Islamic finance industry has suffered less turmoil than western institutions

Financial Times By Dr Humayon Dar. (Available at

Sir, The impressive growth of the Islamic finance industry over the past decade has not gone unnoticed – certainly not by those envious enough to tarnish its strictures against leverage, speculation and gross uncertainty. While some of the issues Lex (May 19) raises must certainly be debated, recognition should also be given to these principles, which have saved Islamic finance from the fate now being suffered by its western conventional counterpart.

It’s true that our industry is relatively new – certainly by conventional financial standards. But one must put emphasis on the fact that it is maturing, with two robust regulatory agencies in the Accounting and Auditing Organisation for Islamic Financial Institutions, and Islamic Finance Service Board, both issuing standards of practice. Sharia scholars are at the forefront of both these organisations.

A criticism of Islamic finance at this stage would be a criticism of the long standing relationship that it has had with capitalist investment banks, through which it has been able to develop innovative hybrid structures, with the added feature of sharia compliancy. Islamic finance has the potential of attracting a new flock of 1.6bn investors. A flock with principles, and also a flock that has enjoyed considerably better protection of capital than that seen in the west.

Learning from the practical mistakes of conventional financial institutions, Islamic banking has initiated a process of reform to further strengthen itself internally. The ruling recently issued by the International Fiqh Academy of the World Muslim League on Tawarruq (a synthetic commodity trade-based mechanism that achieves the economic effects of an interest-based loan) is a firm step in this direction.

Such developments must be appreciated rather than used as an example of disagreement among sharia scholars. Similarly, there is now greater clarity on sukuk structures after the well-advertised ruling against purchase undertakings in partnership-based sukuk.

Best Regards

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  • Muscat, Sultanate of Oman


    Is Islamic Finance the Answer?

    By Robin Brant. (Available at:

    Experts in Islamic finance believe their way of doing business has shielded them from the global credit crisis. But how does it differ from conventional Western finance? A former executive director of the International Monetary Fund, Dr Abbas Mirakhor, says wider Islamic economics relies on God’s guidance, handed down almost 1,400 years ago. There is a “consciousness of a supreme creator and a system that he has provided”, he says. What we know as the conventional Western way does not have that, which is “really the major difference between the two”, he adds. In practical terms, the most significant difference is that charging interest is not allowed in Islamic finance.

    Dealing in interest, liquor, pork, gambling or pornography are prohibited under Sharia law. Islam forbids all forms of economic activity which it deems morally or socially harmful Individuals must spend their wealth judiciously and not hoard it, keep it idle or squander it. Muslims have a duty to contribute a percentage of their wealth to deprived and poor sections of Muslim society. Neither are most forms of speculative investment permitted, such as hedging or derivatives trading.

    “We don’t recognise the concept of interest and look for some profit from trading money,” explains Dr Bambang Brodjonegoro from the Islamic Development Bank. “In the Islamic concept, money is strictly for the purpose of exchange or storing value, but not for the transaction of looking for excessive profit,” he says.

    Sharing risks

    How then, does an Islamic bank, and a customer who puts money in that bank, make a profit? The system is asset-based, with tangible assets or commodities at the heart of it. There are buyers and sellers, not borrowers and lenders.

    Here is a comparison.
    In Los Angeles a customer who wants to borrow money to buy a car would go to a conventional bank and agree a loan. The bank would hand over the money. There would be regular repayments, which include interest accrued on the loan. In Lahore a customer could go to an Islamic bank and sign a contract with the bank to buy a car from them. The bank would not loan the money but buy the car itself. Then it would sell it to the customer at a mark up. The customer would agree to pay back the cost in instalments over a regular period.

    One of the core principles at the heart of Islamic economics is risk sharing. The bank and the people who put their money in it share any profit, or loss, from investments. “In Islam we appreciate merit, so if someone works harder in a business…they (the bank) will get the sharing benefit,” explains Dr Brodjonegoro. “The more important thing is that there will be no bank that rules everything. It will be bank and borrowers at the same level and they share the risk and benefit.”

