Global Islamic Finance

G LO B A L
Islamic Finance
August 2011
Ba
nk Eth
ing ica
& l
Fin
an
ce
www.globalislamicfinancemagazine.com
HOW TO RUN
AN ISLAMIC BANK
PUTTING CORPORATE
STRATEGY IN PLACE
UK: 6.00
Islamic Project Financing Setting the

Agenda for Innovative Opportunities
State of Qatar
End of Islamic Banking Windows
Islamic Finance gains momentum in

Europe
P. 42
P. 28
P. 32
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Contents;QWERTYUIIOPDFHJUIIOPDFHJJ
News
14
9 Islamic Finance News

Islamic Banking
14 How to run an Islamic bank
Part I: Putting corporate strategy in place, values, regulations
The term Islamic banking means the carrying out of banking operations in compliance with Shariah
principles. Islamic banking and finance have been growing rapidly over the years. Its successes not only
include countries with large Muslim populations but also those countries where the Muslim population is
a minority. Banking practices with the concept of receipt and payment of interest are not in accordance
with Shariah principles. In the past Muslim communities could not avoid conventional ways of banking
but Islamic banking practices have been flourishing over the past years so that Islamic finance is now
recognised throughout the financial world...
Interview
25 Islamic Finance is one of the key functional areas for the Halal
Industry
Interview with Mahmood Hasan, CEO of Rasul Group of Companies

Mahmood Hasan is the CEO of Rasul Group of Companies, Pakistan. With a Masters in Business Administration he established this entrepreneurial venture in 1983. His transformational leadership and visionary
approach led to the establishment of the brand Bake Parlor. The Halal industry and Islamic finance share
an economic and ideological interdependence and also have a high growth potential when looking at the
retail and commercial forefront...
25
World Islamic Finance Review

28 State of Qatar: End of Islamic Banking Windows
At the beginning of February, 2011, Qatar Central Bank (QCB) notified all conventional banks in Qatar that
they were required to stop operating Islamic windows (IWs) by the 31st of December 2011.
On the 10th of February 2011, QCB issued a public press release detailing the requirements and explaining the reasons for its decision to stop the operation of the IWs...
32 Part 1: Islamic Finance gains momentum in Europe
Islam all too often resonates negatively in Europe, with much non-Muslim public opinion uncomfortable
with Islamic culture and values. Secular and Christian opinion is at best suspicious of Shariah, Islamic law,
and indeed often antagonistic. The notion of wanting to apply Shariah principles to banking and finance
is treated with scepticism if not outright hostility, especially as there is no concept of Christian or Jewish
banking, even if there are some parallels between Shariah financial principles and the teaching of the Old
Testament...
32
Islamic Finance
42 Part 1: Islamic Project Financing Setting the Agenda for Innovation Opportunities
The global demand for Islamic project financing is growing at an unprecedented rate where many investors
around the world are looking into major financial hubs to aid in funding lucrative projects. As the Islamic
financial market adheres to the principles set out by Shariah law all investments and projects have to be
constructed in a Shariah compliant manner and authorised by an Islamic financial governing or regulatory
body of the country. There are many lucrative sectors which provide scope for profitable projects across
the spectrum of Islamic finance. Traditionally projects in the infrastructure sector proved more rewarding
as there were many opportunities especially in the Islamic financial hub of the United Arab Emirates...
48 Do Conventional and Islamic Finance Share Common Epistemology?
An overall socio-political-economic system gives rise to an economic system out of which grows a system
of financing to facilitate production, trade and exchange. The idea of the contemporary conventional economic system is usually traced to Adam Smiths conception of an economy as envisioned in his book, the
Wealth of Nations. What has been ignored until recently, however, the fact that, from an epistemological
point of view, Smiths vision of the economy is embedded in his vision of a moral-ethical system that gives
rise to the economy envisioned in the Wealth of Nations...
4 Global Islamic Finance
August 2011
Marketing and Branding
48
55 Unleash the Power of Internal Marketing in your Islamic Financial Institution
There are various forms of marketing techniques and strategies that can help to spur the Islamic finance
industry forward. However one such technique which cannot be understated is the effectiveness of using
internal marketing strategies. So what exactly is the concept of internal marketing? Internal marketing
is the application of processes and principles within the marketing framework of financial institutions.
Internal marketing therefore involves a business or company using various different methods and dividing
marketing roles within their departments transforming them into business units...
Sukuk
62 Analysis of Sale/Debt based Sukuk: The Malaysian Saga,
part 2
The absence of bonds instruments in most al-murabaha project finance particularly in the ever liquid
Middle-East countries may be explained by the controversy on the validity of using bai al-inah in the
securitisation process and the application of bai al-dayn at a discount in bonds in secondary trading. The
question now is; what are the underlying issues behind this controversy about the legitimacy of bai al-inah
and bai al-dayn in Islamic law? What could explain its rejection in the Middle-East countries while gaining
acceptance in Malaysia?...
55
Market Review
54 Russia needs Changes to Law to Facilitate Sukuk
As the Islamic finance industry is growing at an unprecedented speed, Russia still remains to have
changed laws in order to facilitate sukuk. Russian borrowers are pitching plans to sell the nations first
Islamic bonds even as regulators lag behind in customising laws for the industry...
72 Oman to Add a Staggering $6 Billion Worth of Islamic Financial

Assets
It has been reported that Oman is to add a staggering $6 Billion worth of assets for the development over
the next few years, according to estimates by Ernst & Youngs Islamic Financial Services Group...
74 Islamic Countries Urged To Adopt Economic Financial Reforms
Saudi Arabias finance minister has reportedly urged Muslim countries to adopt suitable economic reform
programs and adapt to the changing global financial economic changes to confront the challenges of facing them and building solutions...
75 Islamic Finance Trade Sector Expands in Asia and Middle East
Islamic trade finance has grown progressively towards Shariah-compliant banking and could serve as one
of the key growth drivers to aid the $1 trillion Islamic finance industry in its growing global expansion...
62
80 Gulf Banks Tackle Challenges to Boost Shariah Investments
Gulf Banks are making significant efforts to boost Arabian Gulf banks saying that they are more ready to
accept Asian Islamic debt as Shariah-compliant, allowing them to invest in a market that has issued twice
as much sukuk as the Middle East this year...
76 Event Review
78 Book Review
79 Events Calendar
82 Business Directory
84 Glossary
86 In the Next Issue
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International Editorial Board

Prof Dr Khawaja Amjad Saeed, Principal of The University of the Punjab, Pakistan
Prof Habib Ahmad, Sharjah Chair in Islamic Law and Finance in the School of Government and
International Affairs at University of Durham, United Kingdom
Prof Rodney Wilson, Professor in the School of Government and International Affairs at Durham
University, United Kingdom
Prof Humayon Dar, Chief Executive Officer at BMB Islamic UK, United Kingdom
Prof Muhammed Shahid Ebrahim, Professor of Islamic Banking and Finance at the Bangor Business
School, United Kingdom
Prof Andrew White, Director of International Islamic Law & Finance Centre, Associate Professor of
Law, Singapore Management University, Singapore
Prof Simon Archer, ICMA Centre, Henley Business School, University of Reading, United Kingdom
Hailey College of Banking & Finance, University of the Punjab
Dr Majdi Ali Ghaith, King Saudi University Assistant Professor Business Administrator Department,
Saudi Arabia
Dr Abu Umar Faruq Ahmad, School of Law University of Western Sydney Australia, Australia
Dr Julien Pelissier, Lecturer in Islamic economics law, France
Dr Alberto Brunoni, Founder and Director of AASAIF, Italy
Dr Aznan Hassan, Shariah scholar Bursa Malaysia, Malaysia
Dr Zukifli Hassan, PhD Research Scholar at University of Durham, United Kingdom

Dr Mohammed Obaidullah, Economist at the Islamic Research and Training Institute (IRTI) of the
Islamic Development Bank, Saudi Arabia
Dr Amal El-Kharouf, Head of Research and Consultancy Department at University of Jordan, Jordan
Dr M.Kabir Hassan, Associate Professor and Associate Chair of the Department, University of New
Orleans, USA
Dr Abdelhafid Benamraoui,Westminster Business School, United Kingdom
Dr M. Ishaq Bhatti , Faculty of Law and Management, La Trobe University, Australia
Mughees Shaukat, PHD researcher and Assistant Researcher in INCEIF & ISRA, Malaysia
Warren Edwards, CEO of Delphi Risk Management, United Kingdom
John Sandwick, Islamic Wealth & Asset Management Independent Consultant, Switzerland
Brian Kettel, Director at Islamic Banking and Finance Training, United Kingdom
Salina Hj. Kassim, Department of Economics atInternational Islamic University Malaysia, Malaysia
Kasim Randeree, Sad Business School, University of Oxford, United Kingdom
Abbas J. Ali, School of International Management Eberly college of Business,Indiana University of
Pennsylvania, USA
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Editorial Letter
Islamic Banking is fast developing in the global
financial world with many establishments being
set up worldwide to cater for the demands of both
Muslims and Non Muslims around the world. It
is therefore imperative that the development of
Islamic banks is well defined and the system of
running a Shariah compliant bank is well understood by all industry professionals.
The last decade has seen an increasing demand
for Shariah compliant banking with well established conventional banks opening up Islamic
windows to cater for the rising demand. The UK
alone has an estimated US$300 million of combined assets and overall the Islamic finance industry is expected to rise to over US$1 trillion.
This provides adequate scope for the development of Islamic banks and a real opportunity for
companies and interested business professionals
to learn more about running an Islamic banking
institution.
Islamic banking is at the

peak of its
success with many
branches opening up
worldwide. It is therefore crucial that both
business professionals
and entrepreneurs
understand the best
ways to establish an
Islamic financial institution which adheres
to the principles of the
Shariah
If you are considering opening up an Islamic bank

there are a number of issues which need to be
addressed. It is first and foremost crucial that you
have a good support team and reliable regulatory
body who understand the concepts of Shariah
finance to the core. With efficient Shariah supervisory backing your financial institution you can
then implement the facilitation of Shariah compliant products and services which are currently in
global demand around the world.
Islamic banking institutions cannot divert from
the ethics of Shariah as all transactions should
remain Shariah compliant and this should be the
primary ethos when establishing and running
your bank. Malaysia, the Middle East and the
GCC have played a significant role in supporting
the facilitation of the running of Islamic banks
around the world. The Islamic Development Bank
(IDB) in particular has contributed significantly to
the implementation of Islamic banks and funding
throughout the world and is a forerunner in establishing Islamic banking institutions worldwide.
It is important to remember that developing strategies is key in achieving profitable asset growth
for any potential development of an Islamic bank.
Improving the position of risks is a crucial aspect
that contributes significantly to the Islamic banking strategy, although Islamic banks have managed well in overcoming negative asset of invest-
To write the letter to the editor, send an email to editor@globalislamicfinancemagazine.com.
August 2011
ment depositors. Islamic banks have more than

300 institutions spread over 51 countries, including the United States, as well as an additional 250
mutual funds that comply with Islamic principles.
It is estimated that over US$822 billion worldwide
Shariah-compliant assets are managed according
to The Economist.
Although the implementation of Islamic banks
may face some challenges such as liquidity and
the lack of Islamic liquid instruments it still has
potential for any avid investor wishing to tap into
the lucrative current market. Islamic banking is
continuing to grow which is why many international banks such as HSBC, Deutsche Bank and many
others have developed their own Islamic windows
or services.
The main challenge that the heads of Islamic
banks face is the core problem of regulatory conformity to the Shariah. Therefore standardisation
is key in Islamic finance to ensure that all transactions and services have set guidelines which
can be applied to Islamic banking institutions
worldwide. Islamic banking institutions need to
address these challenges and work effectively
alongside Islamic regulatory bodies to ensure
Shariah compliancy at all times which will help to
build up the prestige of Islamic banks around the
world.
Promoting transparency and product breadth can
further help Islamic banks to be successful in
promoting Shariah-compliant funds. With almost
2 billion Muslims worldwide and a vast number of
Non Muslims who prefer to use the ethical methods of Shariah-compliant financing there is much
scope for the development and success of Islamic
banks worldwide.
Farhad Reyazat
PhD in Risk Management
Editor in Chief
News
gif
Islamic finance news

Bank Rakyat Indonesias Shariah Branch
Debuts Scheme to Tap Gold in Islamic Finance
It has been reported that BRI Shariah, a
subsidiary of state-owned Bank Rakyat Indonesia, has launched a new product that
allows its customer to buy gold in instalments, in a bid to draw broader segments
of the population to Islamic banking.
The bank plans to provide Rp 400 billion
($46.4 million) in financing for customers to
buy gold, president director Ventje Rahardjo
said.
The first scheme of its kind in Indonesia,
Precious Metal Ownership (KLM) is intended
to appeal to the young, middle-class population because of its long-term investment
appeal, with customers able to pay in instalments from six months to 15 years, Ventje
said.
At the end of May, BRI Syariahs total financing was almost Rp 6 trillion, about a third
of which came from consumer financing.
Ventje said the bank wants to reach Rp 9
trillion in financing by the end of 2011. The
high target will erode the lenders capital adequacy ratio to 15 percent by the end of this
year, he said.
As of May, its capital adequacy ratio was at
20 percent. Although the bank has the full
support from its parent company, it did not
rule out selling sub-ordinate sukuk to bolster
its capital.
Tenaga to Sell $1.7 Billion 20-Year Islamic
Bond, CEO Says
Tenaga Nasional Bhd., Malaysias biggest
power producer, plans to raise as much as
5 billion ringgit ($1.7 billion) from a 20year ringgit-denominated Islamic bond offering.
Imagine that in 1998 gold was around Rp

