The Politic of Islamic Finance: Reappraisal

KE MANA ARAH TUJU KEWANGAN ISLAM?

Zulkifli Hasan

Pendahuluan

Persatuan Pengguna Islam Malaysia telah mengejutkan masyarakat Malaysia khususnya kepada industri kewangan Islam dengan laporan telah menerima lebih 4000 aduan sejak 2003 hingga 2012 mengenai ketidakpuashatian pelanggan dengan sistem perbankan Islam. Kenyataan PPIM yang sangat keras dengan menuduh bank-bank Islam menggunakan nama Islam untuk mencapai keuntungan melampau ini tidak boleh dipandang enteng dan remeh oleh pengamal kewangan Islam dan pihak berautoriti seperti Bank Negara Malaysia serta institusi berkaitan seperti Pertubuhan Perbankan Islam Malaysia dan Pertubuhan Penasihat Syariah Malaysia.

Berdasarkan kepada perkara di atas, penulis akan cuba secara ringkas untuk menelusuri dan menilai semula perkembangan dan amalan kewangan Islam di Malaysia setelah ianya dilaksanakan lebih 37 tahun yang lalu. Artikel ini akan meninjau dan mendedahkan kritikan-kritikan yang berterusan mengenai pelaksanaan kewangan Islam yang dikatakan semakin hari semakin jauh daripada aspirasi keadilan ekonomi dan sosial yang digariskan oleh teras dan fundamental ekonomi Islam. Penulisan ini bukan bertujuan untuk menjatuhkan dan mencemarkan perkembangan kewangan Islam tetapi sekadar peringatan dan rasa keprihatinan terhadap peri pentingnya industri ini untuk menilai kembali arah tuju pelaksanaan dan amalannya.

Kritikan Terhadap Kewangan Islam

Semasa kunjungan Profesor Yusuf Qaradawi ke Malaysia bersempena menerima Anugerah Tokoh Maal Hijrah pada 2009, beliau secara peribadi ada menyatakan kebimbangan dan keperihatinan terhadap pelaksanaan sistem kewangan Islam. Terdapat beberapa aspek yang perlu dinilai semula demi memastikan hala tuju kewangan Islam ini benar-benar dapat menyumbang kepada pembangunan sosio ekonomi masyarakat dan memberikan keadilan sosial. Sehubungan dengan perkara ini, penulis akan membincangkan secara ringkas tentang kritikan-kritikan yang telah diutarakan terhadap pelaksanaan dan amalan kewangan Islam. Kritikan-kritikan ini adalah sangat bermanfaat untuk diketengahkan kerana ianya boleh dijadikan sebagai kayu ukur dan asas kepada penambahbaikan serta penentu arah tuju industri kewangan Islam. Setelah meneliti dan membuat sorotan literatur dalam topik ini, kritikan terhadap kewangan Islam secara umumnya dapat dibahagikan kepada beberapa aspek iaitu epistemologi, ’model’ atau pendekatan, produk, metodologi, ’governance’ atau tadbir urus dan pembangunan sosio-ekonomi.

Perkara yang kurang mendapat perhatian dalam ’discourse’ atau pentas perbincangan mengenai kewangan Islam ialah aspek epistemologinya. Tatkala banyak literatur atau rujukan dan bahan ilmiah mengenai segenap aspek kewangan Islam, didapati amat sedikit perbincangan secara serius dari aspek epistemologi atau falsafahnya. Umumnya, pengamal kewangan Islam termasuk ahli akademik tidak ramai yang memberikan perhatian dan mempunyai kefahaman yang mendalam dalam aspek epistemologi ini. Implikasinya ialah didapati pelaksanaan kewangan Islam pada hari ini dilihat lebih cenderung ke arah mempunyai satu dimensi utiliti yang menjadi teras ekonomi kapitalis iaitu memaksimakan utiliti individual ’homo economicus’.

Berbanding sistem kewangan konvensional yang berepistemologikan ’secular approach’ (pendekatan sekular) dan ’humanistic approach’ (pendekatan kemanusiaan), epistemologi Tauhid ’Faith-based epistemologi’ merupakan asas sistem kewangan Islam. Epistemologi Tauhid yang menjadi teras dan falsafah prinsip-prinsip muamalat Islam sepatutnya menjadi aspirasi pengamal kewangan Islam untuk meletakkan maqasid syariah pertimbangan utama dalam setiap perancangan yang hendak dilaksanakan. Dalam hal ini, Profesor Masudul Alam Chowdhury menyatakan bahawa kewangan Islam hanya akan beroperasi secara efisyen di dalam ruang lingkup epistemologi Tauhid yang menuntut semua pengamal kewangan Islam bertindak sebagai khalifah yang mempunyai ’taklif’ atau tanggungjawab kepada semua manusia di muka bumi ini. Epistemologi Tauhid ini adalah sangat unik dan menyeluruh di mana ianya menekankan dua dimensi utiliti iaitu kepentingan untuk mendapatkan kejayaan di dunia dan akhirat.

Kritikan terhadap kewangan Islam dari sudut ’theoretical approach’ atau pendekatan teoritikal merujuk kepada model pelaksanaan dan amalannya. Pada hakikatnya, cendiakawan ekonomi Islam seperti Professor Umer Chapra dan Professor Nejatullah Siddiqi yang dianggap sebagai ’founding father’ kepada kewangan Islam mengusulkan pendekatan kewangan Islam dalam kerangka ’ekuiti’ atau perkongsian iaitu ’two-tier mudharabah’. Mufti Taqi Usmani bersependapat dalam hal ini dan telah menyatakan pandangan beliau bahawa pendekatan dalam kerangka ’ekuiti’ ini mempunyai ciri-ciri yang bertepatan dengan ruh keadilan Islam dan sepatutnya dijadikan sebagai kerangka pelaksanaan kewangan Islam. Namun demikian, amalan kewangan Islam yang terdapat pada hari ini adalah sebaliknya. Apa yang berlaku ialah amalan kewangan Islam dikatakan telah jauh meninggalkan aspirasi ini di mana kerangka ’debt-based’ atau sistem berasaskan hutang menjadi dominan di pasaran dan didapati hingga kini aspek ’ekuiti’ yang diaspirasikan oleh pencetus idea ekonomi Islam dalam konteks dunia moden masakini telah diabaikan. Menyentuh soal ini, Profesor Timur Kuran dan Profesor Mahmud El Gamal telah mengkritik keras pelaksanaan kewangan Islam dengan mengatakan ianya bersifat manipulatif.

