Islamic financing rebate (Ibra’) is mandatory

Bank Negara: Islamic financing rebate is mandatory
June 25, 2010 Available at:

KUALA LUMPUR, June 25 — Bank Negara has ordered sharia banks to give borrowers a rebate for early settlement under new rules designed to prevent legal disputes and restore confidence in Islamic financing contracts.

The ruling from Bank Negara’s sharia advisers will standardise the use of rebate, or ibrar, in bai bithaman ajil and murabaha financing contracts which are widely used in Malaysia’s $95 billion Islamic finance market.

Unlike conventional loans which levy interest on the accrued portion upon default, Islamic contracts are often asset sales where banks are entitled to the entire sum based on the whole tenure of the contract, regardless of when default occurs.

In practice, Islamic banks can grant a rebate to waive their right to the unaccrued sum but such discounts are discretionary, resulting in legal disputes. If a rebate is not given, sharia financing contracts can be more costly than conventional loans.

“In line with the need to safeguard maslahah (public interest) and to ensure justice to the financiers and customers, Islamic banking institutions are obliged to grant ibrar to customers for early settlement of financing based on buy and sell contracts,” the ruling said.

The ruling, effective June 7, requires the right of rebate to be specified in contracts. The method of computing the rebate will be determined by the central bank.

Ibrar is derived from the traditional Islamic notion of loans where charitable financing is extended to the poor and the lender writes off the debt if the borrower can’t afford to repay.

Some practitioners said the ruling would resolve uncertainties relating to the use of ibrar but was difficult to reconcile with the sharia’s tenets.

“It throws into doubt the legal principle which has traditionally been that ibrar cannot be compelled because it is at the discretion of the creditor,” said Mohamad Illiayas, an Islamic banking lawyer in Kuala Lumpur.

“In murabaha, bai bithaman ajil and bai ina contracts the price is one of five critical elements, the absence of which, or uncertainty or ambiguity with regard to any of the five elements would render a contract void.”
Figures on the value of bai bithaman contracts are hard to come by but Malayan Banking had earlier estimated that these contracts, along with bai inah and bai al dayn (debt trading contract) account for over 80 percent of the Islamic banking portfolio in Malaysia.

Islamic banking assets in Malaysia, which has the world’s largest bond market, totalled about US$95 billion (RM309 billion) or 19.6 per cent of total banking system assets as at December 2009, according to central bank data. Figures were not available on the number of Islamic financing defaults in Malaysia.

Best Regards

  • Burj Arab, Dubai

    Can we survive without subscribing traditional banking system?

    Salam to all,

    I wish to highlight a possible good area for research pertaining to unbanked and underbanked individuals. According to the Federal Reserve Bank there are 30 Million Unbanked or Underbanked consumers in the United States. Unbanked individuals refer to those who do not have saving or current account while underbanked consumers to those who have bank’s account but use non-financial institutions for their financial services. There are five factors that influence the unbanked and underbanked individuals to avoid subscribing traditional banking facilities and services:-

    1. living paycheck-to-paycheck due to limited and unstable income;
    2. Negative experience with the existing bank;
    3. Consumer misunderstanding and misinformation;
    4. Retailers are often easier to use than banks for use of payment service; and
    5. Need for physical control of and immediate access to money.

    Unlike most of us, any potential of credit default, significant fees and penalties charges are no more relevant to the underbanked and unbanked consumers. For full article, click here: A Study of the Unbanked and Underbanked Consumer in the Tenth Federal Reserve District

    Best Regards

  • Brussels, Belgium

    Why Britain’s Islamic Finance Industry Flopped

    Why Britain’s Islamic Finance Industry Flopped

    By Junaid Bhatti Available at:

    Full disclosure time: I’ve been involved with Britain’s Islamic finance industry for most of the last decade. Indeed, I was part of the small team that set up the first Shariah-compliant FSA-approved bank in the UK, Islamic Bank of Britain (IBB). As an unashamed enthusiast for the cause, I extolled the virtues of IBB with great vigour for more than four years. After I moved on, I went on to be involved with several other big-name Islamic finance endeavours in the UK and promoted their merits with gusto.