78,000 per gram, and now its already over
Rp 400,000 per gram, he said. How many
have regretted not buying it at that time?
With this facility, customers can buy gold at
the current price and pay that in monthly instalments.
Its chief executive officer said, We plan to

sell the bonds in August or September, Che
Khalib Mohamad Noh said. Proceeds from
the offering, the companys first debt sale
since 2004, will be used to finance a coalfired Manjung power plant in the northern
state of Perak, Che Khalib said.
The product utilises two Shariah contracts,

qardh and ijara. Under qardh, the bank
loans money to the customer to buy the gold,
and the debtor is only required to repay the
amount borrowed. The customer must keep
the physical gold in the banks vault which,
under ijara, is rented out by the bank.
The utility is raising power generation capacity to meet rising demand on the Malaysian
peninsula after shelving plans to buy electricity generated by the Bakun hydroelectric
dam on Borneo Island earlier this year. The
20-year paper will help alleviate a shortage
of longer-dated securities that insurers need
to match assets and liabilities.
Islamic finance must match the level of service and innovation of conventional banking,
Ventje said, and that means taking unique
approaches.
I think the hardcore Shariah market is finished, he said, For Islamic banking to expand, it has to see itself as part of overall
banking, not as an alternative.
Total Islamic lending in Indonesia reached
Rp 75.7 trillion by the end of April, compared
with Rp 1,843.5 trillion in conventional banking, according to Bank Indonesia data.
There will be demand for Tenagas sukuk

as long-dated corporate Islamic paper is
scarce, said Michael Chang, who oversees
$1 billion as head of fixed-income at MCIS
Zurich Insurance Bhd. in Kuala Lumpur. Ultimately, demand will depend on the interest-rate outlook and pricing.
The Islamic insurance, or takaful, industry
grew at an annual pace of 16 percent over
the last five years, double that of non-Islamic insurers, RAM Rating Bhd., the bigger of
Malaysias two rating companies said last
week. Sarawak Energy Bhd., a Malaysian

state-owned electricity company based on
Borneo Island, sold 3 billion ringgit of 5-, 10and 15 year Islamic bonds last month at the
lower end of its yield guidance.
Its the right time to sell bonds in the domestic market as theres a lot of liquidity,
Che Khalib said, adding that three investment banks have been short-listed as underwriters. The attractive price for the governments sukuk sold last week is a good
benchmark.
Sri Lanka Commercial Bank Launches Islamic Finance Unit
Sri Lankas Commercial Bank said it is
starting alternative banking services compliant with Islamic Shariah principles with
a three member committee of scholars to
ensure that all products and services under
the Islamic unit are Shariah compliant.
As one of Sri Lankas largest private banks
it is our obligation to ensure that the services the unit provides are fully compliant with
the tenets of the Shariah, managing director Amitha Gooneratne said in a statement.
M M A Mubarak, Fazil Farook and M M Murshid, from Sri Lankas All Ceylon Jamiyyathul
Ulama will be on the Shariah board.
Commercial Bank will offer deposit products
such as Mudaraba savings accounts and
Mudaraba investment accounts and asset
products such as Murabaha, Musharaka,
Diminishing Musharaka, and Ijara leasing
and import financing.
The bank said the products operate on the
Islamic principle of both the bank and the
customer sharing returns as well as risks.
Mudaraba, which is a form of profit sharing
investment, is a partnership where one partner provides full capital while the other manages the business.
Any profit made using the funds is divisible between the customer and the Bank
at a predetermined ratio agreed to by both
parties. Murabaha is the sale of goods by
the Bank to customers at a cost plus profit
where the selling price is decided at the time
2011 August Global Islamic Finance
gif
News
of the sale. Murabaha can be used for local

purchases or import of trading commodities
and the customer is given a fixed tenor to
settle the sales proceeds, the bank said.
Musharaka is a method of financing based
on partnership, used for asset financing
and export financing. Partners are entitled
to a share in the profits that result from the
project at a predetermined ratio which is
mutually agreed upon at the time of entering into the contract.
Diminishing Musharaka is a partnership in
which one partner (the customer) will purchase the Banks share in a fixed asset over
a predetermined period and become the
owner of the asset.
The ownership of it will be passed to the
client upon successful completion of the
agreed terms. This can be used for property
purchase, housing purposes and project finance. Available for unregistered vehicles
and equipment and machinery, Ijara is a
contract where the lessor (Bank) who owns
the asset transfers its usufruct to another
person for an agreed period at an agreed
rental.
The asset will be gifted to the customer
when all lease rentals are met on time. Import financing involves providing letters of
credit with financing on Islamic terms, this
includes import Murabahas.
Bahrains Elaf Bank Licence Granted By
Malaysia
Bahrain-based Elaf Bank, licensed by the
Central Bank of Bahrain to operate as a
wholesale Islamic bank with a paid-up capital of $200 million, has been granted a license by the Ministry of Finance Malaysia
to open a branch office under the Malaysia
International Islamic Finance initiative in
Malaysia.
Elaf Bank was presented with the license
during a formal ceremony held at Bank Negara Malaysia in the presence of key officials
and representatives from both sides.
Elaf Bank plans to start its branch office operations in Kuala Lumpur immediately now
that it has fulfilled the formalities required
for obtaining the license.
Jamil El Jaroudi, CEO of Elaf Bank, highlighted the importance of opening a branch office in Malaysia, which falls in line with the
banks long-term business strategy.
He said Elaf Bank is developing its business through two hubs covering the GCC
and MENA region and the South East Asia
region, as a two-way business corridor. Be10 Global Islamic Finance
August 2011
ing a wholesale Islamic bank headquartered

in the capital of Islamic finance in the Middle
East (Bahrain), the logical next step would
be to open our first international branch office in the capital of Islamic finance in South
East Asia (Malaysia). This will help us operate more efficiently and closely to meet the
needs of our cross-regional clients, and be
able to execute deals that will contribute
to the sustainable growth of the Islamic finance industry in both strategic markets,
he added.
sukuk secondary market to act as a market

maker. Elaf Bank currently provides a wide
range of financial services to clients involving investment banking including fund-raising advisory, mergers and acquisitions and
asset management and treasury and capital
markets such as liquidity management, foreign exchange, investment, structured products and derivatives.
We firmly believe the bank is poised to not

only widen its scope and reach through the
opening of the branch office in Malaysia, but
also to consolidate its excellent client relations and business activities as a result of
this step, which will no doubt generate benefits for both regions and create value for
the Bank, Jaroudi said.
The UAE Central Bank is doing unprecedently well and is about to launch a facility
for repurchase for Islamic certificates of
deposits in order to provide a new liquidity
tool for the OPEC members banks.
Elaf Bank is a closed shareholding company

incorporated in Bahrain. The bank encompasses the full spectrum of wholesale Islamic banking with an additional differentiating
dimension geared toward developing the
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UAE Central Bank To Launch Islamic Certificates of Deposit For Repo Facility
It has been quite a challenge for the UAE

with the lack of liquidity management tools
in the Islamic finance industry, which has
close to $1 trillion worth of assets globally.
The Shariah compliant principle of the ban
on interest rules out the possibility of most
interbank tools therefore liquidity tools need
to be further developed.
The Shariah-compliant facility, which accepts the Central Banks Islamic certificates
of deposits as collateral, is introduced to
provide a source of liquidity to banks, the
central bank said in its circular to banks,
which was seen by Reuters.
The new facility is based on a murabaha
concept; the circular also showed Murabaha
is a sales contract, usually employed in commodity transactions, that involves the purchase from an independent supplier which
is then sold at an agreed price that includes
the institutions costs plus additional profit.
In November, the UAE central bank launched
auctions of Islamic certificates of deposit,
which saw volumes increasing steadily.
Banks held 12 billion dirhams ($3.3 billion)
worth of the certificates in April, some 10
percent of the overall volume, central banks
data show.
It is a repo with Islamic certificates of deposits as collateral against cash and allows
them to free up liquidity when needed, said
an executive at an Abu Dhabi-based bank.
There is a shortage of liquidity instruments
and it is more pronounced on the Islamic
side, he said, asking not to be named. Islamic finance accounts for around 17 percent of banking assets in the UAE.
The UAE central banks monetary policy is
limited by its dirham peg to the US dollar. It
uses CDs auctions and repurchases facilities among other tools to regulate liquidity
in the banking system. Late last month, the
central bank said it planned to tighten regu-
News
Malaysian Islamic Banks See A Brighter

Future
Islamic banks in Malaysia enjoy a bright future as they are able to compete and have
the resilience to survive in the countrys
open and competitive economy said Dr
Awan Adek. Malaysia is an unprecedented
Islamic financial hub with a significant
scope to provide a benchmark to other Islamic financial hubs around the world.
,,
Islamic finance is one of the fastest growing industries in the world. However, authentic
education on the subject is not widely and
easily available. We are delighted to work with
Durham University and Hawkamah to fill this
vacuum and create what will be the benchmark in Islamic finance teaching. For the first
time in the UAE, practitioners as well as students can benefit from a curriculum designed
to teach both the academic and practical skills
needed to succeed in Islamic finance
,,
Dr. Hussain
Hamed Hassan,
Managing Director,
Dar Al Sharia
ercise for banks, including for Islamic banks,

except if the banks themselves conducted
such an exercise. He alluded to the governments merger of commercial banks under
which 23 local banks were merged into nine.
Any merger exercise in future will hinge on
the business decision by the banks board of
directors and shareholders.
Given the increasingly competitive economic scenario today, banks will find ways and
means that will favour them, he said.
Awang Adek said completed merger exercises thus far had yielded good impact for
banks as they have emerged stronger with
higher working capital, have opened more
branches and enjoyed higher national profile
in the banking sector.
The mergers have also enhanced banks
financial standing; improved their internal
,,
lations on how banks in the second largest

Arab economy manage liquidity so they can
better cope with future crises. UAE lenders
remain hesitant to lend following Dubais
$25 billion debt restructuring last year and
weakness in the property sector, although
deposits stand at their highest level in more
than two years as the country enjoys safehaven status amid unrest in the region.
Institutional and corporate banking

will always be more volatile than the retail
side. However, the retail side has the most
untapped potential in terms of offering
investment products, Takaful and other forms
of financing. Financial institutions that focus
on the retail side will win over those focused
on the institutional side
,,
Tariq Al-Rifai,
Director, Dow Jones

Islamic Market Index
Deputy Minister of Finance Datuk Dr Awang

Adek Hussin said 21 Islamic banks are operating in Malaysia, with RM351 billion in
combined total assets.
risk management; quality of their assets,

efficient management; and are able to venture into regional and global markets, he
added.
There are 11 domestic Islamic banks; six

foreign Islamic banks; and four international
Islamic banks, reflecting bright prospects to
plans to transform Malaysia into a premier
international Islamic financial centre, he
said.
Bahrain Takaful Industry Prospering in

2011
Siti Zailah sought explanation on the implications to Islamic banks in the country following impending restructuring of the banks.
Awang Adek said the government had still no
definite plans to carry out a restructuring ex12 Global Islamic Finance
August 2011
The takaful industry in Bahrain is said to

be prospering in 2011 as people are favouring Shariah-compliant methods of Islamic insurance.
Takaful total contributions grew by 16.5 percent to reach BD13.4 million ($35.6m) in
the first quarter of the year compared with
BD11.5m for the same period last year,
according to the Central Bank of Bahrain

(CBB). But traditional insurance still took the
largest share of the market, down slightly at
BD43.3m in the first quarter compared to
BD44.1m last time. The insurance market
in Bahrain consists of 27 domestic insurance companies and 11 branches of foreign
insurance companies covering both direct
insurance and reinsurance.
The recorded data for the insurance market
during the first quarter of the year shows a
slight increase of 1.8 percent in gross written
premiums in the quarter up from BD55.7m
last time to BD56.7m.
This growth was mainly due to the surge in
the premiums of life insurance and the remarkable growth of the takaful. The combined capital of both conventional and takaful insurance companies grew by 4 percent
to reach BD163.6m in the first quarter
,,
gif
To prosper and grow, the Islamic financial

industry needs to be served by firms that can
deliver well-researched and designed tools
that are Shariah-compliant and commercially viable; [it must] also comprehensively
consider taxation, audit and accounting
perspectives
,,
Neil D Miller,
Global head of
Islamic finance,
KPMG
compared to BD157.2m in the first quarter

of 2010. The total assets of insurance companies increased by 6 percent to BD1.29
billion compared to BD1.22bn last time.
Conventional insurance reported the highest contribution in total assets at the rate of
79 percent.
Reinsurance companies that operate from
Bahrain showed a rise in both reinsurance
premiums and net profit during the first
quarter, increasing reinsurance premiums
by 5.6 percent to BD151m compared with
BD143m. The net profit of reinsurance
companies increased by 3.8 percent to
reach BD8.1m compared to BD7m reached
previously. The key indicators show that
News
there has been minimal negative effect on
the growth of insurance companies due to
recent events in Bahrain, where indicators
clearly show a rise in total insurance premiums, capital and assets of the insurance
market in Bahrain, in addition to the remarkable growth of the takaful insurance industry
keeping up with the growth of both the direct
insurance market or the reinsurance market
in previous years, the CBB said.
Islamic Finance The Greener Ethical Option
Seetharaman, however, noted that Islamic

banking is currently in its infancy and faces
several challenges. Young people should be
encouraged to take up these challenges to
ensure that this significant economic system
carries through and plays a leading role in
the current global financial stage. He added
that Islamic banking is growing in popularity
as Japan has just issued five Sukuk Ijara (Islamic leasing bonds) and many other countries including Italy, Canada and Spain are
showing great interest in such products and
services of Islamic banking.
The Chief Executive delivered the inaugural

address at a seminar on Islamic economics,
In the UK, there is a full-fledged Islamic

bank, called the Islamic Bank of Britain, and
there are 22 counters at conventional banks
that offer Islamic banking services and products. Seetharaman noted that infrastructure
development projects in India can attract
foreign investment if the country opens up
its banking sector to Islamic banking. Indias
,,
,,
Islamic Banking is the right platform to

boost green financing as it is based on
the concept of promoting good practices
and values, said R Seetharaman, Chief
Executive Officer of Doha Bank.
Islamic finance is becoming much more

prominent throughout the financial institutions of the world, rapidly growing from a
niche industry to a mainstay of finance
,,
John Willsdon,
CIMA, the Chartered

Institute of
Management
Accountants
organised by the Indian Islamic Association

Qatar (IIAQ), under the title Towards an
Alternative Economy at Omar Bin Al Khattab Preparatory School for Boys in Doha.
Seetharaman said Islamic banking is not
just a financial system but it is part of a total value-based social system that seeks to
enhance the general welfare of society as a
whole.
Sustainable environment development,
developing water resources, facing global
warming, ensuring womens participation
and promotion of small-scale enterprises
are all part of green financing. This is clearly
an area where Islamic Banking can play a
pivotal role, he said.
We want to make that capacity available

to regional Takaful, both in the GCC and Asia,
in order to assist them in their reliance upon
conventional facultative reinsurance for those
risks that either exceed their own underwriting
capacity or are for exposures that are not core
to their underwriting capabilities. We hope that
in time, all Takaful operators will realise that
there is abundant Retakaful capacity available,
and that they will seek to utilise only Retakaful
when looking to mitigate their risk exposures and
volatility of profits
,,
Richard Bishop,
CEO of GNL
Insurance
11th Planning Commission has earmarked

$542bn for this sector, but hardly any money comes from the Gulf-based financiers as
they are reluctant to deposit in an interestbased system.
P P Abdur Rasheed, former Head of Economics Dept at Government College, Malappuram, India, and K Abdullah Hassan, Head
of Research at Islamic University, Santapuram, India, also delivered speeches on
Fundamentals of Islamic Economics and
Basic Principles of the Zakah System in
Islam. Nizar Kocheri, lawyer and noted humanitarian activist, delivered a felicitation
speech and Abdul Wahid Nadvi, Acting President of Indian Islamic Association, Qatar,
gif
presided over the ceremony. V T Faisal, General Secretary of IIAQ, welcomed the guests
and Taj Aluva proposed a vote of thanks.
Albaraka Turkish Unit Secures $150m
Funding
Albaraka Banking Group said its Turkish
subsidiary has mandated several major
banks to arrange a $150 million dual-currency syndicated finance facility to expand
its activities in the country.
Albaraka Trk said the banks involved in the
arrangement of Murabaha financing facility
are ABC Islamic Bank, Emirates NBD Bank,
Noor Islamic Bank and Standard Chartered
Bank (together the initial mandated lead arrangers and the book runners).
As a prominent participation bank in Turkey, Albaraka Trk enjoys a market share of
19.14 per cent in the participation banking
segment by asset size in Q1 March 2011.
The financing facility has a tenor of one year
and carries a profit rate of 150 bppa over the
relevant Libor/Euribor.
The facility was launched into general syndication last month with banks from across
the globe invited to participate in the facility.
Financing under this facility will be used by
Albaraka Trk to expand its financing activities in Turkey. The facility has a tenor of one
year and carries a profit rate of 150 bppa
over the relevant LIBOR/EURIBOR.
The facility was launched into general syndication on the 29th June 2011, with banks
from across the globe invited to participate.
Albaraka Trk is amongst the first financial
institutions and one of the pioneers in the
field of interest-free banking in Turkey. It
completed its establishment in 1984 and
commenced operations in the beginning of
1985. Albaraka Trk is currently rated BB
with negative outlook by S&P.
Albaraka Trk continues its operations in
compliance with the Law of Banking numbered 5411. Albaraka Trk was founded by
Albaraka Banking Group (ABG), one of the
prominent groups of the Middle East, Islamic Development Bank (IDB) and Alharthy
Family, which served the Turkish economy
for more than half a century.
As of the 31st May 2011, the foreign partners own 66.16 per cent, the domestic partners 11.33 per cent and 22.51 per cent are
publicly held. Albaraka Trk has a market
share of 19.14 per cent in the Turkish participation banking segment by asset size in
Q1 2011. gif
13
gif
Islamic Banking
HOW TO RUN
AN ISLAMIC BANK
PUTTING CORPORATE STRATEGY IN PLACE,

