BBA Judgement Erroneous, Rules Court of Appeal

Available at the Malaysian Reserve, Oct, 19, 2009.

The Court of Appeal, in a written judgement on the Bai Bithaman Ajil (BBA) case presided earlier by High Court judgde Datuk Justice Abdul Wahab Patail, had found that the judge had erred when equating profit with riba, misinterpreted a key definition in the Islamic banking regulations and had side stepped earlier rulings made by the Supreme Court. The written judgment is for the March 31 unanimous decision when the Court of Appeal reversed the earlier High Court decision that BBA contracts were contrary to Malaysia’s Islamic banking regulations, providing a relief to local Islamic banks that had earlier feared a potential spike in defaults of Islamic contracts, especially for home financing.

In the judgment dated Aug 26 and signed off by Justice Datuk Md Raus Sharif, he wrote that “judges in civil court should not take upon themselves to declare whether a matter is in accordance to the Religion of Islam or otherwise”, further adding “whether the bank business is in accordance with the Religion of Islam, it needs consideration by eminent jurists who are properly qualified in the field of Islamic jurisprudence.”

The judgment by Justice Md Raus, who sat together with justices Datuk Abdull Hamid Embong and Datuk Ahmad Maarop in a three-men panel, brings to closure the much-debated Abdul Wahab’s judgment in 2008 which probably triggered Bank Negara Malaysia (BNM) into making it mandatory for the courts to refer to the central bank’s Shariah Advisory council (SAC) when deciding on Shariah matters in Islamic banking and finance cases.

In the new Central Bank of Malaysia Act (CBA) 2009, which was gazetted on Sept 3, it now makes it mandatory for courts to refer to SAC for rulings concering Shariah matters. Section 56 provides states that where ‘in any proceeding relating to Islamic finance business before any court or arbitrator any question question arises concering a Shariah matter’, the court or the arbitrator shall take into consideration SAC published rulings or refer such questions to the council for its ruling. On top of that, CBA’s Section 57 makes it clear that SAC rulings shall be binding on the Islamic financial institutions, the court or the arbitrator.

The judgment, in favour of plaintiff Bank Islam Malaysia Bhd (BIMB), was for nine BBA contract cases, including the case of Bank Islam Malaysia Bhd v Ghazali Shamsuddin & 2 Others. The Malaysian Reserve first reported on Abdul Wahab’s judgment on Sept 8, 2008.

In one of the salient points in the 31-page judgment, Justice Md Raus said that Justice Abdul Wahab was plainly wrong when he equated the profit earned by BIMB as being similar to riba or interest.
“We have no hesitation in accepting that riba or interest is prohibited in Islam. But the issue at hand is whether such comparison between a BBA contract and conventional loan agreement was appropriate.
“With respect, we do not think so. This is because the two instruments of financing are not alike and have different characteristics. BBA contract is a sale agreement whereas a conventional loan agreement is a money lending transaction. The profit in BBA contract is different from interest arising in a conventional loan transaction. The two transactions are diversely different and indeed diametrically opposed,” he writes.

He also noted that the law applicable to BBA contracts is no different from the law applicable to loan given under the conventional banking.
“The law is the law of contract and the same principle should be applied in deciding these cases. Thus, if the contract is not vitiated by any vitiating factor recognised in law such as fraud, coercion, undue influence, etc. the court has a duty to defend, protect and uphold the sanctity of the contract entered into between the parties,” he said.

The justices also commented on Justice Abdul Wahab’s attempts to replace the sale price under the Property Purchase Agreement with an ‘equitable interpretation’ and substituting the obligation of customer to pay the sale price with a ‘loan amount’ and ‘profit’ computed on a daily basis, as Justice Abdul Wahab had expounded in Affin Bank Bhd. v Zulkifli Abdullah (Supra).
This, in the views of the Court of Appeal, was the act of “rewriting the contract for the parties”.
“It is trite law that the Court should not rewrite the terms of the contract between the parties that it deems to be fair or equitable,” writes Justice Md Raus.