Perkembangan kewangan Islam yang pesat sekitar 15-20 peratus setahun menyaksikan pelbagai inovasi produk perbankan yang kini terdapat di pasaran. Dalam masa yang sama, kritikan terhadap produk dan perkhidmatan kewangan Islam jugalah yang paling banyak menerima kritikan daripada pelbagai pihak dari segenap sudut. Di antara kritikan yang popular dan semakin menampakkan kebenarannya ialah produk dan perkhidmatan kewangan Islam ini semakin hari semakin menyamai ciri-ciri dan aplikasi apa yang ditawarkan oleh perbankan konvensional. Produk yang paling mudah untuk dijadikan dijadikan contoh ialah produk pembiayaan perumahan. Sejak pengenalan kewangan Islam hingga sekarang, pembiayaan perumahan yang berprinsipkan ’Bay al Inah’ yang dianggap kontroversi dan tidak diterima oleh ramai fuqaha tradisional dan kontemporari masih lagi menjadi ditawarkan di pasaran. Bahkan jika sebelum ini, kadar keuntungannya adalah tetap dan terdapat sedikit perbezaan dengan pinjaman konvensional, tetapi kini terdapat kadar apungan atau ’floating rate’ yang sememangnya hampir menyamai pinjaman yang ditawarkan oleh perbankan konvensional.

Situasi yang sama berlaku pada produk berasaskan ’Tawarruq’. Pada asasnya ’Tawarruq’ merupakan alternatif kepada produk berasaskan ’Bay al Inah’ terutamanya bagi tujuan kecairan atau ’liquidity’. Walaubagaimanapun, apa yang berlaku ialah ’Tawarruq’ kini digunakan untuk tujuan lain dan bukan sahaja untuk tujuan kecairan. ’Tawarruq’ kini digunakan untuk penjanaan keuntungan melalui pembiayaan termasuk juga bagi produk deposit berstruktur. Produk deposit berasaskan ’Tawarruq’ ini bukan sahaja boleh dianggap sebagai ’hiyal’ atau helah untuk menghalalkan sesuatu tetapi ianya juga menjadi titik tolak ’convergence’ atau penyatuan dengan ciri-ciri produk konvensional. Begitu juga dengan produk pasaran modal Islam seperti ’sukuk’. Sukuk yang berasaskan prinsip ’Musyarakah’ iaitu berdasarkan risiko perkongsian untung rugi pada umumnya bertepatan dengan konsep muamalat Islam. Bagi tujuan ’credit rating’ dan menjamin kebolehpasaran, sukuk Musyarakah akhirnya distrukturkan dengan ’wa’d mulzim’ atau ’purchase undertaking’ yang akhirnya menjadikan produk ini mempunyai ciri yang hampir sama dengan bon konvensional malahan amat sukar untuk dibezakan. Situasi yang sama akan berlaku sekiranya produk Derivatif Islam juga dibenarkan secara berleluasa tanpa ada garis panduan yang sewajarnya. Jika produk sebegini menjadi dominan di pasaran tanpa ada kawalan, pasti ianya akan memadam dan menghilangkan perbezaan di antara sistem kewangan Islam dan konvensional malahan mendedahkan industri kewangan Islam dengan pelbagai risiko yang boleh mengganggu kestabilan industri ini.

Pelaksanaan kewangan Islam juga mengalami permasalahan dari aspek metodologi. Metodologi yang digunakan untuk menyelesaikan isu kewangan Islam termasuk meluluskan produk dan perkhidmatan adalah bersifat tidak menyeluruh dan ada yang mengatakan ianya tidak sesuai. Profesor Al Attas umpamanya mengatakan bahawa kewangan Islam menggunakan metodologi yang tidak autentik iaitu pendekatan dalam kerangka ’keynesian economic dan classical economic’. Dalam hal yang sama, Professor Abdul Hamid Abu Sulayman termasuk Profesor Aslam Haneef telah mengkritik metodologi yang digunakan dalam kewangan Islam iaitu menggunakan pendekatan sains ’fiqh’ atau ’usul fiqh’ menerusi resolusi penasihat syariah untuk menyelesaikan permasalahan syariah dan isu lain seperti implikasi ekonomi dan kewangan. Sepatutnya metodologi ini dinilai semula dengan mengambil kira metodologi atau kaedah yang lain secara intensif yang boleh digunakan dalam kewangan Islam. Oleh kerana keputusan yang dibuat oleh pengamal kewangan Islam bukan sahaja melibatkan hukum bahkan implikasi ekonomi, sosial dan lain-lain, sepatutnya metodologi yang digunakan juga adalah bersifat menyeluruh. Di antara kesan metodologi yang bersifat eksklusif digunakan oleh kewangan Islam pada hari ini ialah kebanyakan produk dan perkhidmatan kewangan Islam yang ditawarkan adalah hanya bersifat halal dan patuh syariah tetapi tidak memberikan kesan yang signifikan kepada sosio-ekonomi masyarakat.

Kritikan terhadap aspek ’governan’ atau tadbirurus juga perlu diberikan perhatian. Tadbirurus institusi kewangan Islam didapati mengutamakan ’shareholder’s value’ atau nilai pemegang saham. Orientasi ’Shareholder’s value’ ini menjadikan institusi kewangan Islam ini cenderung kepada misi dan visi untuk memaksimakan keuntungan pemegang saham. Menyentuh aspek ini, Profesor Abas Mirakhor mengesyorkan institusi kewangan Islam untuk menjadikan pendekatan ’stakeholder’s value’ sebagai model tadbir urus. Model ’stakeholder’s value’ ini mengambil kira kepentingan dan kebajikan semua pihak yang terlibat dalam sesebuah institusi sama ada secara langsung atau tidak langsung termasuk pemegang saham, lembaga pengarah, pengurusan, pekerja, pelanggan, pihak berautoriti, masyarakat umum dan alam persekitaran. Walaupun, asas tadbirurus bermodelkan ’stakeholder’s value’ ini dilihat amat bersesuaian dengan aspirasi kewangan Islam, masih terdapat banyak institusi kewangan Islam yang berpegang kepada pendekatan ’shareholder’s value’.