VALUES, REGULATIONS, PART I
Author: Imran Pasha, Head of Retail, Islamic Bank of Britain, United Kingdom
Richard Williams, Finance Director, Bank of London and Middle East, United Kingdom
Tajah Brown, Global Islamic Finance Magazine Editorial Team, United Kingdom
Abstract: When considering the aspects involved in running an Islamic bank it is vital to channel
resources such as knowledge and relationships in the right direction in order to strike a balance between innovation and control. Strategy is the art of creating value and providing frameworks, models
and governing ideas. It could be compared to software, which needs to be updated as people expand
their knowledge and gain experience. How to run an Islamic bank will explore the different strategies
involved in the running of an Islamic bank such as risk positioning and financial fundamentals.
Islamic banking is a rapidly growing industry with the establishment of many new institutions embracing Shariah compliant banking. The UK has combined assets of US$300 million and overall the
Islamic finance industry is worth an estimated one trillion US dollars globally. This article explores the
key factors in running an Islamic bank, covering topics such as regulations and risk management. Imran Pasha and Richard Williams will give their views and advice on subjects such as the tailoring and
overseeing of Islamic products and the attraction of non-Muslims to Islamic finance. The article also
looks at the comparison of Islamic and conventional banks and the steps required when establishing
an Islamic institution.
Keywords: Strategies, Shariah Principles, Basel III, Risk Management, Islamic Financial Products
August 2011
Islamic Banking
Exploring the structure of Islamic banking

The term Islamic banking means the carrying out of banking operations in compliance
with Shariah principles. Islamic banking and
finance have been growing rapidly over the
years. Its successes not only include countries with large Muslim populations but also
those countries where the Muslim population is a minority. Banking practices with the
concept of receipt and payment of interest
are not in accordance with Shariah principles.
Richard Williams, Finance Director,

Bank of London and Middle East
Having qualified as a Chartered
Accountant with KPMG in 1980,
Richards early career in Investment Banking was spent with
Chase Manhattan, Credit Agricole
and Bankers Trust. He then spent
10 years at Robert Fleming & Co
setting up their Global Equities
Derivatives business which took
him to Tokyo and 3 years in Hong
Kong with Jardine Fleming. Richard
joined BLME in January 2007 as
Finance Director.
gif
lenges when introduced to a world where

interest plays an important role in most financial operations. The key principles of
Islamic finance are the prohibition of riba,
uncertainty and forbidden assets such as
alcohol and the existence of underlying assets and finally, profit and risk sharing. The
Shariah principles explain in detail the ethical aspects of money and capital within Islamic finance and the relations between risk
and profit as well as the social duty of the
financial institutions.
In the past Muslim communities could not

The definition of ethics could be described
avoid conventional ways of banking but Isas a set of moral values that distinguish
lamic banking practices have been flourright from wrong. There are various negaishing over the past years so that Islamic
tive effects of interest based finance such
finance is now recognised throughout the
as instability, under-financing the economy,
financial world. One of the first tasks that
which may lead to employshould be implemented when
ment losses, and not enough
establishing an Islamic bank Figure 1: Comparison of Islamic and conventional banking frameworks attention given to economic
is the establishment of a relidevelopment. When considable body to provide Shariah
ering the ethical and moral
Paradigm Version of
supervision.
principles within Islamic fiCharacteristics
Conventional Banking
Islamic Banking
nance and banking there is a
Nominal value guarantee of:
With the advice and approvresponsibility to ensure that
Yes
Yes
Demand deposits
al of a Shariah supervisory
Shariah principles are met,
No
Yes
Investment deposits
body the bank can then start
such as full transparency and
Equity-based system where
development of Shariah coma focus on the Shariah board
Yes
No
capital is at risk
pliant products. The Shariah
membership ensuring that
Uncertain, no guarCertain and guaransupervisory board enables
the Shariah quality of finanRate of return on deposits
anteed
teed
the Islamic bank to conduct
cial products is met.
financial transactions which
Depending on Banks Irrespective of Banks
Mechanism to regulate final
performance/profits
performance/profits
follow Shariah principles.
Islamic banks cannot separeturns on deposits
from investment
from investment
The board should be a group
rate themselves from moral
of scholars who are expert in
and ethical decisions. Their
PLS principle is applied
Yes
No
Islamic jurisprudence.
surroundings and staff, inUse of Islamic modes of financYes
N/A
cluding
experts,
should
ing: PLZ and non-PLS modes
When focusing on the theoabide by the moral and ethiPossible for reducing
retical aspect of Islamic fical standards of the Islamic
moral hazard in PLS
Use of discretion by banks with
nance, the dominant issue
religion, which therefore
modes
Yes always
regard to collateral
is that of interest, which is
determines the values and
Yes in non-PLS
prohibited in Islam and is
standards within Islamic fimodes
not wanted or needed within
nance. Conventional banking
Banks pooling of depositors
Islamic banking operations.
uses the interest rate to confunds to provide depositors
Yes
No
Islam teachings provide a
duct financial actions. On the
with professional investment
strong foundation for organother hand Muslim scholars
management
ising banking operations.
within Islamic banking have
This attitude towards interest Source: IMF working paper: Islamic Banking Issues in Prudential regulations and
developed a different model
in Islamic finance faced chal- supervision
of banking that does not use
15
gif
Islamic Banking
interest. Islamic banks in comparison with

conventional banks both have similar types
of deposits. Conventional banks offer current accounts, savings accounts and fixed
deposit account and Islamic banks have current and savings account. The Islamic banks
also have investment accounts.
The big difference between conventional and
Islamic banks is that the conventional banks
pay a guaranteed interest rate on the savings and fixed accounts while Islamic banks
pay the depositor a profit depending on the
deposit amount. Figures 1 and 2 show the
comparison of conventional and Islamic
banks and their banking frameworks.
The first standalone Shariah compliant retail
bank in the UK authorised by the Financial
Services Authority is the Islamic Bank of
Britain (IBB) established in 2004. The IBB
is also a member of the Financial Services
Compensation Scheme. The bank aims to
provide its customers with an individual and
welcoming service.
The bank, based on its Shariah principles,

is often viewed as an ethical and stable alternative to conventional banks. Certainly,
its achievements are well recognised both in
the UK and internationally. As a result it has
earned a well deserved reputation as the UK
leader in British Islamic banking. The strategies behind the success of Islamic banking.
Imran Pasha, Head of Retail, Islamic Bank of Britain
Having over 10 years experience
within the financial services sector,
Imran held management positions
with Merrill Lynch and HSBC. At IBB
Imran has held various positions
progressing from Branch Manager
to Area Manager. He currently holds
the position of Head of Retail. In
this role Imran holds responsibility
for Banks the distribution network, the marketing function and
deposits.
There are a range of strategies to consider

when running an Islamic bank, such as risk
positioning and the financial fundamentals.
The purpose of having a strategy is to help
the banks improve and establish a strong
place in a selection of markets rather than a
place in a range of competitive markets. Islamic banks have ways to manage commercial risk, such as profit equalisation, investment risk reserves, Mudarib fees and share
holders. In addition, Islamic banks pay more
attention to assets and liabilities compared
to their conventional counterparts.
Islamic banks have problems in managing liquidity and risk because of the limited
amount of financial instruments on offer.
Head of Retail, Imran Pasha, shares his exIslamic products are not as commoditised
pert knowledge of how to run an Islamic bank.
and tend to need more altering and atHe is currently responsible
tention, which can result in
for the banks distribution
operation risk. The latest inThe first steps to establishing an Islamic bank Establishment of the IBB
network, marketing funcstrument to complement the
Imran Pasha, Head of Retail at the Islamic Bank of Britain talks us through the
tion and deposits. With over
operating systems of Islamic
steps:
10 years of experience in
transactions internationally
the financial services sector
is the wakalah structure. The
Licensing. Establishing a bank is a long and painstaking task consisting of several
and various positions in the
exclusion of limitations within
elements. The first is regulatory and financial. IBB therefore came into existence in
IBB such as Area Manager
the Islamic finance industry
August 2004 when the UK governments regulatory body, the Financial Services
Authority (FSA), granted the bank its license. In September 2004 IBB became a UK
and Branch Manager, Imran
should encourage the develpublicly listed company on the Alternative Investment Market (AIM).
Pasha talks us through the
opment and growth of the
establishment of the IBB
industry. The rapidly growing
Retail financial services. Once the capital was raised by investors in the UK and
and the effect it had on the
Islamic finance industry is althe Middle East, the bank set about implementing the vision of offering Shariah
financial industry.
ready worth an estimated one
complaint retail financial services. This included designing and setting up the infrastructure, processes and products as well as bringing together the team.
trillion US dollars globally.
He says that the IBB has
Branch network. This was followed by the setting up of a branch network. IBB now
impacted the UK and EuLiquidity management struchas a national branch network in key locations including London, the Midlands and
ropean financial industry,
ture can be challenging for
North West.
The bank has continued
Islamic banks because of
Smart banking facilities. To complement this, and to enable Shariah compliant
to maintain this position
the lack of liquid instruments
banking to be accessible to consumers across the UK, IBB also developed its Smart
and still remains the only
within Islamic finance. After
banking facilities. These allow customers to carry out their banking over the internet
Islamic retail bank in the
attaining extra revenue the
or telephone by liaising with one of the banks customer services representatives.
UK and Europe. It is conGCC Islamic banks kept a
Marketing and awareness. Marketing and community relations have also played
sidered a pioneer of retail
large amount of core liquidan important role in the banks activities. In order to establish a presence IBB has
Islamic banking and curity in the form of short-term
played a strong role in the British Muslim community, providing services to local
rently offers the largest
Murabaha and deposits from
mosques and charities. It has also undertaken extensive marketing, advertising
range of Shariah-compliant
central banks. The result of
and PR activities to ensure its target audience are aware of the bank and its prodretail financial products to
these actions proved that
ucts and services.
the UK consumer. Almost
it was the right choice for
Product development. Finally, the bank has undertaken extensive product develseven years on and IBB has
that particular area, which is
opment so that its customers can genuinely manage their finance according to the
grown at a steady rate and
known for numerous cycles
principles of their faith, i.e. without the use of interest. As a result of its ongoing
carved itself a niche in the
and recurring shocks.
work, the bank now offers the largest range of Shariah compliant retail financial
UK retail banking sector.
products and services in the UK.
August 2011
Dea
d
Exte line
nde
Unti d
l
1st
Sep
of
tem
b
er
WILL YOUR
INSTITUTION BE IN
2011
TOP ISLAMIC FINANCE

INSTITUTION
RANKING?
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These prestigious rankings provide a comprehensive outlook into the Global Islamic financial industry and are the first of their kind. GIF is working hard to ensure that both individuals and institutions are included in the list of high ranking categories. If you are interested in
taking part please register your interest at the earliest opportunity.
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gif
Islamic Banking
Warren Edwardes, CEO, Delphi Risk Management, United

Kingdom
Islamic products require more tailoring which could create operational
risk. In what way can Islamic banks
reduce the operational risk?
Shariah risk and reputational risk are
prime sources of operational risk for
Islamic banks.
The Holy Quran states: [3:130] O you who have believed, do not
consume usury, doubled and multiplied [2:275] Allah hath permitted trade and forbidden interest.
Hadith I in al-Nawawis Forty Hadith, states that actions are according to intent or actions are what they are by virtue of intent. Niyyah
is intention: an inner act of the heart whereby one performs an outer
act as the fulfilment of a particular duty, rather than merely a series
of motions without religious value. The point of Shariah finance is to
fulfil religious compliance and not just to appear to do so.
An issue for Islamic banks is the tendency to replicate conventional
products with an Islamic veneer rather than create Islamic products
based on Islamic principles of profit and loss sharing and genuine,
rather than fabricated, trade transactions.
Cleverly engineered products, perhaps not fully explained to Shariah
scholars, may initially be deemed Shariah compliant. However, when
the undisclosed side trades affected by the SPVs become apparent,
the products are uncovered as repackaged conventional products
thus damaging the reputation of the Islamic bank.
Niyya, the intention which underlies all transactions, is the responsibility of the end-user investor or finance-seeker. It is important to
have full transparency and disclosure about all of the transactions
making up the structured product, so that stakeholders can evaluate
the true intention behind it and see if it is compliant with their own
Niyya, which may be genuine Shariah compliance or just the appearance of Shariah compliance. It is for the Muslim end-user to enter
into contracts, directly or via financial institutions, with which he is
happy to be judged on the day of judgement and not just on earth.
For that transparency is key.
Products may be structured as a package of trades, which are individually Hallal, while the Niyya of the package as a whole is to replicate Riba, which is Haram. Each person involved must ask himself
what his own Niyya is. If the transactions involve trades in certain
markets, do the investors really understand these markets or are
they entering into a synthetic Riba transaction that does not depend
on the performance of these markets?
Transparency will help to mitigate operational risk represented by
Shariah and reputational risk.
The risks within banking strategies

A selection of people in Islamic banking, such as regulators, shareholders, customers and company employees and management,
determine its business strategy and performance All these people
affect the financial strength of Islamic banks, but regulators in particular have an affect on the banks strategy and ratings through
their influence on the regulatory environment and overall support.
The main aims of the bank regulator are to ensure that the depositors are protected and to spread awareness of a strong banking system.
Shariah compliant products and investments are very important
within Islamic Banking and may determine the banks reputation. If
an investment did not follow Shariah principles it would have negative consequences on the bank and create a risk of dissolution of the
investment entity. It is vital that all investments are checked by the
bank and by a Shariah authority or regulator. The product structure,
contracts, asset securities and other aspects should be assessed
before deciding whether the product or project is Shariah compliant.
After the approval of the Shariah board the product or project can
be released on to the financial market. If the legitimacy is uncertain
then the issue should be taken on by a Shariah auditor or supervisor,
who can quickly deal with and solve any problems.
The purpose of most of Islamic banking strategies is to achieve profitable asset growth. Certain factors can affect the use of strategies,
such as the progression of Islamic banking and finance, the position
of the banks in their home markets, the resources available and medium and long term goals.
Improving risk position is another aspect that is part of Islamic banking strategy, although Islamic banks are able to overcome negative
shocks to the assets aspect of the investment depositors. Commercial risk is also something to be considered and, according to CPI
Financial, Islamic banks have put in place buffers against loss in
order to manage commercial risk. These are:

Profit equalisation (consistent earning across the cycle)

Investment risk reserves (attract negative shocks on asset
value)
Mudarib fees (can decrease in order to avoid having a negative
affect on the depositing Rab al Maal)
Shareholders (always supplying Qardh Hasan to profit-sharing
depositors)
The Finance Director at the Bank of London and the Middle East,
Richard Williams gives his views on Islamic banks in the financial
crisis. When the credit crisis hit in 2008 many commentators and
industry leaders appeared to believe that Islamic banks were immune from the financial crisis. Now, however, we can see that some
Islamic banks were exposed due to over-zealous expansion and excessive risk concentrations, particularly in the property sector. He
continues One of BLMEs priorities has been to offer a diversified
range of products and services, ranging from asset management to
trade finance and leasing.
The legal and regulatory changes in Islamic finance and banking
An important aspect of Islamic banking regulations is the maintenance of a level playing field between banking institutions, this re-
August 2011
Islamic Banking
gif
sults in the regulators within Islamic finance applying the same principles of handling risks to all banks. Regulators apply the national
supervisory principles to all banks, no matter what services they offer,
Islamic or conventional. However the generic principles may not apply
to every Islamic banking framework and the regulatory requirements
should be tailored to cater to any relevant characteristics when running an Islamic bank.
Shah Fahad Yousufzai, Vice