The judgment then commented on Abdul Wahab’s interpretation of ‘Islamic banking business’ in section 2 of the Islamic Banking Act (IBA) 1983 where the High Court judge had argued that if a facility is to be offered as Islamic to Muslims generally, regardless of their mazhab, then the test to be applied by a civil court must logically be that there is no element not approved by the Religion of Islam under the interpretation of any of the recognised mazhabs.
Here, Justice Md Raus writes that it is our view that judges in civil court should not take upon themselves to declare whether a matter is in accordance to the Religion of Islam or otherwise.
“As rightly pointed out by Suriyadi J (as he then was) in Arab-Malaysian Merchant Bank Bhd [2005] 5 MLJ 210 that in the civil court ‘not every presiding judge is a Muslim, and even if so, may not be sufficiently equipped to deal with matters, which ulamak take years to comprehend’.
“Thus, whether the bank business is in accordance with the Religion of Islam, it needs consideration by eminent jurists who are properly qualified in the field of Islamic jurisprudence,” he said.

The Court of Appeal judgment also noted that the questions raised by Wahab Patail on the validity and enforceability of the BBA contracts is not novel and that it had been raised in previous cases and had been ruled upon.
It cited the case of Adnan bin Omar v Bank Islam Malaysia Berhad (unreported) where the Supreme Court upheld the validity and enforceability of the BBA contract. In that case, the Supreme Court accepted as correct and affirmed the judgment of Ranita Hussein JC.

Subsequently, it added that the validity and the enforceability of BBA contracts was again decided by this court in Datuk Hj Nik Mahmud Nik Daud v Bank Islam Malaysia Bhd [1998] 3 CLJ 605, and Bank Kerjasama Rakyat Malaysia Bhd v Emcee Corporation Sdn Bhd (Supra).
“From the above cases, it is clear that the validity and enforceability of the BBA contract had been ruled upon by the superior courts. It is trite law that based on the doctrine of stare decisis, a decision of a superior court is binding on all courts below it. The importance of this principle must not be taken lightly,” writes Justice Raus.

Best Regards

Note: Most predicted judgement by the Court of Appeal. Slight release to Islamic finance industry but continuous nightmare to Islamic banks’ customers. Despite of the High Court judgement was overruled by the Court of Appeal, the decision made by the learned judge at least effectively highlighted several significance issues on the actual implementation of BBA and signalled a strong message about the status of some controversial Islamic financial products.

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  • Stratford, Birthplace of William Shakespeare


    Need For Deeper Look Into Islamic Financial Products

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    KUALA LUMPUR, Oct 31 (Bernama) — While Malaysia is doing a great job in promoting Islamic finance, the adaptation process to some of its products will need a deeper look or “a second visit”, according to a renowned Muslim scholar. Dr Hatem El-Karanshawy, founding dean of the Qatar Faculty of Islamic Studies, has voiced caution over the need to quickly Islamise products just to be at par with other conventional instruments. “We should not rush to adopt products and Islamise them in a way because we would like the products to be on the same footing as other western institutions or non-Islamic banking that are not based on Islamic principles,” he said.

    Egyptian-born El-Karanshawy, who was previously director of the Central Bank of Egypt, however, declined to name the products concerned when interviewed by Bernama during a recent financial event in Doha, Qatar.

    He said that he had discussed the matter with those involved in the industry in Malaysia. However, El-Karanshawy said Malaysia had done a great job in promoting the industry by hosting important international associations working for Islamic finance with the government giving a push in the social development of the system. He dispelled the notion that Islamic finance is not progressive, saying that it is one of the fastest growing industries in the world. However, he pointed out that some Islamic financial institutions are not adhering as they should be to the proper Islamic finance and this is where the real challenge is.

    “If they can develop innovative products that would really correspond to the needs of society and adhere to the basic principles, then the growth would be faster and attract more financial institutions,” he said. On the notion that Islamic bank should not be profitable, El-Karanshawy said no one said that financial institutions in Islam should be charitable organisations. “Yes they have to make profits but what type of profits? They have to make profits, they have to be successful. They are talking about corporate social responsibility after the aggressive movement of the market,” he said.

    This, he added, has been the misconception of Islamic finance. Asked whether Islamic finance should be incorporated into the new global financial architecture, El-Karanshawy said the market then should be involved in social responsibility. “If the financial sector job is financing investments, in the sense, it will study what’s the money, where the money is going to and then have its returns based on fundamentals of investment and develop ways to share the risks, I think that is the direction that Islamic finance principles would help,” he said.