    So, as we now approach the sixth anniversary of IBB’s launch, I’m sad to finally have to admit that Islamic finance in the UK has been a huge flop. IBB may still be limping on as probably the last bastion of the cause, but it’s difficult to imagine it holding out for much longer. It’s a dramatic turnaround from those heady summer days of 2004 when we received the news that the government’s regulator, the Financial Services Authority, had agreed to provide us with a banking licence. IBB was the first entirely new UK bank for almost a century! We imagined we’d be overwhelmed by customers and enjoy accelerating growth for years to come. And I can’t begin to describe my pride when I became first official customer of IBB and opened account number X0000001 – an account I still hold today.

    Flash forward five years since its inception and IBB has never made a profit. Not once, not ever. Rather, the company has reported combined losses of almost £45 million pounds, and its shares have lost more than 95% of their value since the highs enjoyed during the early years. But at least it’s fared better than many of its contemporaries in the industry. So what about the rest of the UK’s Islamic finance providers?

    Well, the UK’s first ‘Halal’ insurance firm, Salaam Insurance, spectacularly shut up shop in 2009 after less than 18 months of trading. Lloyds TSB, which made a half-hearted stab at Shariah-compliant products in 2004, doesn’t seem to have promoted its offering for years. alburaq – owned by Arab Banking Corporation – has effectively withdrawn its savings and mortgage products from the mass market and now serves only the wealthiest of customers. Even HSBC Amanah, probably the most credible and efficient provider of Halal banking in the UK, has dramatically reduced its dedicated Islamic banking staff in Britain, and its marketing volume has been turned way down.

    Clearly things haven’t gone well for the UK’s fledgling Islamic finance market since the promise of the early noughties. Before analysing why things went wrong, it’s worth going back to the beginning to examine the landscape before that early flourishing at the start of the new millennium.

    Origins of the Industry

    The aim of almost every Islamic bank has been to offer Shariah-compliant alternatives to conventional banking services. In practice, this has meant designing products so that, on the surface at least, they look no different to the accounts and loans you get through conventional banks. The customer notices no difference, as the bank does all the hard work to ensure that the contract and its operation are in compliance with the Shariah.

    The main aims of Islamic finance are to avoid Riba (usury) and to ensure that money is not utilised to support unethical businesses, such as those involved in booze, pornography and gambling. Businesses that most conventional banks would (and do) whole-heartedly finance if they believe there’s profit to be made. However, whatever the ethical merits of Shariah banking, no-one could argue that Halal banking provides the best customer value from a financial perspective.

    Islamic financial principles go back 1400 years, and were implemented by the Prophet Muhammad (pbuh) and his companions in their daily business dealings. Islamic banking, in its modern sense, is only about 50 years old. Unsurprisingly, it was an Arab community that revived these centuries-old financial principles. It all began in 1960s Egypt as a community banking movement designed to encourage rural farming communities to save and earn a Halal income.

    However, it’s only been in the last two decades that the Islamic finance industry, buoyed by the increasing value of the Middle-Eastern oil industry, has taken off in a big way. There are now hundreds of Islamic finance companies around the Muslim world, and the industry has demonstrated consistent annual growth of between 15%-20%. So it was only a matter of time before venture capitalists in the West decided to throw their weight behind this potential cash cow.

    British Islamic Banking

    Few realise that the people driving the establishment of Islamic Bank of Britain and Salaam Insurance were not Muslims. Rather it was European entrepreneurs, attempting to mimic the financial success of Halal finance companies in the Middle East, who got the ball rolling for these flagship Shariah-compliant corporations. The flowering of Britain’s Islamic banking movement had little to do with the Koran and much more to do with capital gains.

    In 2004, Islamic Bank of Britain was granted a banking licence and became the first government-authorised Halal bank in the western world. However, it wasn’t the first to introduce Islamic finance to the UK. Since the early 1990s several conventional banks have offered Islamic Mortgages to their British customers, including HSBC’s Amanah, alburaq and Ahli United Bank. These providers are still around, but they haven’t really evolved much since inception, and now limit themselves to offering Islamic Mortgages for only the wealthiest clients.

    Over the years UK Islamic finance has offered its customers Savings and Current accounts for individuals, businesses, Masjids and Madrassahs; Islamic “Mortgages”; Commercial Property Finance, Home and Motor “Insurance” and a Halal alternative to conventional loans (dubbed “Personal Finance”). Yet, as the decade closed, barely 60,000 customers had chosen to join the Halal finance movement, representing about 4% of the British Muslim community.