President, Products Development Department, Islamic
bank of Thailand
The Islamic financial industry is challenged by the development of

consistent regulatory standards that apply to the specific features of
Islamic banking. It is necessary for the regulatory standard to apply
within the industry and to meet the requirements of the basic regulatory standards worldwide. Capital adequacy is a very important part
of assessing whether a bank will succeed or fail. It is an important aspect when looking at a banks risk exposure and may reveal a banks
risk relationships.
Any muamilat (financial transaction)

without Akhlaq (ethics) is considered
irregular and inappropriate.
The Basel III system is the most recent of global regulatory standards
which has developed from the previous Basel I and Basel II agreements. The Basel committee agree on the Basel II standards for
banks capital adequacy and liquidity. The goal of the Basel III system
is to strengthen bank capital requirements and encourage new policies on bank leverage and liquidity.
Imran Pasha explores the legal and regulatory changes to ensure the
aims of Islamic banks are met. He says that within the UK the government and the Financial Services Authority (FSA) have worked with
and encouraged those aiming to establish Islamic financial institutions. The overall goal is to make the UK the capital Islamic financial
hub in Europe. Imran Pasha says To illustrate, the UK was the first
member of the EU to authorise Islamic banks. The government also
introduced changes so that Islamic mortgages would not be subject
to double taxation. There have been at least five Financial Acts since
2003, where legislative changes have been introduced to put Islamic
finance on a level playing field with conventional finance. He adds
that there have also been numerous changes made by the HMRC
and the FSA covering the aspects of profits, taxation and regulation
of Home Purchase Plans.
He refers to the CityUK Islamic Finance 2011 report and gives examples of the UK within Islamic finance. There are 22 banks in the
UK offering Islamic products. This figure exceeds that of any other
western country. There were five Sukuk listings at the London Stock
Exchange (LSE) in 2010 and one in early 2011. This brings the aggregate total at the LSE to 31 listings worth US$19 billion. Islamic funds
in the UK have combined assets of US$300 million.
The Bank of London and the Middle East (BLME) is an independent
wholesale Shariah compliant bank based in London and provides Islamic investment and products to businesses and individuals. The
financial director, Richard Williams, discusses the changes in regulation and how it affects Islamic banks. Joining the BLME in 2007 the
financial director spent his early career working in investment banking.
How are values and regulations tailored to apply to Islamic finance and
banking?
Muamilat (financial transaction) and Akhlaq (ethics) work side by

side within Islamic finance. Business transactions under the umbrella of Shariah must be according to the ethos of Islam. One can
ask what the logic is behind not earning funds through interest. Islam prohibits it because it greatly restricts the physical activity and
circulation of capital. As Islamic business transactions are based
on real trade such as Murabaha sales, Musharakah venture capital
and Istisna for construction purposes etc.
Islam is against the concentration of wealth in the hands of one
individual and also encourages the distribution of wealth from rich
to poor, as in the Zakath and Ushar system.
Islamic prohibits unlawful practices within Islamic finance and prohibits activities that could harm society, such as uncertainty and
gambling.
The role of the Shariah supervisory board and Shariah audit and
compliance team is crucial. One sees many examples of the Murabaha role in developed Islamic banking market economies. All
concerned authorities, for example Shariah compliance and audit
teams and finance assigning executives, are responsible together
with Shariah advisors for supervising financial practices. Each IFI
needs a team of experts to eradicate non-Shariah compliant transactions and strictly monitor each and every transaction.
The main objective of Islamic banks is to carry out precise and accurate transactions according to Shariah principles. The executives
of IFIs all over the world always associate profitability with their success, but profit is a secondary aspect of Islamic finance; the primary
aspect is Shariah compliancy while practicing any mode of Islamic
finance.
My suggestion to all central banks of countries practising Islamic
banking is that a Shariah advisor should be an employee of the central bank and not of the commercial banks involved in practising
Islamic banking. Islamic banks must add spiritual satisfaction to the
job description, since it is an essential professional and social responsibility. It would be helpful for true Islamic banking to function
according to the real Islamic spirit.
He spent the next ten years at Robert Fleming & Co setting up the
global equities derivatives business and travelled to Tokyo and Hong
Kong. Richard also has experience with start up companies and in
the areas of private equity with legal and general ventures. He shares
his views saying Basel III was introduced over the coming years with
full accord, scheduled to be fully implemented by 2019. Richard Wil2011 August Global Islamic Finance
19
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Islamic Banking
Figure 2: Comparison of conventional and Islamic banks
Conventional Banks
Islamic Banks
The functions and operating modes of conventional banks are based The functions and operating modes of Islamic banks are based on the principles
on fully manmade principles.
of Islamic Shariah.
The investor is assured of a predetermined rate of interest.
In contrast, it promotes risk sharing between the provider of capital (investor) and
the user of funds (entrepreneur).
It aims at maximising profit without any restriction.
It also aims at maximising profit but subject to Shariah restrictions.
It does not deal with Zakat.
In the modern Islamic banking system, it has become one of the service-oriented
functions of the Islamic banks to be a Zakat Collection Centre and they also pay
out their Zakat.
Lending money and getting it back with compounding interest is the Participation in partnership business is the fundamental function of the Islamic
fundamental function of the conventional banks.
banks. So we have to have thorough understanding of our customers business.
It can charge additional money (penalty and compounded interest) in
case of defaulters.
The Islamic banks have no provision to charge any extra money from the defaulters. Only a small amount of compensation and these proceeds are given to charity.
Rebates are given for early settlement at the Banks discretion.
Very often it results in the banks own interest becoming prominent. It

makes no effort to ensure growth with equity.
It gives due importance to the public interest. Its ultimate aim is to ensure growth
with equity.
For interest-based commercial banks, borrowing from the money market is relatively easier.
For Islamic banks, it must be based on a Shariah approved underlying transaction.
Since income from the advances is fixed, it gives little importance to Since they share profit and loss, Islamic banks pay greater attention to developing
developing expertise in project appraisal and evaluations.
project appraisal and evaluations.
Conventional banks place greater emphasis on credit-worthiness of
clients.
Islamic banks place greater emphasis on the viability of the projects.
The status of a conventional bank, in relation to its clients, is that of

creditor and debtors.
The status of Islamic bank in relation to its clients is that of partners, investors and
trader, buyer and seller.
A conventional bank has to guarantee all its deposits.
Islamic banks can only guarantee deposits for a deposit account, which is based on
the principle of al-wadiah, thus the depositors are guaranteed repayment of their
funds. However if the account is based on the mudarabah concept, clients have to
share in a loss position.
Source: Mohdhafez.wordpress.com
Figure 3: The structure of an Islamic bank
Board of
Directors
Shareholders
Shariah
Supervisory
Board
CEO & COO

Executive
Management
Shariah
Advisory
Source: Gatehouse Bank Organisation

Chart 2011
Products &
Expertise
Capital
Treasury
Real Estate
Asset Finance
Shariah Advisory
Distribution
Placement
InfrastructureBoard
Finance & Operations Dept

Compliance Dept
Communications
Office Management and

Support Board
Credit and Market Risk

Legal Dept
IT Dept
Human Resources Dept
August 2011
Advisory
Line of Reporting
Islamic Banking
liams continues by saying that the reason for the mixture of complexities and Shariah prohibitions when increasing alternative and lower
quality forms of capital, is that most Islamic banks have capital structures that are led by Tier 1 capital in the common equity form. This results in a lack of debt in Shariah compliant form, as well as meaningful
levels of significant preference shares and hybrid capital structures.
He lists the factors that put Islamic financial institutions in a beneficial
position compared to their conventional counterparts. The capital adequacy positions of Shariah compliant banks will benefit in a range of
ways, which are:

The limited role of Trading Book businesses, where Shariah principles prohibit short selling and impose strict limitations on the use
of derivatives. Consequently, Shariah financial institutions will be
negligibly affected by the higher capital charges for such operations.
The modest and very limited use of derivatives and securitised
structures by Shariah compliant banks will result in such institutions not being adversely impacted by the additional capital charges that are being applied to address the inherent risks in such
products (e.g. wrong way risk).
The lack of leverage and contingent risks within Islamic banks
will result in the new leverage ratio only having a very modest impact.
He ends by saying However, it is vital that Islamic financial institutions

continue to develop liquidity instruments and for central banks to offer
Shariah compliant facilities.
Risk management in Islamic banking
According to the Financial Services Authoritys Financial Risk Outlook
2010, the financial crisis created asset losses, uncertainty about the
amount of loss and the breakdown in funding liquidity. This resulted in
the authorities creating a new capital regime that considers recapitalising the banking sector and of a large amount of liquidity support.
However, with this regime came challenges such as capital adequacy
and problems with funding as the new regime is introduced and low
interest rates produced by margin challenges.
A risk may develop when not all the developers of a project attend the
presentation of a project or investment to the Shariah board. This can
result in a disagreement when deciding if the project or investment is
Shariah compliant or not.
To resolve this risk the Shariah auditor needs to check the project or investment before and after its launch. If the product is launched without
being checked for legitimacy by the Shariah board, then there may be a
demand for the investor to return the profits or cancel the product.
Islamic banks need to bring attention to risk management in Islamic
banking and finance. The profit-and-loss-sharing modes of financing could change the credit risk of investment depositors for Islamic
banks and increase the risk for the asset section of the banks balance
sheets. Profit-and-loss-sharing can make Islamic banks vulnerable to
risks produced by equity investors.
Operation risk is an important aspect in Islamic banking and can develop from a number of sources, such as the internal activities conducted
by Islamic banks, the non-standardised aspect of some Islamic prod-
gif
Dr Osama Alsulaiman, Legal

Consultant in Islamic finance,
Saudi Arabia
How are values and regulations tailored
to apply to Islamic finance and banking?
It is of the utmost importance for the proper functioning of Islamic finance (IF) that
there is an appropriate legal framework to
accommodate its applications. Traditional
finance has enabled legislation, contract enforcement measures and
effective settlement dispute mechanisms. In addition to that IF requires a framework which takes into consideration its own distinctive
characteristics. This necessitates the establishment of a competent
legal framework to achieve the following:
1.
2.
3.
Enabling legislation for the creation and authorisation of financial

instruments, establishing Shariah governance, and addressing
conflicts between common or civil law and Shariah principles.
Ensuring that contracts can be enforced by assuring that the legal documentation of any transactions or instruments complies
with both Shariah and local law.
Forming an appropriate mechanism for dispute settlement.
These legal considerations are crucial not only for proper implementation but also to maintain the growth of the industry. After examining the second and third points above, it can be seen that in practice
contracts should comply simultaneously with two sets of laws: Islamic
law and secular law. Compliance in this situation can be looked at in
the same way as compliance between the laws of two or more jurisdictions when structuring any cross-border transactions. However IF, as
part of the corpus of Islamic law, does not pertain to any particular
country, territory or sovereign legal system. This raises concerns about
the extent to which the norms and principles of IF are recognised by
western countries. For example, in some cases the UK courts have
ignored the reference to Shariah as a governing law; for instance in
the case of Shamil Bank of Bahrain EC v Beximco Pharmaceuticals
Ltd and others.
In Islamic countries such as Malaysia, conflicts also arose in the civil
courts over Islamic finance contracts since judges have not been able
to reach an agreement when dealing with Islamic finance cases. This
can be seen for example, in the cases of Bank Islam Malaysia Berhad
v Adnan bin Omar and Dato Hj Nik Mahmud Daud v Bank Islam Malaysia Bhd. However, the Central Bank of Malaysia Act 1958 was replaced
in 2009 by a new Act. Section 56 of the new Act makes it mandatory
for the court or arbitrator to take into consideration any published ruling by the Shariah Advisory Council (SAC) relating to any Islamic financial business. Sec 57 from the same Act provides that the SACs ruling
is binding on the court and the arbitrator. The financial regulator also
put the SAC under the Securities Commission so that it must be consulted by judges and its rulings must be considered binding. Malaysia
has sought to give authority to the SAC to rule on any cases involving
Islamic finance issues, rather than them being challenged in the court.
It is therefore apparent that a prerequisite to the sustainable development of any financial industry is a suitable regulatory framework,
which includes an effective dispute resolution mechanism. In contrast,
the lack of enforceability of contractual agreements ultimately increases the possibility of default and delinquency.
21
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Islamic Banking
ucts and the lack of a dependable system to implement financial

contracts. There are a number of factors that make the operation of
Islamic banks a higher risk and therefore could make them less profitable than conventional banks. The factors are fewer risk-hedging
instruments and techniques, less developed or no interbank and
money markets and government securities, and less availability of
facilities operated by central banks such as lender-of-last-resort.
the short-term funding markets they will remain vulnerable and will
appear less resilient than their conventional counterparts. Imran
Pasha talks about the tailoring and overseeing of Islamic products.
He says Islamic products require more tailoring and as a result are
subject to a dual set of rigorous controls and monitoring. This ensures that as much risk as possible is mitigated and oversights are
avoided.
Shariah scholars encourage that all transactions be linked to a tangible and underlying asset. This results in a gap between cash and
long-term bonds. Asset-based financing and lending products, which
may well be found on an Islamic bank balance sheet, operate to
lengthen the liquidity gaps because exits from the transactions are
not always decided beforehand. Until Islamic banks are able to use
He continues, saying that the first sets of controls are put in place
when the product is conceptualised and launched. The controls are
there to ensure the products are Shariah compliant and are managed by the banks Shariah Compliance Officer. The banks Shariah
Supervisory Committee provides any additional support, monitoring
and controls. The second sets of controls are to ensure the operational and business risk is mitigated.
Figure 4: The four key areas in Basel III
Capital adequacy
There must be more capital and more high quality

capital in the banking system. Fundamentally, all
Tier 1 capital must be fully effective at absorbing
losses and Tier 2 capital must be far more loss absorbent in order to protect capital.
Liquidity
Strengthened liquidity disciplines that stress test

the robustness of a banks funding profile and the
adequacy of liquid asset reserves.
Leverage ratio
A back-stop measure to control banks unduly increasing their absolute leverage and level of model
risk while retaining a high capital ratio. This is of
particular importance when considering that some
of the institutions that suffered the largest losses
were among the best capitalised banks in the
world.
Counterparty credit
risk
Implementation of a capital charge based on a

stress test volatility assessment of counterparty
pre-settlement risks.
Figure 5: The sets of risks

Product risks
This requires identifying and managing the risks involved in operating the investments for the product.
Payment risks
This risk has the same profile in a conventional bank.