    He added that some elements for venture capital companies in the world could be easily adapted to accept or adhere to the idea of Islamic principles. At the recent CNBC Global live debate in Doha, El-Karanshawy said current banking and finance had strayed from its function of being the “servant of the real economy” in facilitating productivity and development. “People are talking about the secondary market, derivatives. Thinking about making profits rather than the real reason for making investments,” he said. With the problems posed by derivatives, El-Karanshawy questioned the action taken by the free market to address this. Such innovations, according to him, have to be balanced and not risking investors’ money. BERNAMA

    Best Regards
    Durham, UK

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  • The London Eye

    ISDA Writes Global Standards for Islamic Derivatives

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    Oct. 27 (Bloomberg) — Global standards for Islamic derivatives contracts may be published as soon as December, helping companies and investors manage risk more effectively, according to the International Swaps and Derivatives Association. “This is a real innovation in what could potentially be a huge growth area,” ISDA Chairman Eraj Shirvani said in an interview in Singapore yesterday. “Establishing market standards with the input of the scholars’ opinions, combined with the expertise and benefits of the ISDA framework, potentially opens up a significant array of new hedging possibilities for issuers and investors.”

    The New York-based ISDA, which represents more than 830 organizations active in the $592 trillion derivatives market, started working on its Shariah-compliant master agreement with the Bahrain-based International Islamic Financial Market in 2006. The first version of their framework will focus on swaps for profit-rate and currency transactions, Shirvani said. Islamic finance is the fastest-growing segment of the global financial system with $919 billion of assets under management, including $114 billion of Shariah-compliant bonds, known as sukuk, Prudential Financial Inc. said on Oct. 7. Assets will grow to as much as $1.1 trillion this year, Kuwait Finance House KSC forecast in July, as the world emerges from recession and a recovery in oil prices boosts Arab wealth. Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates.

    Bond Trading

    “Investors will have the ability to trade in sukuk they perhaps wouldn’t have been able to before without a hedging tool available to them,” Angus Amran, treasury and capital markets head for Cagamas Bhd., Malaysia’s biggest buyer of home loans, said in a phone interview from Kuala Lumpur. The standards will “promote homogeneity and acceptance of Islamic financial products,” he said. Because Muslim Shariah law prohibits payment or receipt of interest, speculation and uncertainty, many Islamic investors avoid derivatives. To ensure compliance with Shariah, new Islamic financial products must be vetted and approved by recognized scholars who are versed in its principles.

    Standardized terms in derivatives agreements may help market participants focus on “developing a more innovative and diverse range of Shariah-compliant derivative tools and products instead of channeling resources to reduce documentation risks,” said Mark Toh, who helps manage about $525 million in Islamic funds at Prudential Corp. Asia in Kuala Lumpur.

    Oil Prices

    Created in the 1970s after an almost 20-fold jump in oil prices over 10 years, the Shariah finance industry caters to the world’s 1.57 billion Muslims. From being almost non-existent a decade ago, the Islamic bond market has grown to $130 billion, according to Moody’s Investors Service. Sukuk have returned 27 percent this year, an HSBC Holdings Plc index shows, after the market fell four times as much as conventional investment-grade corporate debt last year. The Dubai government set up a $2.5 billion Islamic bond program on Oct. 25 as the emirate seeks to sell international bonds for the first time in more than a year.

    Malaysia, which has 14 Islamic banks and the biggest sukuk market, said in July that it would introduce a trading platform to make it easier for companies to buy and sell commodities like palm oil and rice that are used to back Islamic securities. Sukuk are asset-based bonds that pay a profit rate to investors to avoid interest.

    Government Efforts

    South Korea said on Aug. 26 that it plans to exempt sukuk from tax on distributions, joining countries including Singapore, Hong Kong, the U.K. and France that are modifying regulations to help attract Islamic investments.

    Islamic financial institutions have been more resilient to the global financial crisis than their conventional counterparts because direct investment in subprime assets and derivatives is prohibited to them, Moody’s said in February. “We have had many enquiries regarding derivatives and some people say this is important for the industry and some people have done without them,” Mohamad Alchaar, secretary-general of the Accounting & Auditing Organization for Islamic Financial Institutions, said in a phone interview today. The Bahrain-based AAOIFI, which promotes industry standards, is not part of the ISDA’s project with the IIFM, Alchaar said.

    Market Contagion

    U.S. and European regulators have called for the adoption of central clearinghouses to reduce risk in derivatives after President Barack Obama’s administration described the contracts as a “major source of contagion” in the credit crunch. The derivatives market relies on counterparties negotiating their own buy and sell orders, with no guarantees either will complete the trade.