Dengan pelbagai krisis ekonomi dan kewangan yang melanda dunia, kewangan Islam dilihat mampu untuk menawarkan sistem alternatif yang adil kepada semua. Dalam aspek ini, kewangan Islam diharapkan akan dapat membantu meningkatkan taraf sosio-ekonomi masyarakat terutama kepada golongan yang sangat memerlukan. Namun demikian, sekiranya ditinjau kepada amalan kewangan Islam ada pada hari ini, pelaksanaannya tidak memberikan kesan yang signifikan kepada pembangunan sosio-ekonomi masyarakat. Profesor Mehmet Asutay misalnya telah mengkritik kewangan Islam yang dilihat gagal untuk memberikan sumbangan dan impak yang positif kepada keadaan sosio-ekonomi masyarakat dan pembangunan. Beliau mengatakan bahawa industri kewangan Islam hanya berperanan sebagai aktor dan berkhidmat secara berlebihan untuk pasaran dan tidak memberikan sumbangan sewajarnya untuk pembangunan sosio-ekonomi masyarakat. Bahkan ada juga menyuarakan pandangan bahawa sehingga kini, kewangan Islam dilihat lebih bersifat ’elitis’ dengan memberikan keutamaan kepada projek-projek komersil berbanding pembiayaan dalam sektor kecil dan sederhana dan ’micro finance atau kewangan mikro. Berdasarkan fakta dan informasi yang dikumpulkan, beliau mendapati kewangan Islam tidak sensitif dan sangat kurang memberikan penekanan kepada pembangunan sosio-ekonomi masyarakat bahkan kadang kala terlalu memfokuskan kepada projek komersil yang menguntungkan segelintir individu.

Kesimpulan

Berdasarkan analisis ringkas di atas, dapatlah disimpulkan bahawa pelaksanaan kewangan Islam telah mendapat pelbagai kritikan daripada pelbagai pihak. Kritikan ini adalah bersifat menyeluruh dan ini termasuk aspek espitemologi, pendekatan, produk, metodologi, tadbir urus dan pembangunan sosio-ekonomi. Kritikan ini ada yang bersifat andaian, persepsi dan ada juga yang disokong dengan fakta yang sahih. Walau apapun, kritikan ini harus dilihat sebagai sesuatu yang boleh dijadikan asas untuk menentukan arah tuju industri kewangan Islam. Pengamal kewangan Islam sepatutnya menerima dengan hati terbuka kritikan ini dan semestinya perlu menilai semula strategi, perancangan dan amalan sedia ada. Kritikan-kritikan ini juga membuktikan bahawa trend industri kewangan Islam ini boleh dikatakan secara umumnya semakin hari semakin menuju ke arah ’convergence’ atau penyatuan dengan sistem konvensional dari pelbagai aspek. Hingga satu hari nanti kemungkinan akan berlaku tiada lagi perbezaan yang nyata di antara sistem ekonomi Islam dan sistem berasaskan riba yang menjadi teras perbankan konvensional selama ini. Penulis merasakan, sudah sampai masanya semua pihak yang terlibat dalam kewangan Islam sama ada secara langsung atau tidak langsung untuk secara serius mengkaji, menilai, bermuhasabah, menganalisa dan mentransformasi amalan dan pelaksanaan kewangan Islam sedia ada agar ianya terus subur dan segar demi kemaslahatan umat Islam khususnya dan masyarakat dunia umumnya. Usaha-usaha ke arah memurnikan hala tuju kewangan Islam bukan sahaja perlu datang dari pengamal kewangan Islam dan pihak berautoriti tetapi sokongan penuh oleh masyarakat juga adalah sangat diperlukan.

Regards
Zulkifli Hasan

Duomo, Milan, Italy

Political divisions slow Islamic Finance in Egypt

Political divisions slow Islamic Finance in Egypt

Available at: http://www.kippreport.com/2012/04/political-divisions-slow-islamic-finance-in-egypt/

As one of Egypt’s biggest commercial banks, AlexBank prepares to launch Islamic financial services next April, the country’s political divisions have left the regulatory environment unclear and unsettled.

Last year’s ousting of president Hosni Mubarak, whose regime neglected and discouraged Islamic finance, has cleared the way for rapid growth of Islamic finance in Egypt. But growth requires a regulatory framework, one that is far from being in place. As Egypt’s transition to democracy distracts the government and political parties bicker over what form of Islamic jurisprudence the country should adopt, basic decisions trail behind.

The country of over 80 million people is a potentially attractive market for Islamic finance; over two decades ago, Egypt was a pioneer in developing the industry, before a scandal erupted over money management firms that touted Islamic investments at returns above prevailing interest rates.

Egypt currently has 14 Islamic banking licenses. Operators include three full-fledged Islamic banks such as Faisal Islamic Bank of Egypt, and several which use Islamic windows, including National Bank of Egypt and Ahli United Bank. Some Islamic mutual funds were launched last year by Al Watany Bank of Egypt, Naeem Financial and Banque du Caire, but only eight of 72 mutual fund products available in the market are Islamic. AlexBank intends to use ten of its 200 branches to offer Islamic consumer banking products across the country, says Bassel Rahmy, head of retail banking. United Bank, majority owned by the central bank, has announced its intention to convert to Islamic operations by the end of 2012.

But, the industry’s roughly 200 branches and 120 billion Egyptian pounds ($19.9 billion) of assets are dwarfed by Egypt’s conventional banking industry; total assets of the entire banking sector are about 1.3 trillion pounds, the latest central bank data show. In comparison, Islamic banks account for over a quarter of assets in the Gulf’s commercial banking market, according to an estimate by consultants Ernst & Young.

Expansion of the industry will need a legal framework to attract investors and limit risks to the banking financial system – but progress is slow. AlexBank’s Rahmy says that commercial bankers had been discussing the subject with the central bank governor, who has indicated regulations would be prepared this year. But there have been no clear public statements on the direction of policy, and senior EFSA officials did not appear at an Islamic finance seminar held in Cairo last month. Although political parties have submitted proposals for regulations, officials from the parties decline to discuss them openly.

One key issue that regulators will need to clarify is whether banks can get involved in Islamic finance through in-house windows or whether they must establish separate subsidiaries. The decision will affect banks’ accounting treatment of their operations. Islamic windows, used by global institutions such as Standard Chartered and HSBC, let conventional banks offer products without setting up expensive standalone operations. The banks have internal controls to segregate conventional and Islamic funds.

In contrast, countries such as Qatar require the complete separation of Islamic from conventional banking operations. Qatar has been an important financial supporter of Egypt, giving it a $500 million grant last year, so it is possible that the Qatari model could carry some weight.

Policy issues are unlikely to be resolved until after a presidential election which starts in May. Afterwards, the distribution of power in the government should start to become clear, and agencies such as the EFSA may eventually be shaken up.

Regards
Zulkifli Hasan

Sarajevo Jewish Museum, Bosnia and Herzegovina. (Jewish Bosnian victims of the Holocaust are commemorated in this book)

Sharia scholar moots agency for standardising Islamic products

Sharia scholar moots agency for standardising Islamic products

AFTAB H. KOLA Oman Time Available at: http://www.timesofoman.com/innercat.asp?cat=&detail=3785&sec=news

Muscat: Dr Ali Mohiyuddin Al Quradaghi, one of the top sharia scholars in the Gulf Cooperation Council (GCC) on Islamic finance, has mooted the need for the establishment of an institution that could certify and standardise the different Islamic products in the market.