    Alternative way

    This sense of equality is important. It is one of the defining characteristics which proponents of Islamic economics say make it different from the conventional western way. Islamic economics also highlights a belief in benefitting the wider Muslim community. The former IMF Executive Director Dr Mirakhor says that it chimes with “a movement toward becoming more ‘other conscious’…having consciousness about the other fellow, about the general public interest.” This contrasts with what he described as the “simple narrow basis of self interest which motivates, supposedly, the economic agents in the liberal economic system.” Some see the Islamic model as an alternative. Others see it as complementary to the system which has dominated the western world.

    “I don think that this Islamic banking system is the alternative, that we have one or the other. I think this is a complimentary service, a way of doing service,” says Prof Ekmeleddin Ihsanoglu, Secretary General of the Organization of Islamic Countries. “It needs to be an option there where people can find different ways of doing the same thing.”

    Compromising principles

    Islamic economics is not the exclusive preserve of Muslims. Islamic Bank of Britain UK has 8th largest Islamic finance sector according to the DTI. London is emerging as a major financial centre for Islamic finance. Islamic banking products are also widely used by non Muslims in Malaysia. “This is an alternative system that can be applied to everybody. Everybody can use it regardless of their religion,” says Dr Brodjonegoro from the Islamic Development Bank. Major banks like Britain’s HSBC and Citi of the US have set up Islamic banking subsidiaries that are flourishing. Some of the champions of the Islamic way want to see business expand beyond the natural market of Muslim countries.They believe that now, more than ever, there is a market for non Muslims who share in the values espoused in Islamic economics. But there are some who fear that by expanding the Islamic way is becoming less Islamic.

    Time to reflect

    “Unfortunately what is happening is that Islamic finance in some ways is moving more and more closely to the conventional finance,” says Prof Habib Ahmed, a world authority on Islamic finance. “If you look at the development in the past few years, Islamic finance appears to be mimicking most of the products of conventional finance.” There has never been a better time to champion an economic model which is different to the one laying in shreds on Wall Street, says Prof Ahmed. But he believes that the Islamic concept is being diluted. “As people after this crisis are looking for solutions…the Islamic finance industry is moving towards that very system,” he says. “I think it is time for Islamic finance to pause and think of the direction it is taking”.

    Best Regards

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  • Trafalgar Square, London

    Thought Leadership Series, Islamic Finance and Corporate Governance: My Interview


    Dear Readers,

    I would like to share my recent thoughts on the issue of Corporate Governance in Islamic financial institutions featured in the newsletter of Hawkamah, the Institute for Corporate Governance of Dubai International Financial Centre. As part of its Thought Leadership Series, Hawkamah had conducted an exclusive interview with purpose of getting information and enlightening several essential issues pertaining to corporate governance practice of IFIs across jurisdictions. Below is the excerpt of the interview (Also available at

    Enjoy reading!

    Part of Hawkamah’s thought leadership strategy involves engaging scholars with its work to look at Corporate Governance challenges faced by the region. Zulkifli Hasan a Ph.d candidate of University of Durham, UK from Malaysia has recently joined for a three-month program and has been working on the Taskforce on Islamic Financial Institutions (IFIs). His unique research focus is Shari’ah governance and he has analyzed and looked at corporate governance of IFIs in Malaysia, GCC Countries and the UK.

    What is Shari’ah governance?
    In IFIs, Shari’ah governance mostly refers to the management, establishment and affairs of the Shari’ah board. The Shari’ah board, normally consists of fiqh scholars, practitioners and academicians, is an independent body entrusted with the duty of directing, reviewing, supervising the activities of IFIs for purpose of Shari’ah compliance and issuing legal rulings pertaining to Islamic banking and finance. In carrying out these duties, the Shari’ah board needs sound framework and structure to ensure its independence and effectiveness. On this basis, Shari’ah governance refers to a set of organizational arrangement as to how the Shari’ah board is directed, managed, governed and controlled that ensures the governance structure and framework is in compliance with the principles of Shari’ah. Shari’ah governance aims at ensuring the Islamicity of financial transaction and activities so as to uphold the integrity of the IFIs as inspired by all stakeholders by strengthening the institution of Shari’ah board.