    “In Islamic finance gambling is prohibited, but running a big un-hedged open position is gambling in my way of thinking, so I’m pleased to hear there will now be more alternatives available for reducing risk,” Deborah Schuler, Moody’s group credit officer for Asia, the Middle East and Africa, said in a phone interview from Singapore.

    Best Regards

  • With branch manager and credit officer of Bank Muamalat Malaysia Berhad, Miri, Sarawak.

    Malaysia Budget 2010: Government To Issue USD887 Million 1Malaysia Sukuk

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    KUALA LUMPUR, Oct 23 (Bernama) — The government will issue 1Malaysia sukuk totalling RM3 billion to give opportunity for the rakyat to increase their income, Prime Minister Datuk Seri Najib Tun Razak said on Friday. Najib, who is also Finance Minister said that the sukuk would be offered to all Malaysians aged 21 and above, with a minimum investment of RM1,000 and a maximum of RM50,000. “This sukuk has a maturity period of three years with a five per cent annual rate of return paid quarterly,” he said when tabling the Budget 2010 in Parliament. This will gave opportunity for individuals who were not able to subscribe the earlier, syariah-compliant savings bond totalling RM5 billion launched under the Second Stimulus Package.

    Najib said the syariah-based savings bond received overwhelming response. To ensure rapid development of financial services, particularly Islamic finance, the government has proposed that the existing tax incentives to be extended to 2015.

    These include stamp duty exemption of 20 percent on Islamic financing instruments, tax exemption on banking profits derived from overseas operations which is also extended to profits of insurance and takaful companies as well as deduction on expenditure incurred in the establishment of Islamic stock broking companies. Besides that, the Ar-Rahnu micro credit programme, which uses gold as collateral to secure financing, is expected to be expanded to all syariah-compliant financial and banking institutions such as Bank Muamalat and Bank Islam.

    BUDGET HIGHLIGHTS (Available at:

    * Malaysia economy to grow 2-3 per cent in 2010
    * Mining to grow 1.1 per cent, manufacturing sector 1.7 per cent, agriculture 2.5 per cent, construction 3.2 per cent and service 3.6 per cent.
    * Private consumption expand 2.9 per cent while private investment 3.4 per cent
    * Per capita income to increase by 2.5 per cent to RM24,661
    * TNB to spend RM5 billion to implement electricity generation, transmission and distribution projects in 2010.
    * Individual tax relief on broadband subscription fee up to RM500 a year from 2010 to 2012.
    * Public-private collaborations to include an integrated immigration, customs and quarantine complex in Bukit Kayu Hitam, construction of six UiTM campuses and the development of MATRADE centre
    * 1Malaysia Development Bhd (1MDB) will establish a corporate social responsibility fund totalling RM100 million as a start to finance community activities
    * Government to allocate RM899 million to intensify tourism industry.
    * Government to enhance tax incentives for healthcare service providers who offer services to foreign health tourists with income tax exemptions of 100 per cent on the value of increased exports from 50 per cent previously.
    * Individual taxpayers to be given tax relief on broadband subscription fee up to RM500 a year from 2010 to 2012
    * Civil servants are eligible to apply for computer loans once in every three years and up to a maximum of RM5,000 from the government once in every five years
    * Formulate Halal Act in collaboration with State Islamic Religious Councils.
    * To corporatise the Halal Industry Development Corporation as an agency under MITI
    * Intensify Halal Certification by the Islamic Development Department of Malaysia (JAKIM) by collaborating with international institutions to obtain standards certification such as HACCP ad GMP.
    * To provide RM24 million to develop halal products anti-smuggling system at three entry points and three main ports.
    * Allocate RM137 million to upgrade and improve drainage and irrigation infrastructures in paddy fields involving 180,000 farmers.
    * To provide RM70 million to build the Paya Peda Dam Project in Terengganu to increase water supply capacity to paddy irrigation scheme in Besut.
    * Allocate RM82 million to modernise aquaculture industry and conduct entrepreneurship training scheme for aquaculture breeders with focus on production of fish fry and ornamental fish.
    * “The stock market will be further liberalised to enhance its efficiency as well as attract domestic and foreign investment. For this purpose, the government will undertake the following measures: First, liberalise the commission sharing arrangements between stockbrokers and remisiers in 2 stages to encrouage retail participation in the stock market. The first stage, which takes effect immediately, allows flexible brokerage sharing at a minimum rate of 40 percent for remisiers. The commission sharing will be fully liberalised in the second stage, effective 1 January 2011.
    * Allow 100 per cent foreign equity participation in corporate finance and financial planning companies compared with the present requirement of at least 30 per cent local shareholding.
    * Islamic banking assets account for 18.8 per cent of Malaysia’s total banking assets while takaful industry assets contribute 7.7 per cent of total insurance and takaful industry assets. To ensure rapid development of financial services, particulalrly in Islmaic finance, the government proposes that the existing tax incentives be extended to 2015.
    * The government is currently at the final stage of completing the study on the implementation of goods and services tax (GST), particularly to identify the social impact of GST on the people. The purpose of this study is to ensure that if GST needs to be implemented to stabilised Government finance, it will not burden the population. “If the government implements GST, it will replace the current sales tax and service tax as well as exemption will be granted to the low income group. The GST rate to be imposed will be lower than the current sales tax and service tax rates.
    * The government needs to ensure that the Malaysian tax system is equitable and able to generate revenue for development purposes. In line with this, the government proposes that a tax of five per cent be imposed on gains from the disposal of real property from 1 January 2010.
    * Effective Jan 1 2010, government agrees to allow agencies to retain 50 per cent of rentals received while the remaining 50 per cent will be remitted to the government as revenue.
    * The Government will implement fuel subsidy management system in early 2010.
    * The Government proposes the maximum income tax rate to be further reduced to 26 per cent from 27 per cent effective from the 2010 year of assessment.
    * Maximum tax rate for cooperatives will be reduced to 26 per cent while the fixed tax rate for non-resident individuals will be cut to 26 per cent.
    * Personal tax relief will be increased to RM9,000 from RM8,000 effective from the 2010 year of assessment.
    * The Government also proposes income tax on employment income of Malaysians and foreign knowledge workers residing and working in Iskandar Malaysia be imposed at 15 per cent compared with the maximum 26 per cent for the rest of the country.
    * Government to launch a scheme in January 2010 that enables EPF contributors to utilise current and future savings in Account 2 to promote house ownership.
    * RM14.8 billion is allocated to manage, build and upgrade hospitals and clinics.
    * The Government will issue 1Malaysia Sukuk totalling RM3 billion.
    * The Government will establish the 1Malaysia Retirement Scheme to be administrated by EPF.
    * Employees EPF contributions will be raised again to 11 per cent on a voluntary basis with immediate effect. However, from Jan 1, 2011 employees’ EPF contribution will revert to 11 per cent.
    * The Government proposes existing personal tax relief of RM6,000 for EPF contributions and life insurance premiums be raised to RM7,000.
    * Government allocates RM2.3 billion to build and upgrade infrastructures in rural areas.
    * Government provides RM41 million to improve income and quality of life of the Orang Asli Community by implementing various projects.
    * Budget 2010 allocations totalled RM191.5 billion, of which RM138.3 billion is for operating expenditure and RM53.2 billion for development expenditure.
    * Federal Government revenue in 2010 to decline by 8.4 per cent to RM148.8 billion.
    * Budget deficit at 5.6 per cent of GDP compared with 7.4 per cent in 2009. – Bernama/Reuters


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  • Raja Perempuan Zainab II Hospital, Kota Bharu, Kelantan, Malaysia

    Islamic bank loses millions in New Zealand investment

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    An Islamic bank has been burned by tens of millions of dollars from its investment in one of New Zealand’s most iconic brands. It has been revealed the Bahrain-based Kuwait Finance House was owed more than $54 million when it decided to pull the plug on Canterbury Clothing’s European operations earlier this year.

    According to a report by KPMG, the bank called in the receivers in August as a result of “significant losses” by Canterbury in Europe, and after months of “extensively marketing” the business for sale. The brand was sold to giant British retail chain JD Sports shortly afterwards for $16.2 million.

    The KPMG report estimates Canterbury’s New Zealand holding company owed more than $100 million to creditors at the time of the receivership, including $54 million to the Kuwait Finance House, and $3.6 million to a New Zealand-born academic who lives in the United States, David Teece. The other $43 million was owed to a creditor identified only as “Bridge SPC Ltd”.

    The receivers have estimated nearly $16 million is likely to be recovered from other companies linked to Canterbury, and $14 million elsewhere, leaving a total deficit of around $71 million. It is likely there will be a “significant shortfall” to creditors, they say. KFH-Bahrain has had mixed success with its New Zealand investments. Its other investments here include Woosh Wireless, the Radius Health Group, and touchscreen technology company NextWindow.