Dr Ali Mohiyuddin Al Quradaghi, the secretary-general of the Qatar-based International Union of Muslim Scholars, and also the chairman of Supervisory Board of Al Hilal Islamic Banking Services, Ahlibank Oman asserted that this can be done through a unified body for fatwa (edicts) and Sharia supervision which should be affiliated to the central bank of each country and this body shall be the benchmark for the subsidiary bodies, and can be composed of the heads of Sharia entities within each country and/or other eminent scholars.

Despite the boom of Islamic finance in recent years, the shortage of experienced scholars in applying Sharia principles for Islamic finance is hindering the progress of the industry. Ali Al Quradaghi feels that the opening of schools of Islamic economics in the universities of the Sultanate has become an urgent necessity because of the scarcity of competent people specialised in Islamic banking, considering that the creation of such a talent pool will benefit the Islamic banking in the Sultanate.

“Members of the Sharia boards should be chosen from among those who are specialised in Islamic fiqh (jurisprudence) and Islamic economy and those who have experience in the field of Islamic banking and other Islamic financial institutions. The most notable challenge is the lack of human competent resources specialised in the field of Islamic banking. We can overcome this challenge by holding training courses, seminars on a permanent basis,” he said.

Pointing out the importance of issuing a unified law for Islamic banks, he said that the lack of uniform laws for Islamic banks may contribute to the creation of some of the problems that would result from different policies, standards and laws from one bank to another.

A strong believer that the risk management is actually better in Islamic banking than conventional banking. “There are serious academic studies which show that the risks in Islamic banks are less than those in conventional banks, including a thesis in the Faculty of Islamic Studies at Qatar Educational Foundation about this comparison, that was discussed in March 2012 and it proves that risk management is actually better in Islamic banking than conventional banking,” he added.

When asked, are you seeing a convergence on standardisation for Sharia interpretation and regulations, he said, “Sharia law allows to take advantage of all the beneficial technical aspects, and it essentially sets uniform standards to achieve equality, and thus there is a convergence of standardisation for the interpretation of Shariah law in its texts that can be subject to interpretative judgment, while the definitive texts as constants.”

Speaking about the most challenging aspect of Islamic finance, the top expert observed, “In my opinion, one of the biggest challenges facing the Islamic banking is the wrong applications, because it leads to loss of its credibility. Most people go to the Islamic banks because their contracts are legitimate and Sharia-compliant.”

“So, if they were found later to be not compatible with Sharia, this will be counterproductive. Therefore I recommend Islamic banks and branches to give priority to this aspect, and stay away from abnormal fatwas which do not serve the Islamic economy.”

What precisely are scholars doing when evaluating whether a particular transaction conforms to Islamic law, Ali Mohiyuddin Al Quradaghi said, “Usually the fatwa and Sharia supervisory boards do several tasks, the most important of which are the formulation of the contracts and tools which the banks need; reviewing the processes and budgets that take place within the institution, and the internal audit of the activities that take place in the bank under the Sharia rules.”

Regards
Zulkifli Hasan


Sharjah, UAE

Dispute Resolution in Islamic Finance

Dispute Resolution in Islamic Finance

By Jonathan Lawrence (jonathan.lawrence@klgates.com), Peter Morton (peter.morton@klgates.com) and Hussain Khan (hussain.khan@klgates.com) of K&L Gates LLP

Available at: http://www.jdsupra.com/post/documentViewer.aspx?fid=6e8592de-ff4f-43cb-8ef2-28eec1b77d7e

The number of Sharia compliant products that are available has grown enormously over the past few years. Many Islamic finance transactions are governed by English law or the law of another country, instead of Sharia law. Sharia is a set of moral and religious principles rather than a codified body of laws. These types of transactions often take place on a global level, with parties originating from different regions in the world. For example a Swiss bank may launch a Sharia compliant financial product aimed at investors in the Middle East using documentation governed by English law. Due to the diverse backgrounds of the parties involved, the specialist nature of the agreements and the potential variety of legal jurisdictions in play, there may be considerable benefits in having an authoritative common platform to
resolve disputes as they arise in a manner that is guided by Sharia within a modern commercial context.

The tendency to favour litigation

Litigation (the resolution of disputes through the courts) is the most well known method of determining disputes. Amongst some entities working in Islamic finance there is scepticism towards alternative forms of dispute resolution, such as international arbitration and mediation. At the Asia Pacific Regional Arbitration Group Conference 2011, Hakimah Yaakob, of the International Shariah Research Academy for Islamic Finance in Kuala Lumpur, stated that, following a survey that she conducted of 10 Islamic banks and 12 takaful operators (Islamic insurance providers) in Malaysia, she found that there was a ‘credit policy’ in many of these institutions not to include alternative dispute resolution clauses in their contracts, but to opt for litigation instead. This was said by the financial institutions to have been done, in many cases, in order to avoid credit risks for legal uncertainty. The preference for litigation was further confirmed by enquiries made of arbitration centres in Malaysia for
the purpose of this report.

Malaysia is not the only Islamic country where there is some reticence towards non-litigation forms of dispute resolution. In Middle Eastern states, many people have also been sceptical of using alternative dispute resolution since the outcome of a series of oil concession arbitrations conducted in the 1950s to 1970s. In these arbitrations the local laws were refused and Western systems of law took priority. For example, prior to the tribunal award in Saudi Arabia v Arabian American Oil Company (ARAMCO) (Award of 23 August 1958, 27 ILR 117 (1963)), international arbitration was the most commonly used method of settling disputes between the Saudi government and foreign oil companies. In the ARAMCO case the tribunal stated that the law of Saudi Arabia should be “interpreted or supplemented by the general principles of law, by the custom and practice in the oil business and by notions of pure jurisprudence” and therefore ARAMCO’s rights could not be “secured in an unquestionable manner by the law in force in Saudi Arabia”. International arbitration was subsequently seen by the Saudi government as a tool to protect the interests of Western corporations. The Saudi Council of Ministers issued Decree No. 58 of 1963 which prohibited any government agency from signing an arbitration agreement without prior authorisation from the Council President.

In the renowned English case of Beximco Pharmaceuticals Ltd v Shamil Bank of Bahrain EC [2004] EWCA Civ 19, one of the issues concerned the governing law of the contract. The contract stated that “subject to the principles of Glorious Sharia’a, this agreement shall be governed by and construed in accordance with the laws of England”. At trial, the judge, when dealing with the question of the applicable law,referred to the Rome Convention on the Law Applicable to Contractual Obligations 1980 and stated that the convention only made provision for the choice of law of a country, and did not provide for the choice of law of a non-national system of law, such as Sharia law. It was held that a contract can only have one
governing law and that parties to a contract can only agree to adopt the law of a country as the governing law of a contract. Therefore, according to English law, as Sharia law is a non-national system of law it is not capable of being the governing law of a contract.