    What is the main issue involved in relation to Shari’ah governance system?
    As Islamic finance becomes an integral part of the international financial system, it will face numerous challenges. The world has experienced numerous distinct banking crises in the past including the recent crisis which are all based on conventional banking system. In order to prove its resilience and provide for a better alternative to its conventional counterpart, the Islamic financial industry needs to ensure that it will not be a source of such financial instability.

    A sound Shari’ah governance system is one of the main contributors that guarantee the stability in IFIs because the integrity of IFIs greatly depends on the status of Shari’ah compliance, the impact of products, professional competence and behaviour towards and observance of Shari’ah norms. For instance, one of the major factors of the 1986 failure of Kleinwort Benson, the first investment bank to introduce an Islamic unit trust, was due to investor’s reservations about the absence of a Shari’ah governance system. Additionally the closure of Ihlas Finance House in Turkey in 2001 was due to poor governance practice and this includes failures of management, control, strategy and regulators.

    Therefore it is very important for us to identify challenges and to promote best practice in relation to Shari’ah governance system such as the independence of Shari’ah board, its operative procedures, transparency and disclosure practices, conflict of interest arrangement and competency board and executives. These efforts will bring into focus the needed measures that need to be carried out to strengthen and improve the Shari’ah Governance system in IFIs.

    What do you hope to achieve in relation with Shari’ah governance system in IFIs?
    IFIs in Malaysia, GCC Countries, the UK and any other part of the world have different set of frameworks. The existing Shari’ah governance framework needs further enhancement and improvement and this is important for the consolidation and sustainable of Islamic finance industry globally. I strongly believe that the need to have effective Shari’ah governance is really crucial which would then strengthen the credibility of IFIs. Failure to provide efficient Shari’ah governance would inevitably lead to serious disruptions in the market which would have dire consequences for Islamic finance industry itself. I personally hope that the future Shari’ah governance framework will be nurtured from the best practices and more importantly will be able to promote additional values to the existing corporate governance framework such as trust, fairness, transparency, credibility, responsibility through the underlying Islamic principles of beliefs (aqidah), Shari’ah and ethics (akhlaq). For this purpose, there must be continuous, thorough and intensive research on the subject of corporate governance of IFIs and I believe that in this aspect, Hawkamah is one of the institutions that can contribute something towards this aspiration.

    Best Regards

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  • Sultan Qaboos Grand Mosque, Muscat, Sultanate of Oman

    Organized Tawarruq is NOT permissible: OIC Fiqh Academy

    Resolution 179 (19/5) in relation to Tawarruq: its meaning and types (classical applications and organized tawarruq)

    The International Council of Fiqh Academy, which is an initiative of the Organization of Islamic Conferences (OIC), in its 19th session which was held in Sharjah, United Arab Emirates, from 1 – 5 of Jamadil Ula 1430 AH, corresponding to 26 – 30 April 2009, decided on the following:Having reviewed the research papers that were presented to the Council regarding the topic of tawarruq, its meaning and its type (classical applications and organized tawarruq), a resolution were passed. Furthermore, after listening to the discussions that revolve about the applications of tawarruq, the resolutions were presented at the International Council of Fiqh Academy, under auspices of the Muslim World League in Makkah.

    The following were the resolutions:

    First: Types of tawarruq and its juristic rulings:
    Technically, according to the Fiqh jurists, tawarruq can be defined as: a person (mustawriq) who buys a merchandise at a deferred price, in order to sell it in cash at a lower price. Usually, he sells the merchandise to a third party, with the aim to obtain cash. This is the classical tawarruq, which is permissible, provided that it complies with the Shari’ah requirements on sale (bay).

    The contemporary definition on organized tawarruq is: when a person (mustawriq) buys a merchandise from a local or international market on deferred price basis. The financier arranges the sale agreement either himself or through his agent. Simultaneously, the mustawriq and the financier executes the transactions, usually at a lower spot price. Reverse tawarruq: it is similar to organized tawarruq, but in this case, the (mustawriq) is the financial institution, and it acts as client.

    Second: It is not permissible to execute both tawarruq (organised and reversed) because simultaneous transactions occurs between the financier and the mustawriq, whether it is done explicitly or implicitly or based on common practice, in exchange for a financial obligation. This is considered a deception, i.e. in order to get the additional quick cash from the contract. Hence, the transaction is considered as containing the element of riba.