    Meanwhile, a civil court case in the United States has provided further insight into the buyout 10 years ago of Canterbury. The case, in the US Tax Court, is a dispute between the Internal Revenue Service and the partners who bought clothing company Lane Walker Rudkin (LWR) from Brierley Investments (BIL) in 1999.

    According to Judge Mark Holmes, Teece and his partners bought LWR in 1999 because they saw “hidden value” in the Canterbury brand, and believed they could make it more profitable by shifting production overseas. They chose to use a New Zealand shell company because they “feared a wholly foreign deal would spur negative public reaction to the expected sale of an iconic New Zealand brand”. They also thought it would help the deal “survive New Zealand’s own legal obstacles to overseas investment in existing New Zealand businesses.”

    However, “its ride turned rough, and the shell company that Canterbury was using had to pony up more money in 2000 and 2001 to make the deal go through”. Teece and his partners originally bought one-third of LWR, with a call option over the rest.

    According to the judge, Teece complained that BIL “misrepresented LWR’s financial situation”, and BIL eventually agreed to mark down the price on its call option from $22.7 million to just $6.2 million. The judge noted that Teece and his partners “at least nosed around the possibility of doing other deals” in New Zealand, “even as the problems at LWR took ever larger amounts of the partners’ time”. Teece also hoped that by working with BIL, he would get “a foot in the door” promoting his consulting business, LECG, in New Zealand, the judge said in his findings.

    The partners sold the manufacturing assets of LWR to Christchurch couple Ken and Patricia Anderson in 2001. The business, which celebrated its centenary shortly afterwards, struggled to make a profit and was placed in receivership in May this year, owing more than $120 million, mostly to Westpac. The Serious Fraud Office has since revealed it is investigating the failure, following a complaint from LWR’s receivers. The receivers claim the company misrepresented its financial strength to Westpac, and say if Westpac had known the true position it would not have lent so much.

    Best Regards

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  • Trisakti University, Jakarta, Indonesia

    The Happy Planet Index As an Alternative to The Human Development Index

    Costa Rica is world’s greenest, happiest country
    Available at:

    Costa Rica is world’s greenest, happiest country. Latin American nation tops index ranking countries by ecological footprint and happiness of their citizens. Costa Rica is the greenest and happiest country in the world, according to a new list that ranks nations by combining measures of their ecological footprint with the happiness of their citizens.

    Britain is only halfway up the Happy Planet Index (HPI), calculated by the New Economics Foundation (NEF), in 74th place of 143 nations surveyed. The United States features in the 114th slot in the table. The top 10 is dominated by countries from Latin America, while African countries bulk out the bottom of the table.

    The HPI measures how much of the Earth’s resources nations use and how long and happy a life their citizens enjoy as a result. First calculated in 2006, the second edition adds data on almost all the world’s countries and now covers 99% of the world’s population.

    NEF says the HPI is a much better way of looking the success of countries than through standard measures of economic growth. The HPI shows, for example, that fast-growing economies such as the US, China and India were all greener and happier 20 years ago than they are today. “The HPI suggests that the path we have been following is, without exception, unable to deliver all three goals: high life satisfaction, high life expectancy and ‘one-planet living’,” says Saamah Abdallah, NEF researcher and the report’s lead author. “Instead we need a new development model that delivers good lives that don’t cost the Earth for all.”

    Costa Ricans top the list because they report the highest life satisfaction in the world, they live slightly longer than Americans, yet have an ecological footprint that is less than a quarter the size. The country only narrowly fails to achieve the goal of what NEF calls “one-planet living”: consuming its fair share of the Earth’s natural resources.

    The report says the differences between nations show that it is possible to live long, happy lives with much smaller ecological footprints than the highest-consuming nations. The new HPI also provides the first ever analysis of trends over time for what are supposedly the world’s most developed nations, the Organisation for Economic Cooperation and Development (OECD). OECD nations’ HPI scores plummeted between 1960 and the late 1970s. Although there have been some gains since then, HPI scores were still higher in 1961 than in 2005.

    Life satisfaction and life expectancy combined have increased 15% over the 45-year period for those living in the rich nations, but it has come at the cost of a 72% rise in their ecological footprint. And the three largest countries in the world – China, India and the US, which are aggressively pursuing growth-based development models – have all seen their HPI scores drop in that time.