An alternative argument that was made to the English Court of Appeal was that, with English law being the governing law of the contract, it is possible to incorporate general Sharia principles as terms of the contract. This argument was also rejected. Lord Justice Potter found the attempt to incorporate by reference the “principles of Glorious Sharia’a” to be too vague to be given effect: he stated, “The general reference to principles of Sharia in this case affords no reference to, or identification of, those aspects of Sharia law which are intended to be incorporated into the contract, let alone the terms in which they are framed. It is plainly insufficient for the defendants to contend that the basic rules of the Sharia applicable in this case are not controversial. Such ‘basic rules’ are neither referred to nor identified. Thus the reference to the “principles of …. Sharia” stands unqualified as a reference to the body of Sharia law generally. As such, they are inevitably repugnant to the choice of English law as
the law of the contract and render the clause self-contradictory and therefore meaningless.”

This case demonstrates that general references to the principles of Sharia law will not be given any meaning, at least by the English courts. This is especially so given that there is a divergence of opinions amongst scholars as to the principles in question. On this Potter LJ made the following comment: “Finally, so far as the “principles of … Sharia” are concerned, it was the evidence of both experts that there were indeed areas of considerable controversy and difficulty arising not only from the need to translate into propositions of modern law texts which centuries ago were set out as religious and moral codes, but because of the existence of a variety of schools of thought with which the court may have to concern itself in any given case before reaching a conclusion upon the principle or rule in dispute.”.
A further recent English Court case regarding incorporation of non-national laws was the Court of Appeal case of Halpern v Halpern [2008] QB 195. Although that case related to a dispute between Orthodox Jews under Jewish law, the Court stated that “it may be that for actual incorporation it is necessary to identify “black letter” provisions, but that seems to me to be another way of saying that there must be certainty about what is being incorporated”.

So, in summary, what these court decisions tell us is that, so far as the English Courts are concerned (i) the governing law of a contract has to be either English law or the law of a country, therefore, Sharia law cannot be the governing law of a contract; and (ii) it may be possible to incorporate as a term of the contract certain principles of Sharia law, provided there is certainty as to what is being incorporated.
The cases referred to demonstrate that, whilst there has been a tendency to favour court litigation as a means of resolving disputes in Islamic finance, the English courts have at times encountered difficulties in dealing with contracts where the parties have, at least to a certain extent, sought to have their dispute resolved in accordance with Sharia or other non-national laws or principles.

Professor Andrew White, associate professor at the International Islamic Law and Finance Centre in Singapore, recently stated at the Asia Pacific Regional Arbitration Group Conference 2011 that litigation is not geared towards solving Islamic finance disputes as judges often lack the education in many industry principles. In this context, some would say that arbitration is well placed to deal with these issues given that in arbitration, arbitrators can be selected that have the requisite knowledge both of Sharia and the relevant commercial transactions.

Additionally, there may be less difficulties in electing to have a dispute in relation to a contract decided in accordance with Sharia law by submitting the dispute to arbitration, rather than litigation. Taking the position in England as an example, the English Arbitration Act 1996 (which applies to all arbitrations seated in England and Wales) expressly permits the arbitral tribunal to decide the dispute in accordance with the law chosen by the parties or, “if the parties so agree, in accordance with such other considerations as are agreed by them or determined by the tribunal” (s46(1)(b)). So in English-seated arbitrations the arbitral tribunal can decide the dispute in accordance with such other considerations as are agreed by the parties, and this could include Sharia law.

The key features and foundations of arbitration

Arbitration is a non-court alternative method of resolving disputes, where a neutral, independent arbitrator or panel of arbitrators, known as a tribunal, is appointed by the parties to make a binding decision, known as an award, from which there are very limited grounds of challenge. Arbitration may be either administered (where the arbitration is conducted under the auspices of one of several arbitral institutions) or non-administered/ad hoc (where the parties agree between themselves the rules that will apply to the arbitration, without the involvement of an institution for the arbitration).

Further important features of arbitration include:

1. Arbitral rules and institutions – the procedural framework for the arbitration is stipulated in the arbitral rules. The arbitral tribunal obtain their procedural powers from the arbitral rules which are usually much briefer than court rules, and give the tribunal discretion on many matters unless the parties agree otherwise. Parties are able to choose which institution, if any, should administer the arbitration, and therefore which rules will be applicable to their arbitration.
2. Seat of arbitration – the seat of arbitration is typically, but not always, where the arbitral hearing is held. It is usually expressed as a city. The seat is an important choice as the law of the seat will govern the arbitral procedure. As mentioned above all English-seated arbitrations are governed by the Arbitration Act 1996. The courts of the seat will have certain powers, and the award will be treated as having been made at the seat.
3. Neutrality – arbitration in a third country is often an acceptable alternative when contracting parties are not prepared to submit to the jurisdiction of its counterparty’s local court.
4. Finality – unlike a court judgment, an arbitral award is generally not subject to appeal on the merits, and may only be annulled for jurisdictional grounds or on the basis of serious procedural irregularity giving rise to substantial injustice. Whilst this is generally the position, it is always important to check the local arbitration law and practice at the seat of the arbitration to understand the scope for an award to be set aside and the likelihood of court intervention.
5. Procedural flexibility – arbitral procedures can be adapted to the circumstances of the contract or matter in dispute much more readily than court procedures. For example, the parties can agree to the location of the hearings, the language of the proceedings and the number and qualifications of arbitrators. In the absence of party agreement, the arbitral tribunal usually has a great deal of discretion on procedural matters.
6. Privacy and confidentiality – arbitral proceedings are generally private and parties may insert confidentiality wording in their arbitration clause (if none exist in the arbitration rules) so that the contents of the proceedings and the award are kept confidential.

There are two key foundation stones upon which arbitration as a method of dispute resolution has grown. First, the United Nations Commission on International Trade Law (UNCITRAL) Model Law. The UNCITRAL Model Law is a model national arbitration law designed to assist states in reforming and modernising their laws on arbitral procedure so as to take into account the particular features and needs of international commercial arbitration. It covers all stages of the arbitral process from the arbitration agreement, the composition and jurisdiction of the arbitral tribunal, the extent of court intervention, through to the recognition and enforcement of the arbitral award. It reflects worldwide consensus on key aspects of international arbitration practice and has been accepted by states in all regions of the world.