    That’s a woeful market share for the industry whatever way you try and spin it – and Britain’s Islamic bankers are desperately trying to spin it at every opportunity. However, it’s clear that all their business plans have failed spectacularly and that the strategies implemented by Islamic finance providers have been faulty from the start.

    Where did it all go wrong?

    In the mid-noughties, Islamic Finance in the UK seemed to be going from strength to strength. During the last decade the British government authorised the creation of six stand-alone Islamic finance firms. In addition, many conventional banks started offering Islamic products and services. However, public awareness and understanding of the industry and its products remained limited and muddled. Furthermore, right-wing media began encouraging growing animosity towards Halal finance providers, and their products and services, as part of a wider tabloid crusade against all things Islamic.

    However, the most significant factor stunting the growth of the industry has been the ineffective way in which Islamic finance has been marketed to the public. (Veterans of the industry can stop reading now, as I’ve been banging on about this for longer than I can remember, and you’re probably tired of hearing it.)

    Rational vs. Emotional Consumer

    For many years now Halal finance has been sold as the logical choice for the British Muslim. Islamic bankers have explained at great length how its processes and procedures are Shariah-compliant. How an eminent committee of Imams – paid for by the bank – can confirm that it’s Shariah-compliant. And they’ll quote numerous holy texts to support their assertion that banking with them will help you avoid the Devil’s pitchfork after you die.

    However, that message has limited appeal because when it comes to finance (and in many other areas of life) human beings make emotional choices as well as – and sometimes instead of – rational ones. The only way that Islamic banking will become successful is if the people marketing Halal finance appeal to the public in a way that is emotionally compelling.

    After more than a decade, Islamic finance has attracted a tiny proportion of a potential 1.5 million Muslim adults in the UK. You’d think that, by now, the Islamic finance providers would have realised that boring technical explanations and emotional blackmail may not be the most effective way to win customers.

    In fact, it’s the complete opposite of how financial services are marketed by everybody else. If you look at the conventional banking world, the majority of their adverts focus on how their bank offers more convenience and/or better value than their rivals. They usually claim to have the friendliest staff around, and some even go so far as to try and turn themselves into a premium fashion brand – as is the case with Amex Platinum or the NatWest Black.

    And it works. It works because customers are driven by their whims, by their emotions and by their vanity. So the question any experienced marketer would ask the Islamic finance industry is this:

    “If you were the average customer would you rather join a bank that promises to save your eternal soul thanks to the operational hoops it jumps through so it can conform to Islamic law? Or a bank that promises to be friendly, convenient, good value for money and also offers you a credit card that will make you the envy of your friends and family?”

    “But we’re not appealing to the average customer,” they’ll reply, “We’re appealing to Muslims.”

    It demonstrates how disconnected the industry’s marketers are from the hearts and minds of their target audience. There exists a myth in the minds of Islamic bankers, and the investors who fund their endeavours, that British Muslims are exceptionally devout and will always choose the ‘Halal’ option if it’s offered to them.

    It’s a belief built upon an abundance of solid market research, conducted by independent (i.e. non-Muslim) research firms. The only problem being that the researchers don’t appreciate one important fact. When it comes to questions of religion, most Muslims will lie and pretend to be far more devout than they are in reality. It’s only natural when you are brought up in a community full of people who are judgemental about everyone’s sins but their own. That isn’t likely to come out in the research, however.

    Islamic bankers need to ask themselves: if Muslims are as concerned with saving their eternal soul as the research suggests, then why is it that the Mosques are empty for most of the week, for most of the year? The number of people attending the obligatory communal dawn prayer can be counted on one hand (The exception being the month of Ramadan, where everyone suddenly seems to find rediscover their spirituality.) Clearly, most British Muslims are not puritanical and devout. So it hardly makes sense to appeal to a sense of religious devotion that isn’t there.

    Islamic banks in the West need to face the reality that Muslim customers are not much different from mainstream customers. It seems counter-intuitive to sell a religious, ethical or moral choice by appealing to people’s ignoble instincts. But it’s a paradigm shift the industry needs to make, and they better make it soon before it’s too late. Because the reality is that the “devout Muslim” segment is nowhere near big enough to support the exceptional operational costs involved in running a bank or insurance firm.

    If Islamic Bank of Britain, and the UK Islamic finance industry in general, hopes to survive – and there is some doubt as to whether it can – then it needs to understand the psychology of the customer, which is something that conventional banks have already perfected. Only then will there be hope that our children will still have access to the Islamic finance options we enjoy today.