    The highest placed western nation is the Netherlands. People there live on average over a year longer than people in the US, and have similar levels of life satisfaction – yet their per capita ecological footprint is less than half the size. The Netherlands is therefore over twice as environmentally efficient at achieving good lives as the US, Nef says. The report sets out a “Happy Planet Charter” calling for an unprecedented collective global effort to develop a “new narrative” of human progress, encourage good lives that don’t cost the earth, and to reduce consumption in the highest-consuming nations – which it says is the biggest barrier to sustainable wellbeing.

    Note: Malaysia is in 33rd place out of 143 nations surveyed. For full report, click here:

  • Happy Planet Index 2009
  • Best Regards
    Durham, UK

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  • Kyoto University, Japan

    Consultation on the legislative framework for the regulation of alternative finance investment bonds (sukuk): Summary of Responses

    The UK Consultation on Islamic Bonds
    By Puzant Merdinian, SJ Berwin – Available at:

    This article will briefly analyse the joint consultation paper published by the Financial Services Authority (FSA) and HM Treasury on 10 December 2008 on the regulatory treatment of alternative finance investment bonds (AFIBs). The AFIB concept has been chiefly identified with sukuk (Islamic bonds), but can also refer to any financial instrument with similar characteristics.

    The overarching aim of the consultation is to ensure that AFIBs are treated in a consistent manner with other financial instruments exhibiting similar economic characteristics, so as to achieve legal and regulatory certainty in classification of sukuk given their growing importance to the London capital markets. This initiative, in turn, falls within a broader UK government objective as explained in the consultation paper, consisting of:

    1. Enhancing the UK’s competitiveness in financial services by establishing the UK as a gateway for international Islamic finance.
    2. Ensuring that everybody, irrespective of their religious beliefs, has access to competitively priced financial products.

    The consultation paper is open to responses from the public for 12 weeks from the date of its publication.
    Sukuk and Current UK Legislation. According to the leading Islamic standard-setting Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) sukuk standard, sukuk (sakk in the singular) are defined as “certificates of equal value put to use as common shares and rights in tangible assets, usufructs and services or as equity in a project or investment activity.” Sukuk usually take the form of trust certificates typically issued by a special purpose vehicle (SPV) situated in a jurisdiction with a low or nil tax regime. The SPV issuer purchases Shariah-compliant assets backing the sukuk from the sukuk originator, who is also the ultimate borrower in the structure. In addition, the SPV issuer is a trustee holding the sukuk asset property on trust for the sukuk holders, who in effect end up owning undivided beneficial ownership interests in the sukuk property. Since one of the principal tenets of Islamic finance is that debts can not be traded below or above their par value, this structure makes it possible for the sukuk to be tradable (as it represents interests in assets rather than debts), which is essential for fixed income capital market instruments.

    Sukuk are one of the most prominent Islamic financial instruments. The consultation paper says “according to a recent industry survey, the UK has over £18bn worth of Shariah-compliant assets, the eighth largest amount in the world”, and adds that since July 2008 “there have been 18 AFIB issuances listed in London, valued at more £6.5bn.” Classifying Islamic financial instruments, such as sukuk, under the existing regulatory regime in the UK has posed challenges, as it is difficult to map these products completely in the various and moving parts of the existing legislation. Although AFIBs are designed to replicate the economic characteristics of conventional fixed income securities, the variety of underlying Shariah-compliant structures utilised in sukuk issuances makes it difficult, under the existing legislation, for all such instruments to be consistently classified as bonds. Therefore, a determination is made by the regulators on a case-by-case basis, with some sukuk ending up being classified as guaranteed bonds (when the sukuk is of the so-called ‘asset-based’ type) and others falling within the definition of a Collective Investment Scheme (CIS) as set out in the Financial Services and Markets Act (FSMA 2000) (when the sukuk tends to be of the so-called ‘asset-backed’ type).

    A detailed discussion as to the structural differences between ‘asset-based’ and ‘asset-backed’ types of sukuk is beyond the scope of this article. In brief, although asset-based sukuk may have underlying assets in the structure, they essentially require some form of Shariah-compliant guarantee or a purchase undertaking from the borrower to the SPV issuer. Therefore, although in theory all sukuk are documented as limited recourse obligations of the SPV issuer, in reality the investment decisions of the sukuk holders are based on the credit strength of the borrower. By contrast, in asset-backed sukuk, the risk is truly related to the performance of the underlying assets and these securities are akin to conventional asset-backed securities. As a consequence, the credit rating agencies may assess the two different types of sukuk differently, choosing, in the case of the asset-based sukuk type, to evaluate the credit strength of the ultimate obligor, rather than probability of default (as in the asset-backed sukuk), which creates additional divergence in the analysis of various sukuk structures.