Secondly, the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (commonly referred to simply as the New York Convention). The New York Convention seeks to provide common legislative standards for the recognition of arbitration agreements and for court recognition and enforcement of foreign arbitral awards. The Convention’s principal aim is that foreign arbitral awards will not be discriminated against. It obliges parties to ensure such awards are recognised and generally capable of enforcement in their jurisdiction in the same way as domestic awards. Grounds for non
recognition of a foreign award are very limited. These include awards that are contrary to public policy; where the parties to the agreement were under some incapacity; the agreement is not valid under the law to which the parties have subjected it; or the absence of proper notice of the appointment of the arbitrator or of the arbitration proceedings. An ancillary aim of the Convention is to require courts to give full effect to arbitration agreements by requiring courts to deny the parties access to court in contravention of an arbitration agreement.

Historical connection between Islam and arbitration

Arbitration is specifically mentioned in the Quran at Surah 4, verse 35, “If you fear a breach between them twain (the man and his wife), appoint (two) arbitrators, one from his family and the other from hers; if they both wish for peace, Allah will cause their reconciliation. Indeed Allah is Ever All-Knower, Well-Acquainted with all things.” Although the subject matter of this quote is a matrimonial dispute, the framework of arbitration has been applied to commercial disputes for many years. Arbitration under Islamic law is known as tahkim where parties agree to settle their dispute by referring it to an arbitrator known as a hakam or muhakkam.

Arbitration has a longstanding history as a form of dispute resolution in Islam, and with the development of international arbitration institutions in the Islamic world, there is therefore an ideal opportunity for international arbitration to establish itself as the method of choice for the resolution of Islamic finance disputes.

Development of international arbitration in the Islamic world

The previously described reticence towards international arbitration is now changing, with many Middle Eastern countries adopting the UNCITRAL Model Law for their arbitration laws, signing the New York Convention and establishing local arbitration centres in the region.

For example, there are four arbitration centres in the United Arab Emirates:
1. the Dubai International Arbitration Centre (DIAC) which was established in 1994 as the “Centre for Commercial Conciliation and Arbitration”;
2. the DIFC LCIA Arbitration Centre which was launched in February 2008;
3. the Abu Dhabi Chamber of Commerce & Industry which was formed in 1993; and
4. the Dubai based International Islamic Centre for Reconciliation and Arbitration (IICRA) which was established in 2005 by the Islamic Development Bank and the General Council for Islamic Banks and Financial Institutions in order to provide a Sharia based arbitration facility.

Of the four UAE institutions, the DIAC is probably the best known and busiest of the Gulf arbitration centres.

In Qatar there are two institutions: the Qatar International Centre for Commercial Arbitration (QICCA) and the Qatar Financial Centre (QFC). In Egypt there is also the prominent Cairo Regional Centre for International Commercial Arbitration (CRCICA). Arbitration institutions in Islamic countries outside of the Middle East include the Kuala Lumpur Regional Centre for Arbitration (KLRCA), which has introduced specific rules to deal with Islamic banking and finance disputes. Other centres, such as Hong Kong, are also able to cater for Islamic finance disputes, with the establishment of the International Islamic
Mediation & Arbitration Centre (IMAC) which was opened in 2008 by the Arab Chamber of Commerce & Industry after consultation with the International Chamber of Commerce, a pre-eminent arbitration institution. Singapore is also a major centre for international arbitration, with the Singapore International Arbitration Centre (SIAC) being its foremost arbitration institution.

However, the arbitration laws in the UAE, Saudi Arabia, and Qatar are not based on the UNCITRAL Model Law. In Egypt, Singapore and Malaysia the arbitration laws are based on UNCITRAL Model Law (albeit with the Malaysian act modelled on the 1958 UNCITRAL Model Law with some modifications, rather than the newer 1985 Model Law). In 2010, the UAE Ministry of Economy published a draft independent Federal Arbitration Law, which is based on the UNCITRAL Model Law. This draft is currently under review and is expected to be introduced in 2012. In the UAE and Qatar there are ‘free zones’ for financial services. These free zones have their own legal jurisdiction and court system which is separate from the rest of the country. The DIFC and QFC are based in free zones and as such have their own distinct laws that are independent from the national laws governing international arbitration. Both the DIFC and QFC laws are based on the UNCITRAL Model Law. The parties do not have to have a connection with the jurisdiction in order to adopt these jurisdictions and their associated laws as the seat of arbitration.

All of the countries discussed above have acceded to the New York Convention. They are also contracting states to the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (the ICSID Convention). Additionally the UAE, Saudi Arabia and Qatar (along with Bahrain, Kuwait and Oman) are members of the Gulf Cooperation Council (GCC). The GCC has a unified economic agreement between member states that they will recognise and enforce judicial and arbitral awards rendered in other member states.

For the purpose of this report we contacted a range of international arbitration institutions to enquire about the number of cases that they have dealt with involving Islamic finance. We were informed that take up by parties was generally very low. This could be due to a number of factors: many of these institutions are relatively new and are currently establishing themselves; and certain regions favour litigation to settle disputes. This curious response from the institutions is all the more unexpected as arbitration has many potential beneficial features as a form of dispute resolution, especially for Islamic finance disputes. Of course another explanation might be that disputes involving Islamic finance may themselves be relatively rare or resolved by negotiation between the parties without reference to an outside body.

The benefits and the use of arbitration have been highlighted by Peter Werner, Senior Director of the EMEA office in London of the International Swaps and Derivatives Association (ISDA) Financial Law Reform Committee. On 1 March 2010, ISDA and International Islamic Financial Market (IIFM) published the ISDA/IIFM Tahawwut (Hedging) Master Agreement. Mr Werner recognised a marked increase in the use of arbitration in the financial sector, and particularly in relation to ISDA Master Agreements involving parties established in or operating from emerging market jurisdictions.

The factors for this growth in the use of arbitration include globalisation, the increased involvement of parties from emerging markets in international finance and the clearing rules of most, if not all, of the world’s clearing houses providing for disputes to be resolved by arbitration. The main reasons for using arbitration were stated to be the unattractiveness of litigating in the courts of many jurisdictions, particularly emerging markets, and the enforcement advantages of the New York Convention. If a party succeeds on the merits of a dispute that may prove to be a pyrrhic victory if it is not possible to enforce the resulting judgment. Leading international arbitrators are familiar with complex transactions, are able to get to grips with issues outside their core expertise and are likely to be much better able to
deal with derivatives disputes than the courts of many jurisdictions. Arbitration agreements also provide for the parties to be able to nominate members of a tribunal whose main expertise is in derivatives.