It can occur because of an error or mistake in processing payments. As with conventional banks, IBB has
processes and controls in place to manage this risk.
Fraud risks
This again has the same profile in any conventional

bank. Again, IBB has robust processes and controls to
mitigate any such risk.
Operation risks
This would include any risk associated with processing

queries related to products, services, counterparties
and third parties. The risk is again mitigated through
the controls IBB has in place.
August 2011
The IBB has distinct processes put in place to manage the operational and Shariah compliance risk. He ends by saying in fact, Shariah compliance adds another layer of rigour to IBBs overall risk
management procedures. Shariah compliance control is therefore
the safety net that conventional banks do not have.
What does the future hold for risk management in Islamic banking?
As the Islamic financial industry grows rapidly there is a need for
the risk management sector of Islamic investments to improve. Islamic assets are estimated to be worth US$126 billion in the next
ten years. The risk management sector needs to focus on strong
management, vigorous governance and the ability to address Islamic banking issues.
The complicated Islamic banking products and relations, together
with Shariah compliant substance and form, create issues such as
displaced commercial risk. Islamic banks must have a consistent
Shariah interpretation and standardisation to enable the banks to
take advantage of opportunities quickly.
Establishing Islamic banks around the world
Todays modern commercial banking system in the majority of countries is developed from the financial practices in Europe. The banking system revolves around the principles of capital certainty for depositors and the assurance of the rate of return on deposits. In order
to ensure the successful running of the banking system the Central
Banks have the power of regulation and influence.
This means that all other banks have to abide by the rules of the
Central Bank. However, Islamic banks face challenges when complying with the rules when operating in non-Muslim countries.
The challenges that Islamic banks face when operating in nonMuslim countries are the tax procedures, the fact that the Islamic
banking system cannot ensure any fixed rate of return on deposits
and some Islamic banks cannot ensure the capital because if there
is a loss it is taken from the capital. Another challenge that Islamic
banks face is the Central Bank regulation and influence, which relates to liquidity and capital adequacy. These aspects depend on the
assessment of the worth of assets from Islamic banks.
Non-Muslims within Islamic finance
Imran Pasha discusses the attraction of non-Muslims within Islamic
finance. Shariah compliant products and investments are based
Islamic Banking
gif
Figure 6: Islamic modes of financing

TYPE
DESCRIPTION
COMMENTS
PLS modes
Profit and loss sharing modes
At the core of Islamic banking
Mudaraba
Trustee finance contract

The bank provides the entire capital needed for financing a project, while the
entrepreneur offers his labour and expertise. The profits (or losses) from the
project are shared between the bank and the entrepreneur at a certain fixed
ratio. Financial losses are borne exclusively by the bank. The liability of the entrepreneur is limited only to his time and efforts. However, if negligence can be
proved he may be held responsible for the financial losses incurred. It is usually employed in investment projects with short gestation periods and in trade
and commerce. It affects both the assets and liabilities sides of banks balance
sheets. On the liabilities side, the contract between the bank and depositors is
known as unrestricted Mudaraba because depositors agree that their funds be
used by the bank, at its discretion, to finance an open-ended list of profitable
investment and expect to share with the bank the overall profits accruing to the
banks business. On the asset side, the contract between the bank and the
agent-entrepreneur is known as restricted Mudaraba because the bank agrees
to finance a specific project carried out by a specific agent-entrepreneur and to
share the relative profits according to a certain percentage
Three conditions need to be met:

1. The banks should not reduce credit risk by requesting
collateral for this purpose. It bears the financial risk entirely
and exclusively. However, collateral may be requested to help
reduce moral hazard, e.g., to prevent the entrepreneur from
running away.
2. The rate of profit has to be determined strictly as a percentage and not as a lump sum.
3. The entrepreneur has the absolute freedom to manage
the business.
Musharaka
Equity participation contract

The bank is not the sole provider of funds to finance a project. Two or more
partners contribute to the joint capital of an investment. Profits (and losses)
are shared strictly in relation to the respective capital contributions. It is usually
employed to finance long-term investment projects.
Banks can exercise the voting rights corresponding to their

share of the firms equity capital. Their representatives can
sit on the firms board of directors.
All parties invest in varying proportions, and have the right to
participate in the management of the enterprise.
Muzarah
Traditional counterpart of the Mudaraba contract in farming.

The harvest is shared between the bank and the entrepreneur. The bank may
provide funds or land.
Musaqat
Traditional counterpart of Musharaka contract in orchard keeping.

The harvest is shared among the partners based on their respective contributions.
Direct
investment
The same concept as in conventional banking. The bank cannot invest in the
production of goods and services which contradict the value pattern of Islam,
such as gambling.
Banks can exercise the voting rights corresponding to their

share of the firms equity capital. Their representatives can
sit on the firms board of directors.
Non-PLS
Modes
Non Profit and loss Sharing modes
They are used in places where PLS modes cannot be implemented. For example, in cases of small scale borrowers or
for consumption loans
Qard AlHasanah
Beneficence loans, These are zero-return loans that the Quran exhorts Muslims
to make to those who need them. Banks are allowed to charge the borrowers a
service fee to cover the administrative expenses of handling the loan, provided
that the fee is not related to the amount or maturity of the loan.
Bal Mua jja
Deferred payment sales, The seller can sell a product on the basis of a deferred
payment in instalments or in a lump sum payment. The price of the product is
agreed upon between the buyer and the seller at the time of the sale and cannot
include any charge for deferring payments.
Bai Salam
or Bai Salif
Purchase with deferred delivery, The buyer pays the seller the full negotiated
price of a product that the seller promises to deliver at a future date. This mode
only applies to products whose quality and quantity can be fully specified at the
time the contract is made. Usually, it applies to agricultural or manufactured
products.
Ijara
Ijara wa
iqtina
Leasing
Lease purchase, A party leases a particular product for a specific sum and a
specific period of time. In the case of a leas-purchase, each payment includes
a portion that goes toward the final purchase and transfer of ownership of the
product.
Murabaha
Mark-up, The seller informs the buyer of his cost of acquiring or producing a
specified product; then profit margin (or mark-up) is negotiated between the
buyer and the seller. The total cost is usually paid in instalments.
Jo alah
Service charge, A party undertakes to pay another party a specified amount of

money as a fee for rendering a specified service in accordance to the terms of
the contract stipulated between the two parties. This mode usually applies to
transactions such as consultations and professional services, fund placements,
and trust services.
The bank is entitled to receive from the entrepreneur the

principle of the loan at the end of the period stipulated in the
contract if, and only if, a surplus exists. If the enterprises
books show a loss, this will not constitute default on the part
of the entrepreneur, except for negligence or mismanagement.
Contrary to contracts based on the PLS principle, modes

such as markup, leasing and lease purchase have a predetermined and fixed rate of return and are associated with
collateral.
In fact, banks add a certain percentage to the purchase price
and/or additional costs associated with these transactions
as a profit margin, and the purchased assets serve as a guarantee. Additionally, banks may require the client to offer a
collateral.
These instruments can be considered to be more closely associated with risk aversion and they do not substantially differ from those used in a conventional banking system, other
than in their terminology and in some legal technicalities.
They are considered to conform to Islamic principles because
the rate of return is meant to be tied to each transaction,
rather than to the time dimension. However, some Muslim
scholars advocate a stricter utilisation of such modes.
Source: Kazarian, 1993; Iqbal and Mirakhor, 1987

23
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Islamic Banking
on ethical and equitable principles, taken

from Islamic law and are compared with the
values of socially responsible investing. He
says Many of Islamic Bank of Britains products have a wide appeal to consumers of all
faiths who are seeking an ethical, competitive alternative. IBB is certainly very welcoming of customers who practise faiths other
than Islam.
He continues saying When judged on its
products, the bank strives to ensure its
products are competitive as well as Shariah
compliant. As a result, several of its products have been taken up by customers of
different faiths because they have proved
to be very competitive when compared with
competitor products.
Imran also says that the recent financial turmoil proved that the Islamic finance system
is more resilient, transparent, asset-based
and asset-backed compared to the conventional system. The Islamic finance system is
a good base for people of other faiths to discover more about Islamic banking.
He ends by saying With ethical banking
and socially responsible investing on the
increase, Islamic banking has the potential
to appeal to an even wider customer base,
irrespective of their religious belief.
Richard Williams also shares his views on the

attraction of non-Muslims to Islamic finance.
He begins by saying For Islamic banks to
continue to expand their market share, raise
awareness and diversify their investor base
they must attract more Muslims but also appeal to conventional investors.
He continues by saying that the investors
are now looking for alternative investment
options or a change to their current holdings
which is different from the conventional
high street banks.
The reason for this is the last three years
of economic turmoil, which some agreed is
because of the high risk strategies of some
conventional financial institutions. He says
that Shariah finance is one of the alternatives available to investors, both non-Muslim
and Muslim.
He concludes by saying that there are a
number of reasons why Islamic banking
is attractive to non-Muslims. The reasons
include a personal service, competitive offerings and the similarities with ethical financing. From BLMEs perspective, being
a relatively small, nimble, flexible bank with
competitive products and rates resulted in
many of our clients being non-Muslims.
Conclusion
The Islamic financial industry will continue
to develop and become more established in
Muslim and non-Muslim countries. The participatory financing is an exclusive feature of
Islamic banking and can provide funding for
social and economic development projects.
This is an example of an alternative service
that Islamic banks offer compared to the traditional services of conventional banks. This
alternative way of banking gives the customer much more choice.
With increasing information about Islamic
finance becoming available to Muslims and
non-Muslims there is no reason why Islamic
banking and finance will not continue to expand. Richard Williams says With each new
product or service launch IBB engages in an
education programme to help the consumer
understand how it will benefit them. Explaining how products are Shariah compliant is
also critical.
BLMEs financial director gives his thoughts
on the future of Islamic banks. He says
Growth and consolidation, with Reuters
predicting an increase in Sukuk issuance,
the IMF forecasting growth of 10-15% in the
Islamic market and Moodys anticipating the
worth of the Islamic finance industry reaching US$5 trillion by 2015. gif
References and Further Reading

Islamic Banking from: http://www.islamicbanking.nl/chap4.html#_Toc3149130

Prudential Regulation of Islamic banks: An analysis of Capital Adequacy Standards from: PDF 8-1-M.A.Noibi_3
Islamic Banking: Issues in Prudential Regulations and Supervision from: http://www.nzibo.com/IB2/IMFprs.pdf
Islamic Finance Explained (briefly) from: http://www.blakewatersolicitors.com/content.php?id=islamicfinance
Commercial risk from: http://cbb.complinet.com/cbb/display/display.html?rbid=1821&record_id=8374&element_id=7257&highlight=commercia
l+risk#r8374
Islamic banking: state of the art from: http://www.irti.org/irj/go/km/docs/documents/IDBDevelopments/Internet/English/IRTI/CM/downloads/
IES_Articles/Vol%202-1..Ziauddin..ISLAMIC%20BANKING.pdf
CAMEL rating system from: http://pdf.usaid.gov/pdf_docs/PNADQ079.pdf
Islamic Banks Their strategies and ratings from: http://www.cpifinancial.net/v2/FA.aspx?v=0&aid=247&sec=Islamic%20Finance
Growing pains: Managing Islamic banking risks PricewaterhouseCoopers from: http://www.pwc.com/en_GX/gx/financial-services/pdf/growing_
pains.pdf
Financial Services Authority Financial Risk Outlook 2010 from: http://www.fsa.gov.uk/pubs/plan/financial_risk_outlook_2010.pdf
Islamic Financial Institutions and Products in the Global Financial System: Key Issues in Risk Management and Challenges Ahead by V. Sundararajan
and Luca Errico from: http://books.google.co.uk/books?hl=en&lr=&id=9FtK7n6r_dwC&oi=fnd&pg=PA3&dq=islamic+banking+risk+management&
ots=Dte1LB7gy3&sig=eTTUlU-zheeu-fJkXJHM-OazvUQ#v=onepage&q&f=false
The Basic Principles of Islamic Financial Institutions: Compared to Conventional Ones from: http://www.nzibo.com/IB2/basic.pdf
Differences between Islamic bank and conventional from: http://mohdhafez.wordpress.com/2007/03/03/differences-between-islamic-bank-andconventional/
Regulation and Supervision of Islamic Banks from: http://www.sbp.org.pk/departments/ibd/Regulation_Supervision.pdf
Regaining the ethical standards of Islamic finance from: http://eng.assaif.org/Temi-generali/Finanza-islamica-e-finanza-etica
Gatehouse Bank organisation chart from: http://www.gatehousebank.com/about-us/corporate-governance/organisation-chart/
August 2011
Interview
gif
ISLAMIC FINANCE IS ONE OF THE

KEY FUNCTIONAL AREAS
FOR THE HALAL INDUSTRY
Interview with Mahmood Hasan,
CEO of Rasul Group of Companies
Mahmood Hasan is the CEO of Rasul Group of Companies, Pakistan. With
a Masters in Business Administration he established this entrepreneurial
venture in 1983. His transformational leadership and visionary approach led
to the establishment of the brand Bake Parlor. The Halal industry and Islamic
finance share an economic and ideological interdependence and also have
a high growth potential when looking at the retail and commercial forefront.
Both sectors have common grounds such as sharing the aim to attain sustainable growth and innovation under the Shariah principles. Only 5 to 10 percent
of Halal businesses opt for Islamic finance the problem could be the Islamic
banks limited understanding of the Halal industry. Islamic banks are focussing
on Shariah-compliant index and Halal industry focus on Halal index. To bridge
the gap both sectors need to identify the upcoming challenges and proactively
implementing a solution. Mahmood Hasan shares with GIF the connection
between the Halal industry and Islamic banking.
Islamic Finance is also in the process of strengthening its footing in the industry. It is faced with
several regulatory and product development issues. Islamic
financial expertise is limited in Halal food industry so employees need to be trained and be made aware of the potential benefits of Islamic Finance
Please tell us a little bit about yourself and
how you became involved in the Halal food
industry?
As an entrepreneur and industry representative in a Muslim country like Pakistan I have
observed that food manufacturers primarily
deal in or rather choose to believe that they
deal in Halal food products by default. Over
the years Halal has turned out to be more
than just a religious concept. Total global halal food market size is estimated to be about
USD 635 billion. The domestic and international markets are gradually becoming more
aware of the concept of Halal and market
demand for halal products is on the rise.
How would you best define the term Halal
and what type of food products is it applicable for?
Awareness of the real meaning and implication of the term Halal is limited and subjective. Infact, there exists an inherent issue in
Muslim majority regions that Muslim manufacturers at times believe that whatever they
produce is by default Halal.
Halal food manufacturing implies integrity in
supply chain by adherence to Shariah Law,
maintaining high quality products, assuring
consumer safety, fair trade and animal welfare.
Halal food should be manufactured under
hygienic Shariah compliant guidelines. The
primary prohibitions include items containing alcohol or intoxicants, animals where the
name of Allah has not been invoked during
slaughter and animals which have not been
slaughtered or dead before slaughtering.
There are several prominent halal-certification agencies. How is your organisation
abiding by these certifications? Do you see
the possibility of a natural collaborative effort amongst them in any areas?
Prominent Halal certifications include South
African Halal Certification and Malaysian
Halal Certification bodies. There are certification agencies in Canada, Europe and
United States as well. Infact, I would like to
share that the importance of these certifications has been recently realised in Pakistan.
25
Interview
gif
Food companies are now realising that to enter international markets and to attain credibility in the local market
halal certifications are a must. Rasul Group has recently
attained Halal certification from Bureau Veritas which is
Halal certification agency registered in France.
Bureau Veritas together with the approval of Pakistan
standard quality control authority (PSQCA) has lead to attainment of Halal certification by Rasul Group. The certification attaining process is highly rigorous and involves
amendment measures to be incorporated in supply chain
and specialised training of key employees.
Surely, the issue of having a range of different certification agencies leads to be a major pitfall. The Halal food
industry is in the process of establishing a strong footing
and to attain long-term sustainable growth these certification bodies will have to find a collaborative mid way.
What is the potential demand of Halal food products?
Well, I would say that more important than the current
demand figure is the potential increase in demand for
Halal food products. Currently the demand is about USD
635 billion out of which about 63% demand lies in Asian
markets. However, to cater to this demand, food manufacturers and Halal certification bodies need to find a plausible solution to cater to this fragmented market. As it is a
highly fragmented market in terms of awareness level and
understanding of the term halal.
What are the major challenges faced by the Halal food
industry?
There are several regional challenges faced by the Halal
food industry. Three major challenges that the industry is
facing are:

Need for Certification: Halal food manufactures need

to realise and understand that they need to attain
certifications. A huge majority of market players especially in Pakistan do not realise the importance of
these certifications. They need to realise that halal
certification label on the packaging has a value in domestic and international market and has a high acceptance level in not only religious terms but also in
terms of hygiene.
Promoting Halal Brand: Halal is a brand in itself. Although Halal food associations and bodies exist yet
the brand equity is yet to be strengthened. For starters
there exists a need for collaborative effort amongst
industry players and halal food associations.
Halal food markets are highly diverse and fragmented. They are basically fragmented markets by ethnicity, location, income level, awareness level, religious
factors and a few other determinants. Hence, a onesize-fits-all strategy simply cannot work. It is a challenge for Halal food manufacturers to deal with product adaptability and to cater to target market needs.
Should it be compulsory for Halal food manufactures to

adopt Islamic Finance?
In the extremely rigid sense one may argue that Halal food
manufacturers should adopt and abide by Islamic means
of financing. At Rasul Group we use a mix of conventional
and Islamic finance. However the ratio of use of Islamic
finance is increasing day by day.
August 2011
Why dont Halal food manufactures strictly adopt Islamic Finance? What are the hurdles? How can they be
removed?
As for any other business, finance is one of the key functional areas for Halal food industry. Halal food industry is
in the process of strengthening its brand equity and improving its supply chain. In the process it is faced by range
of challenges with respect to market demand, product acceptability and certification issues.
Islamic Finance is also in the process of strengthening its
footing in the industry. It is faced with several regulatory
and product development issues. Islamic financial expertise is limited in Halal food industry so employees need to
be trained and be made aware of the potential benefits of
Islamic Finance.
These issues can best be resolved through mutual effort
of Islamic Finance and Halal food industry. Islamic finance
industrial players need to recognise the Halal food industry as a key niche market and provide tailored solutions to
suit their needs.
What is the future potential for Halal food exports to
international markets?
The major players in Halal food export market include
Halal food manufacturers in Malaysia and Indonesia.
These markets are better regulated and understand the
importance of Halal certifications. Infact, majority of Halal
products exported to European and American markets are
from these regions.
As for Pakistan the demographic trend is such that we
are a thickly populated country with a large proportion of
young generation. The domestic demand is immense and
production capacity of local Halal food manufacturers is
usually targeted to fulfilling this ever-increasing demand.
As in our case we do export Halal products to Middle East,
Europe, America Canada and Australia but most of the
production is catered to fulfil the local demand.
What is the future potential for Halal food investment
in Asian markets?
There exists an immense potential for Halal food investment in Asian market. Since 63% of the global halal food
market demand is currently derived from Asian markets
the market can be tapped by European and American investors. However, international investors need to understand the concept of Halal and the need for Halal certification.
What advice would you like to give to potential Halal
food investors in Asian markets?
Asian markets have high demand potential and capacity
for further investment. However, international investors
need to identify the market dynamics of selected Asian
market, awareness level of consumers and requirements
of Halal food industry supply chain methodology.
Infact total integrity in the Halal supply chain needs to be
well preserved. If consumers lose credibility in the status
of Halal, as in the case of Ajinomoto MSG product in Indonesia, it is extremely hard to earn back the required trust
and credibility. Therefore, it is important for investors to
get the Halal certificate from the most reputable certification body. gif
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gif
At the beginning of February, 2011, Qatar

Central Bank (QCB) notified all conventional
banks in Qatar that they were required to
stop operating Islamic Windows (IWs) by
the 31st of December 2011. On the 10th of
February 2011, QCB issued a public press
release detailing the requirements and explaining the reasons for its decision to stop
the operation of the IWs.
What are conventional banks required to
do?
New Operations
The press release indicated that conventional banks are required to stop the following actions:

Opening Islamic branches;

Accepting Islamic deposits; and
Entering into Islamic financial operations.
Existing Operations
For existing assets and liabilities, including
deposits and finance operations, conventional banks are obligated to do the following up to and including 31 December 2011:

STATE OF QATAR:
END OF ISLAMIC BANKING
WINDOWS
Author: Siraj Al Islam, Associate, Dewey & LeBoeuf LLP
August 2011
Collect the relevant assets and liabilities and dispose of their obligations
within any earlier agreed upon dates;
and
Pay back all Islamic deposits upon any
earlier agreed maturity date.
Following 31 December 2011, to the
extent that neither of the above options
could be exercised, banks may do the
following:
Manage the remaining Islamic assets
in a special portfolio;
Transfer some of the remaining Islamic
assets to the existing Islamic banks;
and
Convert the existing Islamic window
branches to conventional branches.
Although it is not stated, there appears to

be no reason why such conventional banks
could not open independent Islamic banks
and then transfer the existing assets to the
newly established Islamic banks. This option, however, appears not to have been
clearly provided for and has created a situ-
gif
In addition to specialising in Islamic banking and finance, Siraj has a long history of advising sponsors, banking institutions and quasi-governmental entities with the structuring, implementation and delivery of major
projects, including PPP and PFI.
At the age of 28, Siraj was appointed and served as the United Kingdom General Counsel for ISS, a global
organisation listed by Forbes as the worlds 5th largest private employer and as the 6th best outsourcing company in the world by American Fortune Magazine.
Prior to joining Dewey & LeBoeuf, Siraj worked at international law firms including Clifford Chance LLP
ation where customers of such IWs have

been left without a clear understanding
of their rights and obligations. It is argued
that QCB should now categorically provide a
mechanism whereby IWs should be allowed
to convert to full Islamic banks and that the
process should be simplified and made clear
to ensure that this is affected in a smooth
and transparent manner.
In the publicly available information from
QCB, it is not clear whether it would be
possible for existing Islamic banks to acquire the IWs portfolios and thus allow the
conventional banks to dispose of their IWs
portfolios. To the extent that the QCB agrees
with and allows such disposal, it may be that
the customers of such IWs may not wish to
deal with the existing Islamic banks and this
may have been a reason as to why such customers did not choose the existing Islamic
banks in the first place.
Another possible, voluntary scenario on the
part of all the IWs, their customers and existing Islamic banks may provide for a program
whereby the IWs agree with their customers
to bring to maturity their existing relationship. At the same time the IWs agree with
existing Islamic banks to provide the same
facilities so that the customers of the IWs
are not commercially affected. Subject to
Qatari law, this may even be achieved by the
parties entering into a novation agreement.
It is argued, however, that this may not be
a workable solution from a commercial perspective as the existing Islamic banks may
not be willing to provide the same terms to
the IWs customers as they currently have,
on the basis that existing customers of
the Islamic banks may be under different
terms which may not be on par with the IWs
terms.
Why is QCB stopping the operations of Islamic windows by conventional banks?
QCB has provided two categories of reasons
for its decision:

Supervisory issues and

monetary policy issues, both of which
are dealt with in full detail below.
Supervisory Issues
QCB believes that, under Article (1) of the
Qatar Central Bank Law No.33, enacted in
2006, a bank may either conduct its affairs
following conventional banking practices or
it may conduct its affairs according to Islamic banking and financing principles. There
is no option for the same entity to provide
both conventional and Islamic banking, and,
as such, Islamic windows are incompatible
with the law.
QCB further believes that there is no need
to provide Islamic window operations, on the
basis that there exist well-established Islamic banks which are capable of meeting the
needs of investors and depositors who wish
to conduct their affairs according to Islamic
banking and finance principles.
QCB contends that conventional banks are
effectively commingling the non-Islamic
banking practices and Islamic banking practices, and, as a result, are having difficulty in
managing the following specific risks.
1. Bank Risks
The principle of Islamic banking is based
on trade and a return on a specific trade,
which always has an element of ownership,
as opposed to conventional banking, which
does not look at trade or base its return on
trade or a value of a product of a trade, but
rather on a direct increment of an amount
borrowed or lent. Thus, the general risk profiles of Islamic and conventional banking are
completely different.
As more large and complex transactions are
entered into, both Islamic and conventional
deposits are being utilised for the same
transactions. Clearly, the rates of return for
conventional interest-bearing deposits are
wholly different from deposits based on Islamic banking practices. QCB appears to
contend that both Islamic and conventional
risks are getting recorded in the same manner, and therefore that reliability, application
of oversight, calculating ratios and indexes,
and preserving the rights of conventional and
Islamic depositors are becoming increasingly complex. The risk related to commingling
has been widely debated by leading scholars in the past. The end result of the debate
appears to be that insofar as strict controls

are adhered to, then effectively there are no
particular issues that cannot be overcome.
The controls discussed by the leading contemporary scholars such as Taqi Usmani are
as follows:
2. Segregation of Funds
The conventional funds and the Islamic
funds should be completely segregated.
This means that Islamic funds should be
held in separate accounts and that books
and records should be maintained which evidence the segregation so as to ensure that
there is no commingling of conventional and
Islamic funds.
3. Shariah Supervision
The bank should have a group of Shariah
scholars who are fully independent of the
bank, whose decisions should be fully binding on the bank, and who provide effective
supervision of how the bank conducts itself.
The Shariah scholars would effectively control each and every aspect of the operation
of the bank so as to ensure that each and
every product that is stated as being Islamic
does indeed comply with the Shariah.
4. Managerial Commitment
It is argued that the management of the
bank should be fully committed to Islamic
banking and should not be there simply for
the purpose of exploiting practicing Muslim
investors and in so doing unfairly compete
with Islamic financial institutions.
5. Providing Security for Investors Funds
To the extent that Muslims only deposit their
funds with the bank, this amount should be
fully guaranteed, and even where the bank is
only acting as an investment manager, there
should be proper screening and security in
place to protect Muslim investors from such
matters as fraud and deception.
6. Adhering to Islamic Standards
It is paramount for a bank to adopt either
the AAOIFI Standards or the Islamic Financial Services Board (IFSB) standards and
clearly demonstrate this. It is argued by
many whether a conventional bank operates
a window or incorporates a wholly owned
subsidiary the net effect is the same and
29
gif
At the beginning of February, 2011, Qatar

Central Bank (QCB) notified all conventional
banks in Qatar that they were required to
stop operating Islamic windows (IWs) by
the 31st of December 2011. On the 10th of
February 2011, QCB issued a public press
release detailing the requirements and explaining the reasons for its decision to stop
the operation of the IWs.
What are conventional banks required to
do?
New Operations
The press release indicated that conventional banks are required to stop the following
actions:

Opening Islamic branches;

Accepting Islamic deposits; and
Entering into Islamic financial operations.
Existing Operations
For existing assets and liabilities, including
deposits and finance operations, conventional banks are obligated to do the following
up to and including 31st December 2011:

Collect the relevant assets and liabilities and dispose of their obligations
within any earlier agreed upon dates;
and
Pay back all Islamic deposits upon any
earlier agreed maturity date.
Following 31st December 2011, to the extent that neither of the above options could
be exercised, banks may do the following:

Manage the remaining Islamic assets

in a special portfolio;
Transfer some of the remaining Islamic
assets to the existing Islamic banks;
and
Convert the existing Islamic window
branches to conventional branches.
Although it is not stated, there appears to

be no reason why such conventional banks
could not open independent Islamic banks
and then transfer the existing assets to the
newly established Islamic banks. This option, however, appears not to have been
clearly provided for and has created a situation where customers of such IWs have been
left without a clear understanding of their
rights and obligations.
It is argued that QCB should now categorically provide a mechanism whereby IWs
should be allowed to convert to full Islamic
banks and that the process should be simplified and made clear to ensure that this is
affected in a smooth and transparent manner. In the publicly available information
from QCB, it is not clear whether it would
August 2011
be possible for existing Islamic banks to acquire the IWs portfolios and thus allow the
conventional banks to dispose of their IWs
portfolios. To the extent that the QCB agrees
with and allows such disposal, it may be that
the customers of such IWs may not wish to
deal with the existing Islamic banks and this
may have been a reason as to why such customers did not choose the existing Islamic
banks in the first place.
Another possible, voluntary scenario on the
part of all the IWs, their customers and existing Islamic banks may provide for a program
whereby the IWs agree with their customers
to bring to maturity their existing relationship. At the same time the IWs agree with
existing Islamic banks to provide the same
facilities so that the customers of the IWs
are not commercially affected. Subject to
Qatari law, this may even be achieved by the
parties entering into a novation agreement.
It is argued, however, that this may not be
a workable solution from a commercial perspective as the existing Islamic banks may
not be willing to provide the same terms to
the IWs customers as they currently have,
on the basis that existing customers of
the Islamic banks may be under different
terms which may not be on par with the IWs
terms.
Why is QCB stopping the operations of Islamic windows by conventional banks?
QCB has provided two categories of reasons
for its decision:

Supervisory issues and

monetary policy issues, both of which
are dealt with in full detail below.
Supervisory Issues
QCB believes that, under Article (1) of the
Qatar Central Bank Law No.33, enacted in
2006, a bank may either conduct its affairs
following conventional banking practices or
it may conduct its affairs according to Islamic banking and financing principles. There
is no option for the same entity to provide
both conventional and Islamic banking, and,
as such, Islamic windows are incompatible
with the law.
QCB further believes that there is no need
to provide Islamic window operations, on the
basis that there exist well-established Islamic banks which are capable of meeting the
needs of investors and depositors who wish
to conduct their affairs according to Islamic
banking and finance principles.
QCB contends that conventional banks are
effectively commingling the non-Islamic
banking practices and Islamic banking practices, and, as a result, are having difficulty in
managing the following specific risks. gif
Islamic Finance Lawyers Clifford

Chance Launches Offices in Qatar
Source: GlobalIslamicFinanceMagazine.
com
Clifford Chance has further expanded its
business in the Middle East with the opening of a QFC regulated office in Tornado
Tower. The new QFC office is headed by Richard Parris, a projects specialist, together
with Greg Englefield, who previously spent
two years on secondment to a local Qatar
law firm.
They have also been joined by Islamic
finance lawyer and Arabic speaker Hussain Shalchi. They anticipate that the
headcount will increase over the coming
months.
Parris comments, Clients have responded very positively to our presence in Qatar. While we have long-standing and wellentrenched relationships in Qatar, there
is an understandable desire to have advisors near at hand when working on strategically critical mandates.
Clifford Chance has been active in Qatar
since the 1980s and already regularly
works with leading Qatari entities, international banks, financial institutions and
corporate entities based in Qatar.
The team in Doha are working closely with
Clifford Chance lawyers across the Firms
Middle East and international network
to provide clients with access to the full
range of the Firms expertise.
Graham Lovett, Middle East Managing
Partner, comments, We are delighted
with the headway the Qatar team is making, both with existing and new Qatari clients.
David Childs, Clifford Chance Managing
Partner adds, We are very pleased to be
joining our clients in Qatar and offering
them access to the entire Clifford Chance
network through our dedicated presence
in Doha.
Top 50
Best Companies to work for
Coming in October issue
in Islamic Finance
Definitive guide to Islamic finance most respected
employers, a compilation of 50 top and best
companies to work in Islamic finance industry.
Ranking factors are determined by company size
(turnover), reputation in industry, compensation &
benefits, environment & culture (employee survey), and industry rankings.
Make sure you are listed.
Contact us on
rankings@globalislamicfinancemagazine.com
www.globalilsamicfinancemagazine.com/rankings
gif
ISLAMIC FINANCE
GAINS MOMENTUM
IN EUROPE, PART I
Author: Professor Rodney Wilson, Durham University, UK
Abstract: Part 1 of Islamic Finance