    Junaid Bhatti is Chief Editor of and a Fellow of the Institute of Islamic Banking and Insurance. He is an activist for the Conservative party and an e-strategist for Westminster Conservatives.

    Best Regards

  • Milan, Italy

    HSBC, Lloyds Banking Group: Defeat on Islamic banking

    HSBC, Lloyds Banking Group: Defeat on Islamic banking

    By Will Peters Available at:

    Lloyds Banking Group accused of ‘half hearted stab’ at Islamic finance provision. Lloyds Banking Group and HSBC Holdings have reportedly had to scale back their march into Islamic finance.

    A report in this morning’s edition of the Times says Lloyds Banking and HSBC have failed to make much of an impact with their Sharia-compliant products which were set up to appeal to the UKs 2 million strong Muslim population.

    The Times quotes Junaid Bhatti, a founder of the Islamic Bank of Britain, as saying HSBC Holdings and Lloyds Banking Group were seen as having made the most effort in trying to corner this niche market. “Lloyds, which made a half-hearted stab at Sharia-compliant products in 2004, doesn’t seam to have promoted its offering for years,” says Bhatti.

    Lloyds Banking Group to acknowledge that while it no longer markets its Islamic products they are offered in detail on the Lloyds website.

    HSBC Holdings says its Sharia accounts were growing 15% a year. Lloyds Banking had no figures to divulge on the issue.

    Mohammad Qayyum, the director general of the Institute of Islamic Banking and Insurance in the UK said that the main problem the banks face is pricing – the products are too expensive – and standard alternatives are a much more attractive option.

    However the Times reports that there could be legislative changes on the cards that will allow the likes of Lloyds Banking Group and HSBC Holdings to offer Islamic finance at reduced prices. The Treasury has made changes in the tax law to accommodate Sharia Qayyum says, The FSA (soon to be redundant) is also reportedly consulting on a new framework for issuance and regulation of sukuk bonds.


  • The Rock of Gibraltar “Jabal Tariq”.

    Islamic banking needs to focus on innovative products: Dr Zamir Iqbal

    Islamic banking needs to focus on innovative products: Dr Zamir Iqbal

    Available at:\16\story_16-6-2010_pg5_9

    KARACHI: Dr Zamir Iqbal, a renowned scholar on Islamic Finance, has stressed the need for developing mechanism to enhance liquidity and innovative Islamic financial products in order to cater to the growing demand of Islamic Finance in the world.

    Delivering a talk on ‘What Needs to be Done for Islamic Finance to Succeed’ at the State Bank of Pakistan, Karachi on Tuesday, Dr Iqbal observed that current business model of the Islamic banking industry needs to be reviewed to cater to the demand for more sophisticated products, which is likely to grow rapidly.

    He said that it would be better for the Islamic banking industry to innovate rather than replicate the conventional banking products and noted that no or limited collective efforts have been made so far to develop such products.

    Highlighting some factors for sustainable growth of Islamic Finance, Dr Iqbal emphasised the need for consolidation of Islamic banking; expanding the scope, services and products, strengthening the risk management systems and reducing reliance on commodity/fixed income-like products.

    Referring to legal and regulatory issues, Dr Iqbal asserted that there is a need to improve corporate and Shariah governance, and supervision & monitoring systems. He also stressed the need to promote risk-sharing through participatory instruments like Musharaka and Mudaraba.

    Dr Iqbal said that over the years Islamic Finance has grown into a global phenomenon and Islamic Finance market in the world is estimated at $1 trillion. “Islamic Finance is not just a phenomenon restricted to only Muslim countries,” he said and added that there is a growing recognition and acceptance of Islamic Finance in the world.

    He said that several factors have contributed towards global acceptance of Islamic finance, which include increased demand for Shariah-compliant products fuelled by increased liquidity in the market, successful track record of Shariah-compliant financial intermediation, commitment by Islamic Development Bank, AAOIFI and IFSB to promote Islamic finance industry, etc.

    Dr Iqbal said the development of Sukuk also had a positive impact on the development of Islamic finance. Director Islamic Banking Department, State Bank of Pakistan, Saleemullah, who also spoke on the occasion, highlighted the achievements of Dr Zamir Iqbal in the field of Islamic Finance.

    Best Regard

  • Dubai Dessert, UAE