Drafting the arbitration clause

In cases where arbitration is the chosen method of dispute resolution it will be necessary to include in the contract a suitably drafted arbitration clause. Parties and their counsel should consider carefully, as a minimum: the seat of arbitration and the laws which would be applicable due to this choice, and importantly whether the seat of arbitration and the anticipated jurisdiction for enforcement are signatories to the New York Convention; the rules of any institution they wish to use; the categories of dispute covered; the method of appointment and number of arbitrators; the language of the arbitration; and the governing law of the contract, which should preferably be stated outside of the arbitration clause. Legal advice should be taken to ensure that the proposed choice of governing law will be respected in the arbitration. For example, whilst an election by the parties to have their dispute referred to arbitration and decided in accordance with Sharia law should be respected for arbitrations seated in England (per s46(1)(b) of the Arbitration Act 1996), that is not necessarily the case in all seats of arbitration.

Special care should be taken in seeking to draft arbitration clauses for multi-party arbitrations and multi-contract arbitrations. Optional provisions which may be considered for inclusion in the arbitration clause include, for example, making provision for: a specific procedure to be followed relating to the disclosure of evidence; allowing for remedial powers, such as interim relief; rights of appeal; confidentiality; and the qualifications of the tribunal.

In order to avoid ending up with an ill-suited arbitration procedure, it is very important that the arbitration clause is given careful consideration at the time of contracting, and appropriate legal advice is taken. It is unfortunately the case that all too often the arbitration clause is very much the “midnight clause” thrown in at the last minute without due consideration. This can have very serious time and cost consequences if a dispute should arise and can seriously hamper a party’s ability to obtain a fair and efficient resolution of a claim.

Mediation

Mediation is another important method of alternative dispute resolution. Mediation is a flexible process conducted confidentially in which a neutral person (the mediator) actively assists parties in working towards a negotiated agreement of a dispute or difference. The parties are in ultimate control of the decision to settle and the terms of any resolution. Mediation can be used alongside litigation or arbitration at any stage.

As with arbitration, mediation (which is known as sulh) is also a traditional method of reconciliation in Islam and is mentioned in several verses of the Quran. Sulh is usually conducted in an informal manner, but can be facilitated by an institution. Unlike in international arbitration or litigation, mediation does not result in a binding award or judgment. At the conclusion of the mediation process if the mediation has been successful, the parties draft and sign a contract that reflects the settlement terms.

Not all mediations result in a settlement being concluded, and for that reason, mediation is not a standalone means of dispute resolution. However, it is commonly used alongside, or to prevent, litigation or arbitration.

A form of facilitated negotiation, mediation can have considerable benefits in terms of saving time and costs. Parties may also wish to select the mediator based on their expertise in Islamic finance. However, mediation may not always be suitable, for example where there is a need for a precedent or a binding award or judgment or the same issue arises in related agreements or matters.

Conclusion

The Quran and Sunnah repeatedly stress the importance and benefits of settling disputes quickly and discreetly. International arbitration is a method that can be used to achieve this. When parties have carefully considered and drafted international arbitration clauses in their Islamic finance agreements, they can have greater confidence that any disputes which may arise will be handled in an equitable, confidential and, importantly, Sharia compliant manner.

Best Regards
ZULKIFLI HASAN

Pesantren at Danok, Thailand

100% Islamic financing: What could go wrong?

What could go wrong?

By Blake Goud: Available at: http://investhalal.blogspot.com/2012/04/what-could-go-wrong.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+sharingrisk+%28Sharing+Risk+dot+org+blog%29

When I saw the headline “Emirates Islamic offers 100% financing for UAE homes”, I thought I had traveled back in time to a bygone era (specifically 6-10 years ago in the United States). I looked at the date on the article, April 14, 2012, and it surprised me that an Islamic bank would have stumbled upon a product that had so recently led to havoc in the conventional financial markets. Sure, the US housing boom was fueled by other factors (securitization and re-securitization of mortgages into complex securities), but one of the reasons the problem spread into the real economy was that a fall in home prices pushed many homeowners into a position of negative equity (owing more on their homes than it was worth).

The way that Islamic home finance works today would not insulate an Islamic bank offering this type of product from problems down the road, and since the product offered here is only for 5 years, it creates a potential refinancing risk, since most people cannot afford to pay for a house in just 5 years. A 5 year loan requires that either refinancing will be a available five years from now, or a rise in home prices (and thus a buyer expects to sell within 5 years). Both assume that the home will either remain the same price or increase, which the financial crisis and recession following it has demonstrated is a dangerous assumption.

The difference between a 100% financing product and an 80% financing (e.g. 20% down payment) is that the former incentivizes greater speculation on home price rises because it doesn’t require they buyer to have ‘skin in the game’. The incentive problem is made more complicated by the potential for buyers who default to be threatened with arrest. However, while this might limit the number of defaulters (in an non-optimal way), the incentive problem remains. It is a frequent refrain that Islamic finance was spared some damage during the credit because it is different from conventional finance, but if Islamic banks start moving into the same types of products that caused problems in the financial crisis, will this hold true in the future, or are we on the road to Islamic CDOs?

Regards
Zulkifli Hasan

Langkawi Island, Malaysia

Islamic finance set to surge

Islamic finance set to surge

Issac John / 18 April 2012 Available at: http://www.khaleejtimes.com/biz/inside.asp?xfile=/data/uaebusiness/2012/April/uaebusiness_April71.xml&section=uaebusiness

DUBAI — The Eurozone crisis and widespread protests against the global financial system present the $1 trillion Islamic the finance industry with a big opportunity to accelerate growth, Hussain Al Qemzi, chief executive of Noor Islamic Bank said.
Speaking at the 2nd Annual Middle East Islamic Finance and Investment Conference on Wednesday, Al Qemzi said greater cooperation, rather than competition, between the Middle East’s Islamic financial institutions is necessary if the industry is to provide a real alternative to the conventional international banks operating in the region.

“We need to build bigger banks, bigger capital and to cooperate,” Al Qemzi said.

He said regional Islamic banks do not have the financial punch to challenge their larger competitors from the US, Europe and the Far East. He said the global Islamic finance industry could grow to around $4 trillion from $1 trillion at present within five years as untapped markets such as China open up and new products drive demand.

Al Qemzi called for the Islamic banking industry to build scale through consolidation, but said his own bank is currently not considering any mergers and acquisitions activity.

“It is now time to talk about how Islamic finance can contribute to long-term inclusive, equitable and sustainable economic growth not just here, in the Middle East, but in every country across the globe,” he said.

“Though it is true that greater awareness of the inbuilt strengths of Islamic finance has contributed towards increased international participation in Islamic financial markets, awareness alone is not sufficient to ensure sustainable growth for our industry. To remain competitive we have to continually innovate and adapt. If we are to challenge the conventional banks’ entrenched position in international financial deals, we must develop the capacity to structure multi-currency and cross border transactions and build scale,” Al Qemzi said.

Moinuddin Malim, Mashreq Al Islami CEO, said global Islamic banking and finance industry has been on a steady and consistent growth path with the Middle East being its nerve centre. Though the industry has built a wealth of opportunities and options for investors over the last decade, a lot more still has to be done in order for the industry to successfully compete with their conventional counterparts.