gains momentum in Europe will take you
through the years of Islamic finance with
in Europe covering the various financial
sectors such as Sukuk issuance, liquidity
management, investment banking and
wealth management. Professor Rodney
Wilson will also discuss the development
of Sukuk issuance in Europe covering factors such as the political desire to ensure
that British Muslims feel welcomed rather
than outsiders.
Keywords: Sukuk Issuance, Muslims,
Investment Products, Shariah-compliant
Finance
August 2011
slam all too often resonates negatively in Europe, with much nonMuslim public opinion uncomfortable with Islamic culture and values.
Secular and Christian opinion is at
best suspicious of Shariah, Islamic
law, and indeed often antagonistic.
The notion of wanting to apply Shariah principles to banking and finance is treated with
scepticism if not outright hostility, especially
as there is no concept of Christian or Jewish banking, even if there are some parallels
between Shariah financial principles and the
teaching of the Old Testament.
Yet Islamic finance is thriving in Europe, and
many major European banks perceive it as a
profitable opportunity to generate new business rather than as a threat to existing business. Although Islam is sometimes viewed
as prescriptive and concerned with restricting choice, Islamic finance is about widen-
ing choice, and in particular about providing

alternatives to interest based finance. The
aim is to develop financial products that are
seen as ethical and within the realm of socially responsible investment.
The approach in this paper is largely thematic and institutional rather than geographical,
with the subject viewed from a European
rather than an Islamic world perspective. It
is perhaps appropriate to start by examining the role of Islamic finance in Euro-Arab
banking relations. Much of the focus is on
Shariah compliant asset management, with
a section on liquidity management without
the use of conventional instruments such as
treasury bills, and an extensive discussion
of the structuring of Islamic sukuk securities. In the banking field the development of
Islamic retail banking in Europe is reviewed,
with a further section devoted to Shariah
compliant wealth management and private
The Islamic financial activities of major European banks will become apparent from
the discussion, as will the Islamic finance
operations of some of the Arab banks with
subsidiaries and branches in Europe. The
achievements of the European based exclusively Islamic banks will also be reviewed,
notably those of Islamic Bank of Britain and
the European Islamic Investment Bank.
The role of Islamic finance in Euro-Arab
banking relations
Islamic finance has become a key dimension of the relationship between Arab banks
and their European counterparties. While
the Arab banks imported most of their conventional financial products from Europe in
the past, now European banks are importing
Shariah compliant products from the Arab
World, not only for their overseas Arab clients, but more significantly for the growing
Muslim population of Europe. Thanks to the
emergence of Islamic banking, knowledge
transfers in finance have become a two way
process rather than simply a one sided affair. European banks have as much to learn
from the Arab World as the latter have from
Europe as interdependence replaces dependence.
The increasing spread of Shariah compliant
finance, and the dynamism of the economies where it is important, is making the
Euro-Arab financial relationship more a partnership of equals in the twenty first century.
In contrast for much of the nineteenth and
twentieth centuries the Arab economies
underperformed those of Europe, and one
explanation for this underperformance was
the development of a financial system in the
region based on riba that was never fully
accepted given its inherent conflict with Islamic values.
Fortunately now pious Muslims have a real
choice, as Shariah compliant products have
been developed over the last three decades
to serve most of their financial needs, and
these products are at least as efficient as
their conventional counterparts. The United
Kingdom has been the gateway for Islamic
finance to enter Europe, partly reflecting the
role of London as the leading international
financial centre, but also as a consequence
of the exposure of leading British

banks to the Arab and wider Islamic
World and their knowledge of these markets. It was the Arab joint venture banks that
first brought Islamic finance to London in
the early 1980s as Islamic banks in the Gulf
found that re-depositing on a murabahah
basis could be an effective tool for liquidity
management, with the marks-ups generated from trading activity on the London Metal
Exchange.
The United Kingdom has also hosted the
first Islamic retail bank in Europe, the Islamic Bank of Britain which started operations in September 2004, and the European
Islamic Investment Bank, which opened for
business in 2006. The leading conventional
banks have also become involved in serving
the local retail market for Islamic financial
services, notably HSBC and Lloyds TSB, both
of which provide Islamic deposit facilities
and housing finance using Shariah compliant structures.
It is of course internationally that European
banks have made the greatest contribution to Islamic finance with Barclay Capital partnering Dubai Islamic Bank for the
worlds largest sukuk issuances, Standard
banking. Prospects for Islamic investment

banking are also considered as well as the
European experience of Shariah compliant
fund management. Finally future prospects
for Islamic banking and finance in Europe
are assessed, notably the provision of Shariah compliant services for continental European Muslims, and the possible implications of Turkeys accession to the European
Union will be examined, although there the
fortunes of Islamic finance have been rather
mixed.
gif
dah to provide money

changing services
for pilgrims from Dutch
Indonesia, the condition
being that it avoided all interest based transactions.
For the next fifty
years most of the
European banks involved in the Muslim
world carried out their business using interest, as indeed did their local counterparts, within financial systems where
governments believed religion had no role to
play. By the late 1970s however the perceptions of European bankers was starting to
change, largely as a result of the emergence
of Islamic banks in the Gulf, with the Dubai
Islamic Bank the first to be established in
1974, followed by the Kuwait Finance House
in 1977 and the Bahrain Islamic Banks in
1978.
In the banking field the development of Islamic retail banking in Europe is reviewed,
with a further section devoted to Shariah
compliant wealth management and private banking.
Prospects for Islamic investment banking are also considered as well as the European experience of Shariah
compliant fund management
Chartered making a notable contribution to

Islamic finance through its networks in the
Gulf, Pakistan and Malaysia, Deutsche Bank
in pioneering capital protected funds in the
Gulf and UBS in developing Shariah compliant wealth management services to name
just some examples. It is the operations of
these major European banks that will be
also reviewed here.
All these banks

were extensively
involved in Shariah
compliant
trade
finance, especially
of imports from
Europe, using a
structure
known
as
murabaha,
whereby an Islamic
bank would purchase an imported good on behalf of a client, and then resell the good to the importer
for deferred payments covering the costs of
the purchase plus a mark-up representing
the banks profit. As the bank was involved
in a real trading transaction which involved
ownership risks this justified its profit, unlike
interest on a conventional loan where there
was only the credit risk of default.
Early Islamic trade finance operations of

major European banks
It was the involvement of European banks in
the Gulf that first resulted in them encountering demands for Islamic finance. These
date back over eighty years, as it was in the
1920s that the Eastern Bank, the predecessor of Standard Chartered, was asked by the
ruler of Bahrain that the banks proposed
branch on the island would only be allowed
if it avoided all interest based transactions.
At the same time the National Handelsbank
of the Netherlands, the predecessor of ABNAmro, was allowed to establish itself in Jed-
As the payments by the Islamic banks would

be made to the European exporters bank
those bankers involved started to learn
about Islamic finance. In a conventional
trading transaction usually the exporters
bank would demand a letter of credit from
an importers bank that would guarantee the
payment. With murabaha however, as it is an
Islamic bank, and not the import distributor
or agent who is making the payment, letters
of credit are arguably unnecessary, as well
regulated banks are less likely to default
than individual corporate clients. This potentially lowered the costs of trade financing,
33
gif
but European banks acting on behalf of their

exporting clients were only prepared to wave
the requirement for their Shariah compliant
counterparties to provide letters of credit if
they were satisfied that these Islamic banks
could meet their payments obligations. To
be confident in the timely payment of receivables European banks needed to find out
more about Islamic banking and understand
how Islamic financing techniques worked.
Shariah compliant liquidity management
in Europe
All banks need to maintain liquid assets to
meet depositor withdrawals and financial
obligations to other institutions including
banks. Rather than merely holding cash,
which yields no return, usually liquid assets are held as treasury bills or repos, repurchase obligations on which a financial
institution which holds these monetary
instruments earns interest. Islamic banks
cannot hold such instruments, as interest is
regarded as riba, which is explicitly prohibited in the Holy Koran.
This presented a challenge for Islamic banks,
as they were required by regulators to hold
liquid assets as part of prudential risk management requirements, but there were no
Shariah compliant liquid instruments available which they could hold.
From 1980 onward a number of banks in
London offered Shariah compliant liquidity management services to Islamic banks
from the Gulf and the Jeddah based Islamic
Development Bank. This involved inter-bank
wholesale operations, with banks in London
providing overnight deposit facilities for the
newly established Islamic banks in the Gulf.
The major institutions involved were the
joint venture Arab banks in London, such
as Saudi International Bank and the United
Bank of Kuwait. They accepted deposits on
a murabaha mark-up basis, with the associated short
term trading transaction
being conducted on the
London Metal Exchange.
The margins were very
small on these buying
and selling transactions,
but they were sufficient
for the banks in London to
offer the Islamic financial
institutions in the Gulf and
Jeddah a return which
was comparable to
that on conventional
treasury bills. The attraction of London
was the financial
expertise available and the low
risk transactions
facilitated by the
London Metal Ex34 Global Islamic Finance
August 2011
Professor Rodney Wilson is Director

of the Islamic Finance Programme
in Durham University. He has
researched on Islamic finance
since the 1970s and has written
numerous books on the subject for
leading international publishers
including Edinburgh and Columbia
University Presses and Brill. He has
extensive consultancy experience,
including with the Islamic Financial
Services Board with respect to its
Shariah Governance Guidelines.
He is currently working on a project
on Islamic finance in North Africa
for the African Development Bank.
From January until June 2009 Rodney Wilson was a Visiting Professor
at the Qatar Foundations Faculty
of Islamic Studies in Doha, and he
returned there in 2010 for a four
month period.
Professor Wilsons teaches masters
level courses on Islamic economics and finance and supervises
PhD students working on Islamic
finance. He has acted as Course Director for Euromoney Legal Training
in various regions such as London,
Bahrain, Kuwait, Riyadh and Abu
Dhabi.
change because of the depth of the market.

The joint venture counterparties were not
directly involved in the trading, but rather
engaged specialist brokers, notably Dawnay
Day, which soon acquired the knowledge of
the Shariah issues that concerned their Gulf
clients.
Although the provision of murabaha facilities
as an instrument for liquidity management
remains significant, the real transactions
involved result in it being a relatively costly
means of ensuring Shariah compliance. A
preferable and less costly

solution is for Islamic
banks to hold modified
treasury bills that satisfy
Shariah requirements.
Progress has been slow
in
developing such instruments, and the trading of securities based on bai dayn debt
contracts, which is allowed by Shafii scholars
in Malaysia, is not permitted by more conservative schools of Islamic jurisprudence,
including those whose opinions prevail in
the Gulf. European Shariah scholars tend to
follow the more conservative interpretations
in the Gulf and South Asia associated with
the Hanafi and Malaki schools of Islamic
jurisprudence rather than the Shafii School
which prevails in Malaysia and Indonesia.
How to manage liquid assets remains a major
matter of controversy in Islamic finance, not
least because many Islamic banks continue
to have liquidity well in excess of regulatory
requirements. Although the Islamic Financial Services Board has provided guidelines
for regulators on liquidity management, it
does not specify what instruments should
be used. In Bahrain salam sukuk securities
have been developed which serve the same
function as treasury bills, but as these are
asset backed, the issuance and redemption
involves buying or selling a claim to the underlying real asset rather than simply acquiring or disposing of debt.
This has been approved by the more conservative Shariah scholars in the Gulf as
a preferable alternative to bai dayn debt
contracts and the bai bithaman ajil sukuk
traded in Malaysia which are backed by financial rather than real assets. A salam contract involves a payment for a real asset to
be delivered in the future, with the timing of
delivery and the precise details of the asset
specified in the contract. In the case of Bahrain the issuer is the government, the assets
are commodities such as aluminum used by
the countrys smelter and the time to maturity is ninety days.
Islamic financial institutions purchase the
salam sukuk and on maturity are reimbursed after ninety days with a mark-up
representing their return on the asset. On
receipt of these funds they relinquish their
rights to the underlying asset which reverts
to the government as the issuer. At present
salam sukuk are not traded on a secondary
market, even though Bahrain has a Liquidity
Management Centre established for sukuk
trading, as the Shariah scholars view them
as financial instruments and are concerned
about the link with the underlying asset.
This is a major limitation for salam sukuk,
as treasury bills and repos are usually widely traded in secondary markets, resulting in
greater liquidity.
International
Investment Co (IIC)
Success is not for the timid. It is for those who seek guidance,
make decisions, and take decisive action.
www.iiconline.co.uk
gif
Sukuk issuance and

trading in Europe
At present there are no
salam sukuk available
in Europe although
most countries have
active treasury bill
and repo money
markets.
This
presents a problem
for Islamic banks in
Europe that have to
continue to rely on murabaha inter-bank deposits for their treasury
management. There is an
opportunity to develop markets in Islamic
securities in Europe which would attract
institutional Shariah compliant investment
from the Middle East as well as serving Islamic banks in Europe. London is an obvious
location given the depth and breadth of its
financial markets, especially as the Islamic
Bank of Britain and the European Islamic Investment Bank are listed on the Alternative
Investments Market (AIM). Developing a market in salam sukuk is problematic however
unless tradability is allowed by the Shariah
scholars, as merely having issuance is not a
substitute for an Islamic money market.
The pioneering sukuk in Europe was by the
German Federal State of Saxony-Anhalt
which raised 100 million through an issuance on 31st July 2004. The sukuk is for five
years using an ijara leasing structure with a
floating return based on the six month Euribor rate plus one percent. In other words
in financial terms it is identical to a floating
rate note but because of the ijara structure
the payments to the investors represent rent
rather than interest or riba which is prohibited under Shariah. This is not merely the
renaming of the return, but rather having
a structure that is recognized as distinctive
under national law, and in the case of the
Saxony-Anhalt sukuk, German law.
Like other German state debt instruments
the sukuk was listed in Luxembourg, with an
additional listing in Bahrain to attract Gulf
investors. Citigroup Global Markets was the
arranger for the sukuk, and the Shariah advisory board of Citi Islamic Investment Bank
in Bahrain vetted the legal documentation
for Shariah compliance. The sukuk was rated AA by S&P and AAA by Fitch with the
state of Saxony-Anhalt acting as guarantor.
The Kuwait Finance House, the second largest Islamic bank in the Gulf, acted as lead
manager for the issue, with its visibility and
reputation helping ensure that other Islamic
financial institutions would invest in the sukuk. As sukuk have to be asset backed, the
solution under German law was to establish
a Dutch foundation, which corresponded
to the classical Islamic concept of a waqf.
August 2011
The Ministry of Finance then transferred

usufruct rights to its building to the foundation, which served as the underlying asset.
When the sukuk is traded investors are buying and selling rights to the real underlying
asset which is permissible under Shariah,
rather than simply paper debt instruments
which cannot be traded in the view of Gulf
Shariah scholars as already indicated.
Effectively the structure is a sale and lease
back arrangement, with the foundation
serving as a special purpose vehicle, (SPV),
which is wound up on termination of the sukuk, when the usufruct rights revert back to
the Ministry of Finance which no longer pays
rent to service the investors. In this respect
it is different from a waqf religious endowment trust which exists in perpetuity rather
than for a definitive period.
The idea for the sukuk followed an earlier
road show during 2001 when German states
tried to ascertain if there was a market for
near sovereign issuers in the Gulf countries,
with institutions there suggesting that any
offering would attract more attention if it
was Shariah compliant rather than being
structured as a conventional bond or floating rate note. Most of the sukuk issued in
the Gulf and South East Asia are for corporate clients rather than sovereign sukuk, but
corporate issuances have been slow to start
in Europe. The Swiss company, EnergyMixx
AG announced on 15th August 2007 that it
had appointed Faisal Private Bank and the
law firm Vinson Elkins to advise it on a suitable sukuk structure to fund a power plant
project in the Gulf, but the structure and the
terms have still to be decided.
A relatively small corporate sukuk worth $26
million was arranged in April 2005 by ABC
Islamic Asset Management in London and
the Abu Dhabi Commercial Bank on behalf
of Al Safeena Ltd of London. The English Law
firm Norton Rose advised on the structure
together with Voisin and Co. of Jersey, as
the trust structure governing the sukuk was
registered under Jerseys offshore laws. This
was the first Islamic security to be used to
finance shipping, as the asset used was a
Very Large Crude Carrier (VLCC), Venus Glory, which was chartered to a Saudi Arabian
shipping company.
An ijara structure was used for the sukuk,
with the tenor being five years and the return
a fixed six percent payable quarterly with the
return of the principle on maturity. A fixed
return is unusual on an ijara sukuk, which
in this case means in financial terms it is
equivalent to a bond rather than a floating
rate note. Normally a murabaha structure
with a mark-up would be used for a fixed return sukuk, but as murabaha is a short term
instrument, arguably an ijara structure is
preferable for a period of five years. A larger