    The recommendation is as follows:

    To ensure that islamic banking and financial institutions adopt investment and financing techniques that are Shari’ah-compliant in all activities, they should avoid all dubious and prohibited financial techniques, in order to conform to Shari’ah rules and so that the techniques will ensure the actualization of the Shari’ah objectives (maqasid Shari’ah). Furthermore, it will also ensure that the progress and actualization of the socioeconomic objectives of the Muslim world. If the current situation is not rectified, the Muslim world would continue to face serious challenges and economic imbalances that will never end. To encourage the financial institutions to provide Qard Hasan (benevolent loans) to needy customers in order to discourage them from relying on Tawarruq instead of Qard Hasan. Again these institutions are encouraged to set up special Qard Hasan Fund.

    My Observation

    I personally view that the IFIs must be very caution and not to be complacent in developing Islamic financial products by relying on controversial instruments as in the case of Tawarruq. Muhammad Nejatullah Siddiqi has already viewed that Tawaruq is impermissible due to its inherent mafsadah. Although there is no explicit text which denotes the illegality of tawaruq or even analogical reasoning, the element of mafsadah has clearly overwhelmed the maslahah. By offering tawaruq which is appeared to be as much as bay’ al Inah instrument adds another debt financing facilities that generates debt proliferation in the market. If there is no restriction and warning to the excessive utilization of debt based instrument such as further involvement of the IFIs with tawaruq facility, it will clearly undermine the ‘productive economic activity’ discourse in Islamic economics.

    Best Regards

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  • Durham, UK

    Credit Crunch: A Chance to develop the Islamic Finance Market in Germany?

    By Nicole Guski, Islamic Finance News (IFN) Vol. 6, Issue 10. Available at

    Nearly five years have passed since the federal state of Saxony-Anhalt in Germany issued Europe’s first Islamic bond in July 2004. As a result of such issuance market players were quite enthusiastic about the potentials of Islamic finance for the German market. Although more than 3 million Muslims live in Germany and the Deutschland-AG has a good reputation in many Muslim countries the expected boom of Islamic finance seems not to have arrived in Germany. The reasons for this are manifold, but unlikely due to a lack of potential. Although the majority of Muslims living in Germany have a background of migration and as a result have tendency to a lower income by than German natives, their savings are usually higher. According to Booz & Company there is a potential of Euro 1.2 Billion per annum for Shariah-compliant finance products which would mean an annual growth of 15 – 20 % . There is definitely also a growing interest in the product as the increasing number of attendees from Germany at Islamic finance conferences shows.

    Due to globalization a rising number of German banks are already involved in the Islamic finance markets outside Germany. In particular German banks such as Deutsche Bank, Commerzbank and Dresdner Bank are quite active in such markets. Deutsche Bank has been issuing sukuks in cooperation with Saudi banks since 2005. These are, however, not the only banks which are active in the field of Islamic finance. In 2005 for example, it was announced that Arcapita Bank B.S.C. mandated Bayerische Hypo- und Vereinsbank AG, Standard Bank plc and WestLB AG, London Branch to arrange a US $ 200,000,000 five multicurrency murabaha sukuk. In particular Islamic trade and export finance structures are structures which are regularly used by German banks. Similarly CCH Europe GmbH, the German subsidiary of CCH International, arranged a $ 20 million murabaha for Globexbank, Moscow in 2006.

    In order to service their Muslim customers German banks often establish a Shariah-compliant window. Just recently HSH Nordbank, a German financial institution and key market player in shipping and renewable energy finance, together with Dubai’s Al Salam Investment signed an agreement with the intention of setting up a Shariah-compliant joint venture in 2009. Also in the past Islamic finance was never a one-way street. Since 2006 Islamic investors have shown an increasing interest in investment opportunities in Germany. In particular the German real estate market was a main target of such investments. Just to name a few, Abu Dhabi Investment House launched a Euro 600 million Gulf German residences fund in 2006, Arab Investment Ltd set up its German AIL Fund 1 for the purpose of making investments in German shopping centers and commercial properties in 2007 and Deutsche Bank even launched a special banking brand called Bankamiz for its Turkish costumers who represent the largest Muslim community in Germany. Still the German Islamic finance market is not yet as developed as in the UK and in all likelihood now also ranks behind the French Islamic finance market given the significant tax and regulatory changes announced by the French authorities last year. What are the obstacles which prevent the German Islamic finance market from developing faster? Why is there not a higher demand for Islamic finance products in Germany given the size of the Muslim community?