He said the Islamic finance industry in the Middle East is at a crucial evolutionary phase. “Regardless of the current socio-political concerns facing some markets in the Middle East, there is large untapped liquidity available at the disposal of investors in the region and it is critical that the Islamic finance industry realises this potential and utilises the opportunity to ensure stronger growth for the industry in the region.”

Conference organiser David McLean noted ‘though Islamic banking assets have grown significantly over the past few years, they still only represent less than one per cent of total global banking assets – with more than 50 per cent concentration in the Middle East region and this represents a unique growth opportunity. Islamic finance represents one of the fastest growing segments in the global finance industry and the Middle East region has been at the forefront of the dramatic and exponential growth.

“Being a significant source of capital, Islamic financial institutions in the Middle East are significantly contributing towards the global development of Islamic finance with an increasing number of Middle East based Islamic financial institutions now taking a more global perspective. With the growing global demand for Islamic finance, the Middle East region is well positioned to be the global hub of Islamic finance linking key markets of Asia, Europe and Africa,” said Mclean.

Dr. Jarmo Kotilaine, chief economist of the National Commercial Bank, said while Islamic banking assets have grown significantly in the past decade, their share of total global banking assets remains marginal. Absence of long-term financing tools and a growing importance of long-term capital projects launched in the region has significantly increased the attractiveness of Islamic finance, he pointed out.More than 250 leaders of the international and regional Islamic banking and finance took part in the conference.

Regards
ZULKIFLI HASAN

Cambridge University

Egypt’s Brotherhood raises stakes by excluding IMF

Analysis – Egypt’s Brotherhood raises stakes by excluding IMF

By Patrick Werr Available at: http://uk.reuters.com/article/2012/04/11/uk-egypt-imf-idUKBRE83A16I20120411

(Reuters) – In all but ruling out an early agreement on an IMF loan, Egypt’s Muslim Brotherhood has dramatically raised the stakes in its struggle with the army-led administration for control of a country still reeling from a year of political turmoil.

The Brotherhood’s candidate for president, Khairat al-Shater, said this week the group would not accept an International Monetary Fund loan unless its terms were changed or a new government was formed to monitor how it is spent, demands that almost certainly won’t be met.

Even without a loan before the presidential election in May and June, whoever comes to power will be forced, sooner or later, to impose hugely unpopular taxes and cuts in government spending to reduce budget and balance of payments deficits inflated by a year of political and economic turmoil.

But any delay in securing a loan brings closer the prospect of a fully fledged fiscal crisis that would mean a jump in consumer prices and interest rates, a sharp devaluation and huge pressure on banks.

It’s a game of brinkmanship in which the Brotherhood might be first to yield to avoid inheriting an economy in tatters, fearing it will end up taking the blame for painful measures that the current government has repeatedly delayed.

The country’s transition to civilian rule will culminate at the end of June, when the military hands power to a newly elected president for whom the economy will be a top priority.

In the 14 months since the overthrow of Hosni Mubarak, Egypt’s army-backed government has been supporting the economy largely by drawing down reserves and borrowing from domestic banks, with interest rates having risen to historic highs as funds grow tighter.

The government has spent more than $20 billion (12 billion pounds) in foreign reserves to prop up the currency since last year’s uprising. Reserves fell by another $600 million in March to $15.12 billion, equivalent to less than three months worth of imports.

Economists warn that with foreign reserves running low, the country risks a disorderly devaluation of the currency unless it secures new sources of funding. A political or economic shock could increase pressure on the pound if it prompted people to switch funds out of pounds and into dollars.

“If the IMF deal falls through, then the likelihood of foreign capital returning to Egypt will diminish and there will be no let-up in the pressure on the currency,” said HSBC economist Simon Williams.

Barring shocks, the country should have a big enough financial cushion to see it through for at least three months, until an elected government is installed with a popular mandate to push through an IMF agreement.

The IMF, however, has demanded broad political support before it signs any agreement, in particular from the Muslim Brotherhood, whose Freedom and Justice Party won nearly half the seats in the new parliament.

Shater said he was not opposed to a deal in principle, but only to the plan to disburse part of it while the army-backed transitional government remained in power.

He said the Brotherhood might accept an IMF deal if the loan’s first instalment was reduced to $500 million from the current plan of paying out more than $1 billion immediately upon signing.

DECLINING FOREIGN RESERVES

Economists say the central bank still has enough foreign reserves to hold on well past the presidential election without having to devalue the pound.

“Capital flight has already taken place, and that’s going to leave the central bank having to cover a shortfall of around $600-750 million a month from here on,” said Williams, who estimated the government could hold out for another six months.

But other economists warn that an outbreak of political violence could provoke capital flight and disrupt tourism, which has yet to recover since last year’s uprising. Similarly, a spike in oil prices could drive up the cost of imported fuel.

The next three months hold potential political minefields, including the increasingly polarised presidential election, a heated battle over the wording of a new constitution and the verdict in the politically charged trial of Mubarak, which is due to be read out on June 2.

Any resulting drain on dollars could exhaust the ability of the central bank to defend the pound, which it has allowed to weaken by only 3.5 percent against the U.S. dollar since the uprising.

“Failure to secure help from the IMF would make a disorderly devaluation more likely. In this scenario, the pound could overshoot, falling by perhaps 50 percent or more against the U.S. dollar,” Said Hirsh of Capital Economics wrote in an April 5 research note.

“The costs to the economy would be severe. This is likely to lead to a spike in inflation, sharp hikes in interest rates, a potential banking crisis and rapid fall in asset prices.”

EARNING DOLLARS

The government has been searching for ways to earn foreign exchange to take the pressure off its reserves.

In November it began selling one-year treasury bills denominated in U.S. dollars, an instruments that has now raised a total $4.75 billion, and on March 24 it began selling parcels of residential land to Egyptians living abroad, a measure it hopes will eventually earn it $2.5 billion.

It also wants to sell $1 billion in certificates of deposit to Egyptians living abroad, but the plan has been delayed by technical problems over their issue in one Gulf country, the planning minister said last week.

Another option would be to implement capital controls to block major shifts in funds.

One currency trader said rising concerns that the currency is headed toward a devaluation has dried up the trade in Egyptian non-deliverable forwards (NDFs).

“The NDF market is totally broken. Hardly anything trades now,” said the trader said. “There is no confidence in a remedy or timing of it, so no one is providing liquidity.”

“The large majority of players believe that it’s all but inevitable that the currency will go unless there is a serious action plan, so why bother selling U.S. dollars further than three months?”

Regards
Zulkifli Hasan

Angel of the North, Newcastle, UK