of Amlak Finance.

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LONDON: A new mortgage scheme complying with the sharia law has come into being in the U.K. targeted at Islamic investors. The new buy-to-let mortgage is designed by Bristol & West and the Arab Banking Corporation.

Lloyds TSB had introduced some Islamic banking as a pilot scheme when it launched a sharia-compliant current account in February 2005. Subsequently, it introduced a home finance package too. The current account facility is now available in 18 branches.

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Lloyds TSB has opened its 17th Islamic banking centre at Bethnal Green that has been designed to provide financial services to the areas Muslim community.

The branch will offer customers financial products that comply with Islamic law, which forbids the payment or receipt of interest.

Paul Sherrin, head of Lloyds TSB Islamic financial services, said: "Bethnal Green is home to one of London’s strongest Muslim communities and by bringing Islamic banking to the area we hope to give our customers a real alternative to traditional banking."

The current account comes with no credit interest and there is no overdraft facility. However, a debit card is provided and there is no fee or minimum balance requirement.

There is also a home finance product, with which the bank buys the customers home outright – paying up to 90 per cent. The "owner" then pays rent on the property as well as regular repayments until the home is effectively re-purchased.

All Lloyds TSB Islamic financial services funds are held by the bank in accordance with Islamic laws.

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