    New FSA and HM Treasury Proposals

    The varying classifications of sukuk create legal uncertainty. For example, if classified as a CIS, sukuk are subject to increased regulation both at the SPV issuer level (including authorisation costs and periodic fees) and at the distribution level, since the regulatory regime for distribution of CIS is more complex than that for the distribution of bonds.

    In order to align the regulatory treatment of AFIBs with conventional fixed income securities, the FSA and HM Treasury are seeking to introduce legislative changes. The consultation paper sets out four policy options. The FSA and HM Treasury’s preferred option does not distinguish between private and public issuance of AFIBs. Under this policy option
    Option 1

    * The FSMA 2000 (Regulated Activities) Order 2001 (RAO) would be amended to include AFIBs as a specified investment on the same basis as instruments creating or acknowledging indebtedness.
    * AFIBs would be explicitly excluded from the CIS definition by amending the Schedule to the FSMA 2000 (Collective Investment Schemes) Order 2001 (CIS Order).
    * A unique definition of AFIBs would be created, consistent with relevant tax legislation (that is, Section 48A of the Finance Act 2005).

    In addition, the consultation paper proposes that all AFIBs should be subject to mandatory listing requirements on a recognised stock exchange, in order to avoid the arbitrage risk resulting from the proposed legislative changes (i.e. the risk that the exclusion of sukuk issuances from being classified as a CIS is exploited by instruments not intended to be so excluded). A draft statutory instrument making these amendments to the RAO and the CIS Order is included as Annex B to the consultation paper. The remaining three options outlined in the consultation paper, all of which are considered inferior by the FSA and HM Treasury, are as follows:

    Option 2
    This option is substantially the same as Option 1. However, it proposes that AFIBs are defined in the existing tax legislation contained in Section 48A of the Finance Act 2005. Option 2 would be inferior to Option 1 since:

    * Changes to the definition for tax purposes may have unintended consequences for the regulatory regime.
    * Some of the existing tax provisions are not relevant for regulatory purposes.
    * There may be differences in interpretation by tax and regulatory authorities leading to uncertainty for market participants.

    Option 3
    This option is also substantially the same as Option 1, except that instead of creating a new category of specified investment, AFIBs will be included in the list of instruments in an existing specified investment under Article 77 (instruments creating or acknowledging indebtedness) and Article 78 (government and public securities) of the RAO. Option 3 would also be inferior to Option 1 since it would distinguish between AFIBs issued by the private and public sector, which is not believed to be the government’s intention. The implementation of Option 3 would also result in the creation of a lengthy article covering a number of different instruments or in the need to define AFIBs in a separate section of the RAO as a result of the fact that Article 77 of the RAO only defines some instruments creating or acknowledging indebtedness.

    Option 4
    Do nothing. As already discussed, this would mean that the regulatory treatment of sukuk would be based on the interpretation of existing regulations, which market participants are concerned leads to regulatory and legal uncertainty.

    Cost Benefit Analysis of New Proposals

    The consultation paper explains that it would be necessary for it to perform a cost benefit analysis when implementing its preferred legislation contained in Option 1, in light of: the increased costs associated with upgrading the FSA technology platforms to accommodate AFIBs; and costs associated with the proposed mandatory listing of AFIBs. By way of example, the consultation paper says the cost of implementing the Markets in Financial Instruments Directive (MiFID), which according to the government was a much larger exercise, was £1m. Therefore, although it is possible that the above described additional costs of implementing Option 1 may be material, the benefit from increased sukuk issuance and tradability is likely to outweigh any such cost increases.

    If Option 1 is implemented, the consultation paper states that AFIB issues will be subject to marginally higher one-off costs resulting from them being listed as debt securities (approximately £10,000 per issuance, according to the consultation paper), but marginally lower on-going costs (approximately £5,000 per issuance per year). Further, the consultation paper provides an estimate, by way of example only, according to which, in present value terms, for an AFIB of duration of five years or less total cost savings for an issuance are estimated to be around £35,000 per annum (as set out in the FSA’s Collective Investment Schemes Handbook). The consultation concludes that implementing Option 1 would lead to cost savings in the long run.

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  • Consultation on the legislative framework for regulation of alternative finance investment bonds (sukuk): 10.12.2008
  • Summary of Responses: 14.10.09
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  • P1030281
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