    Lobby for Islamic Finance in Germany
    One suspicion is that German Islamic finance products are not widely known within the Muslim community in Germany as such products are rarely advertised. According to Michael Mahlknecht even bankers are often not aware of the existence and availability of such products within their bank. Accordingly such products are not offered to their customers and there is also probably an element of reluctance on such customers to enquire about these products in light of the unjustified but nevertheless stereotypical association that is often made with persons of a Muslim background being linked to terrorists. In addition, the Muslim community in Germany is not a homogeneous group as most of them have a background of migration with family stemming from different countries. Even if they are second or third generation Muslims living in Germany their cultural differences are still quite apparent. Accordingly it is more difficult for them to create their own lobby in Germany. A good example for such difficulties is the Central Council of Muslims in Germany (Zentralrat der Muslime in Deutschland – ZMD). Although the ZMD was established in 1995 there is still an ongoing discussion amongst Muslims in Germany whether the ZMD has the authority to represent the German-Muslim community.

    To alleviate such concerns it would assist if, similar to the UK or France, the German government acknowledges Islamic finance as part of standard business by implementing the appropriate legal framework. A platform for which might be that the Federal Financial Supervisory authority (BaFin) in Germany has signed Memoranda of Understanding (MOU) with various regulatory authorities in the Middle East. Pursuant the MOUs BaFin agreed to co-operate with such authorities which includes establishing training programs to increase a better mutual understanding. Although such a co-operation will not immediately change the legal framework for Islamic finance in Germany a better mutual understanding will increase the awareness of Islamic finance products in Germany and may build a greater confidence in the product which may ultimately lead to a stronger lobby for such product.

    Certification of Islamic finance products
    In addition to the lack of a unified lobby, not every product which is called an Islamic finance product might be recognized as such by every Muslim living in Germany. To overcome such obstacle and to support the German financial institutions to increase the reliability on the Shariah-compliance of their products, ZMD commenced an initiative for establishing a program to certify the Shariah compliance of a product. Although such a program is undoubtedly appropriate to improve the reliability of Islamic finance products it is unlikely that such a program can allay all doubts surrounding the Shariah-compliance of the product. As stated above ZMD is not recognized by all Muslims in Germany as their authorized representative.

    A similar issue exists in most Muslim countries where the compliance of a product with the Shariah is supervised by a competent Shariah Board of the relevant financial institution. Although the Shariah Board is independent from the financial institution and not bound by any instruction from it, experience shows that the degree of supervision often depends on the individual members on such board, i.e. a product approved by a fatwa of one Shariah Board as being Shariah-compliant might be criticized by the members of another Shariah Board. It is therefore regularly discussed at conferences and in meetings whether a central Shariah Board should be established to avoid any discrepancies. Apart from Malaysia, the concept of a central Shariah Board is however not accepted in Muslim countries since Islam does not recognise the concept of a centralized representative, as opposed to for example the Catholic Church.

    Highly engineered products
    Furthermore, it has to be acknowledged that Islamic finance products compete with conventional banking products. The German Muslim community is not prepared to accept Islamic finance products which do not provide them with a similar return as conventional products. Although for example a number of Shariah-compliant structures have been developed to address issues such as double real estate transfer tax, it is desirable that the legal framework in Germany is adjusted to reflect the particularities of Shariah-compliant products to allow a simplification of the relevant structures. This would support a broader use and acceptance of such structures in Germany.

    Credit Crunch as a chance for Islamic finance?
    Due to globalization the Islamic finance markets have also not been immune to the financial crisis, but as a result of Islamic principles, the Islamic banks are not as highly leveraged as conventional banks and tended to stay away from the main triggers of the financial crisis such as risky derivative products . Due to the global financial crisis the financial sector faces an unprecedented situation which requires a new way of thinking to overcome the difficulties brought by the crisis. Therefore the market is probably more prepared to look at the financial sector from a different angle and in particular be open for a more ethical approach. Accordingly there is good chance that the principles of a Shariah-compliant financing like the ban on uncertainty (gharar), the promotion of risk and profit sharing as well as the promotion of asset-backed transactions may become of a greater interest also to non-Muslims. On the other hand Shariah-compliant products have other inherent risks which have to be taken into account. For example they have usually a greater liquidity risk due a greater mismatch in maturity.

    The German market still holds some interesting potentials for Islamic finance products. Regardless of the fact that it is already possible to use Islamic finance products in Germany, it is desirable to increase their awareness and lobby for Islamic finance in Germany by a clear statement from the German government in the form of establishing a legal framework as done in the UK and France and thereby recognizing the particularities of Islamic finance products. A certification of the Shariah-compliance of a product is likely to support the development of the German Islamic finance market even if such certification is not recognized by all Muslims living in Germany. Despite of the fact that the Islamic finance market is not large enough to solve the credit crisis on its own, it can add an interesting dimension to a solution even for the non-Muslim community, but without forgetting to mitigate the risks which are inherent in Islamic finance structures.

    Best Regards

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    Islamic banks take share of the pain

    By Robin Wigglesworth (Available at:

    Islamic prohibitions against fixed interest and most complicated financial instruments have helped Islamic banks avoid the avalanche of derivative debt losses that have wreaked havoc across the world financial system. Devout Muslim investors have also fared better when buying global equities that do not violate Islamic principles. Sharia screening has shielded them from exposure to over-leveraged corporates, conventional banks, gaming companies and sellers of alcohol such as hotel groups, all of which have suffered from precipitous drops in value.

    Dividend boost for investors unlikely to last – Apr-22Vodafone Qatar begins big IPO test – Apr-15Elections loom largest for Lebanon markets – Apr-01Egypt equities rally sparks wary optimism – Mar-25Saudi exporters fall foul of investors – Mar-18Gulf companies suffer earnings ‘bloodbath’ – Mar-11The FTSE All-World Index has shed 42.3 per cent over the past 12 months, while the sharia-compliant version of the index has lost 37.6 per cent over the same period.

    But have investors in Gulf-based Islamic banks enjoyed a better time than shareholders in conventional ones? Evidently not. Since oil prices peaked last July, regional Islamic banks have shed 45 per cent of their value, compared with a 39 per cent slide of their conventional brethren, according to Nomura, the Japanese investment bank. As markets have picked up in recent months, Gulf Islamic banks have climbed 11 per cent, while conventional banks have risen 10 per cent. “The fact is that overall they haven’t performed that differently,” says Tarek Fadlallah, executive director of Nomura in Bahrain. “You have good and bad Islamic banks, just like you have good and bad conventional banks.”

    On one side is Al Rajhi Bank, a conservative Islamic lender in Saudi Arabia. The world’s largest Islamic bank has lost only 22 per cent of its value since July and now has a higher market capitalisation than Citigroup. In contrast Dubai Islamic Bank, the world’s oldest Islamic bank, has seen its shares tumble 72 per cent over the same period, partly because of alleged scandals and concerns about its real estate exposure. Both banks have still reported profits that would now be the envy of many western financial institutions, although DIB’s results have been tempered by some heavy writedowns related to the alleged scandals. But the global economic crisis hit the Gulf region later than developed markets and some economists say it is still to feel the full effects of the worldwide recession.

    Indeed, analysts warn that Islamic banks could be more exposed to effects of the credit crunch in the future than conventional institutions, with their exposure to property held up as a crucial risk. There are exceptions but most Islamic banks have a higher exposure to flagging real estate markets than conventional institutions. This is because of the restrictions on investments in many asset classes and the sharia requirement to have a physical asset underlying all Islamic transactions. “There are some things that Islamic banks are less exposed to, such as derivatives and toxic debt assets, but they are more exposed to property and a lax regulatory regime, which often come to the fore in a downturn,” says Raj Madha, a banking analyst at EFG-Hermes.

    Best Regards

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  • Atlantis Hotel, Palm Jumeirah, Dubai, UAE