corporate sukuk worth $261 million was
used to finance the purchase of the Sanctuary Building in London in 2005. Taylor
Wessing, the international law firm, advised
on the structuring, the clients being Bahrain based Taib Bank and Hong Kong based
Dominion Asset Management, represented
in the United Kingdom by Pelham Associates. This sukuk was also based on an ijara
structure, but with a variable return linked
to LIBOR, the London Inter-Bank Offer Rate,
rather than a fixed return.
Turkey, an aspiring European Union member,
has more Islamic bank branches than any
other European country, although the role of
Shariah compliant finance in its banking system remains marginal. It is an active member of the Jeddah based Organisation of the
Islamic Conference (OIC) and subscribes to
and has received Shariah compliant funding
from the Islamic Development Bank, the aid
agency of the OIC. At present all of Turkeys
government debt is funded through conventional bill, bond and note issuance involving
interest based payments, but since September 2005 consideration has been given as
to whether some debt should be funded
through sukuk securities.
As always in Turkey the issue has been complicated by political considerations, given
the tensions between the AK, the moderate
Islamist governing party, which supports Islamic finance, and the former president, and
upholder of Turkeys secularist constitution,
who was at best skeptical towards the notion
of finance being Shariah compliant. The tensions between Islamists and secularists in
Turkey are long standing, and Islamic banking and finance is viewed from the perspective of political symbolism, rather than being
simply about financial choices. The change
in Turkish law necessary for the issuance of
sukuk has been made more likely since the
decisive election win by AK in 2007 under
the Prime Minister, Recep Tayyip Erdogan,
and the appointment of his political ally, Abdullah Gl, as President.
It is inevitably London that has the most
potential as a centre for sukuk issuance
in Europe given its established reputation in Islamic banking, the depth
and breadth of its financial markets
and a regulatory framework that
encourages rather than inhibits financial innovation.
There has been over three
decades of official support,
initially by the Bank of England, and from 1997 onwards by
the Financial Services Authority as it
took over regulatory responsibility for banking, including Islamic banking. However the
Treasury has only been marginally involved,
The first is to ensure that British Muslims

see that their government is open and responsive to the opportunities that Islamic
finance offers. There is a political desire to
ensure that British Muslims feel included
rather than excluded, not least because
Muslims who are United Kingdom nationals
may vote, and their support is crucial to ensure that the Labour Party maintains control
of key marginal constituencies.
A second factor is to ensure that the City
of London continues to play a major international role in Islamic finance and attracts
business for investment banks and law firms,
which results in well paid jobs. The government has established a Working Group on
City Competitiveness to ensure that Londons leading role in international finance
is consolidated and enhanced, and the encouragement of Islamic finance is viewed as
part of this strategy.
Third although government debt is relatively
modest in relation to gross domestic product
(GDP) in the United Kingdom and funding
can be secured easily, there is a desire to
diversify funding sources to keep costs low
and attract attention to Sterling as a stable
and attractive currency for international investors, including Muslim institutions and
individuals concerned with Shariah compliance.On 23rd April 2007 the Treasury
announced that it would be undertaking a feasibility study of the po-
tential for sovereign sukuk issuance by the

British government, the aim being to include
a statement of progress in the pre-budget
report for 2007. On 16th August 2007 the
first meeting of the Islamic Finance Experts
Group was convened in London, an official
body established to advise the Treasury and
the Financial Services Authority on issues
relating to Islamic finance, including sukuk
issuance. Issues being considered include
who and how Shariah compliance will be
ensured, the structure and size of the issuance, the period to maturity and the pricing.
would be made in 2008, and

that a report identifying key
issues in the sukuk issuance would be announced,
including the tax treatment
of assets transferred into
and from the SPV. It
was also proposed that
National Savings and
Investment (NS&I), the
British government savings scheme, would offer Shariah compliant
products to retail investors through the national post office branch network.
Shariah assurance could imply the Treasury

either appointing its own Shariah board or Islamic retail banking in Europe
outsourcing compliance, both options having As the main source of support for Islamic
advantages and disadvantages. The struc- banking has always come from ordinary
ture is most likely to be based on an ijara Muslims, and the development of Islamic
leasing contract,
with the payments
The United Kingdom has been the gateway
to the sukuk holdfor Islamic finance to enter Europe, partly
ers being rents.
As with other ijara
reflecting the role of London as the leadbased sukuk the ing international financial centre, but also as a consegovernment would
quence of the exposure of leading British banks to the
establish an SPV
which would hold Arab and wider Islamic World and their knowledge of
the asset, a piece these markets
of state owned
land, for the duration of the sukuk
that is anticipated to be five years. The gov- finance can be regarded as a populist moveernment rental payments for the use of the ment rather than an initiative from governasset would be paid through the SPV to the ments, it is not surprising that retail Islamic
investors with the tax treatment the same banking has been the dominant activity. The
as for conventional securities. Rents would worlds largest Islamic financial institutions,
be benchmarked to either the London Inter- the Al Rajhi Bank of Saudi Arabia and the KuBank Offer Rate (LIBOR) or Bank of England wait Finance House, primarily provide retail,
Minimum Lending Rates (MLR), the expecta- personal and private banking products, as
tion being that the actual rents paid would do the Dubai Islamic Bank and Bank Islam
be at a discount to LIBOR or MLR reflecting Malaysia. In Europe Islamic finance has also
the high quality of the government paper is- been a bottom up rather than a top down
sued and its implicit AAA rating as the United movement, although it is only in the United
Kingdom government always meets its finan- Kingdom that the regulator, the Financial
cial obligations.
Services Authority, has actively facilitated
the development of the industry.
The pricing would be in line with conventional government debt instruments, and it Yet France and Germany have much larger
is anticipated that the same financial institu- Muslim populations than the United Kingtions will take up the offer as hold the con- dom, where the total was only 1.8 million
ventional equivalent. The prime aim is not when Islamic retail banking started in the
to attract Gulf capital inflows, but rather 1990s and still remains below two million
to establish a benchmark for high quality today.
Islamic debt that can be used as a base
for the higher pricing of future more risky As Muslims are no different to non-Muslims
corporate sukuk issuance in London.
in their needs and demands for financial
services, not surprisingly Islamic banks and
There was some disappointment that conventional banks offer Shariah compliant
no sukuk announcement was made retail products that mirror those provided to
in the Chancellor of the Exchequers ordinary clients. Current account or transacpre-budget statement of October 2007, tions deposits are always offered, as these
but given the complexity of the legal and facilitate payments through cheques, standtechnical issues to be resolved, the ing orders, direct debits and most imporomission at this early stage was not sur- tantly debit cards for use at point of sale
prising. The Chancellor Alistair Darling or through automated teller machines. Of
indicated that further announcements course as conventional current accounts
largely through granting tax concessions to

ensure a level playing field for Shariah compliant housing finance, rather than viewing
Islamic finance as a vehicle for raising revenue. During 2006 the idea of London serving as a centre for sukuk issuance was first
raised at an Islamic finance conference in
June, which was attended by the then Chancellor of the Exchequer, Gordon Brown, and
his deputy Ed Balls. As they became involved
this gave the cause of sukuk issuance political momentum which has propelled subsequent developments. Three factors appear
to be positively influencing developments.
gif
37
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pay little or no interest, some observers

may question the need for special Shariah
compliant current accounts. Such accounts
however are provided using wakala trust
structures, where the financial institutions
guarantees that the amounts deposited will
not be used for interest based financing, or
under the qard hassan principle, where the
depositor provides the bank with in interest
free loan on the understanding that no riba
will be charged when the finance is utilised.
In the United Kingdom both Lloyds TSB and
HSBC Amanah offer Shariah compliant current accounts.
Banks providing Shariah compliant retail financial services in Europe all offer a range
of savings and investment products. The
Islamic Bank of Britain offers a treasury
account, where those who have 100,000
or more to invest can place their funds for
fixed periods ranging from 1-24 months,
with higher returns offered for longer time
deposits. The deposits are structured on a
murabaha basis, with the funds used to buy
and sell commodities on the London Metal
Exchange, with the client being paid a markup reflecting the trading profit.
The profit rate is pre-determined, eliminating
risk for the client, and the bank covers its position in the commodity exchange by agreeing the sale price at the time of purchase.
Such transactions are permissible under
Shariah, as the hedging does not involve
the use of derivatives such as futures and
options, but rather real trading transactions
involving physical commodities.
Savings accounts are also offered where no
minimum balance is required but returns
are significantly lower than with the treasury placements. The Islamic Bank of Britain
offers three instant access accounts, an internet direct access account paying 3 percent in September 2007, a young persons
account paying 2.5 percent and a undetermined savings account using a passbook
with branch deposits and withdrawals paying 2.0 percent.
It also offers term savings deposits with
minimum notice periods for
withdrawals, the 30
day account
paying 3.25 percent, the 90 day account

3.50 percent and the 180 day account
3.75 percent. These accounts are based on
a mudaraba structure, with the depositor
sharing in the profits of the bank rather than
earning interest. It should be noted that
the percentage returns indicated are target
rates, which are not guaranteed, as under a
mudaraba structure returns cannot be predetermined.
With mudaraba the profit rate declared on
which returns on deposits are based should
be related to the profitability of the financial
institution. However most Islamic banks,
including the Islamic Bank of Britain, maintain a profit equalisation reserve into which
a proportion of bank revenue is paid rather
than being distributed to depositors.
The aim is to maintain a reserve fund, from
which a profit share can be paid, even in
years when the bank generates less profit.
The cost to depositors is that they receive
less in the more profitable years.
This profit smoothing, which is encouraged
by regulators, including the Financial Services Authority, enables Islamic banks to stay
competitive with conventional banks, with
the option of increasing profit rates when
interest is rising and other financial institutions pay more to depositors.
Islamic banks are often criticized by strict
Muslims for benchmarking profit rates to
interest indices, but legally the returns they
pay are profits, not interest, and as Islamic
banks only account for a minute share of
bank deposits in most markets, they are
price takers, not price makers.
There is a potential conflict between mudaraba depositors and shareholders in an Islamic bank, as higher dividend payments
to the latter may be at the expense of profit
share payments to the former. However if
the mudaraba depositors are not sufficiently
rewarded, not many will be attracted to the
bank, which will adversely affect the banks
growth and its long run profitability.
In other words the market can provide a solution, without the need for regulatory intervention. Mudaraba is regarded as an equity
type arrangement, but it is not the same as
equity investment, as it is the shareholders
who own the bank and enjoy voting rights,
not the mudaraba depositors.
However while the shareholders may receive very variable dividends, and suffer
capital losses as well as gains, returns to
the mudaraba depositors fluctuate less,
but they do not benefit from capital gains.
Under Shariah the nominal capital value of
mudaraba deposits cannot be guaranteed,
August 2011
but in practice it is never

written down as it is the
shareholders
dividend
that is cut or eliminated when losses occur,
with mudaraba depositors also higher in the
pecking order with
regard to claims in
the case of insolvency.
In part 2 of Islamic
Finance in Europe
Professor Rodney
Wilson will give his
insight of the future of Europes
Islamic finance
industry looking
at Turkey and the
Financial Services
Authority, their roles
in the success of Islamic finance. The article will focus on sectors
such as
Islamic wealth, retail banking and Islamic
investment banking. gif

Chapra, M. Umer, The Future of Economics: An Islamic Perspective, Islamic Foundation, 2000.
El-Ashker, Ahmed and Wilson, Rodney,
Islamic Economics: A Short History, Brill
Academic Publishers, 2006.
El-Gamal, Mahmoud A, Islamic Finance:
Law, Economics and Practice, Cambridge
University Press, 2006.
Iqbal, Zamir and Mirakhor, Abbas, An Introduction to Islamic Finance: Theory and
Practice, Wiley, 2007.
Hassan, M. Kabir and Lewis, Mervyn K.,
Handbook of Islamic Banking, Edward Elgar, Cheltenham, England and Northampton, Massachusetts, 2007.
Henry, Clement and Wilson, Rodney, The
Politics of Islamic Finance, Edinburgh
University Press and Columbia University
Press, New York, 2004. (reprinted by Oxford University Press, Karachi, 2005)
Adam, Nathif J. and Thomas, Abdulkader,
(eds.) Islamic Bonds: Your Guide to Issuing, Structuring and Investing in Sukuk,
Euromoney Books, London, 2004.
Archer, Simon and Karim, Rifaat Abdel
(eds.) Islamic Finance: Innovation and
Growth, Euromoney Books, London,
2002.
Islamic Finance Information Service:
http://sitesecurities.com/ifis
Institute of Islamic Banking and Insurance, London: www.islamic-banking.com
Event Review
gif
JAMES CAAN OF
BBCS DRAGOS DEN
IS SUPPORTING THE
GLOBAL INVESTOR
WINDOW
Investors from
this region [Middle East] generally expect entrepreneurs to
have more direct contact,
demonstrate their understanding of the local/
regional market, and structure deals in accordance
with cultural norms
Global Islamic Finance magazine was proud

to support UCIs annual conference at the
London Stock Exchange for investors from the
Middle East region. Conference organizer, Mr.
Tahar Benourrad, and his team from UCI put
together an exciting Dragons Den type format,
with James Caan of BBC Dragons Den fame
as the keynote speaker. The format gave the
panellists an opportunity to see presentations
from entrepreneurs requiring investments of
between 5m and 150m in sectors ranging
from real estate to renewable energy. The
UCI event was heavily over subscribed and
attracted some leading figures from both the
UK and the Middle East, including sovereign
wealth funds, private investors, and government representatives.
The conference panellists, who included Mr.
Michael Clark, CEO of Qatar Islamic Bank,
Mr. Hadi Damirji, Managing Director of Trinity Group, Dr. Hatem Abou Said of Al Baraka
Banking Group, and Mr. James Caan, shared
their views on the cultural and commercial nuances of raising finance from the Middle East
and investing into the region. Mr. Caan kicked
off the event with en exhilarating keynote
speech highlighting his signature approach on
private equity and real estate investing. Mr.
Caan introduced his real estate investment
firm Hamilton Bradshaw Real Estate (HBRE),
which was represented at the conference by
himself and his colleague and fellow investor
Mr. Faisal Butt. One of Britains most successful and high profile entrepreneurs and in-
vestors, James Caan was in familiar territory,

having seen over 1,000 presentations during
his time at the BBCs hit series Dragons Den.
In Mr Caans opening remarks he shared his
ideas with the audience, advising them on
how to raise investment from the Middle East.
He focused on the importance of understanding the Middle Eastern investor, who values
relationships and trust above other factors.
Mr. Caan stressed that investors from this
region are highly sophisticated and professional, and their investment analysis is led by
top talent recruited from leading global investment houses.
Investors from this region generally expect
entrepreneurs to have more direct contact,
demonstrate their understanding of the local/regional market, and structure deals in
accordance with cultural norms, said Caan
to an audience of private investors and entrepreneurs. Mr Caan went on to explain that the
Middle East attracts literally thousands of entrepreneurs/investors looking to raise capital;
investors from this region see presentations
almost on a daily basis. They understand
risk, they understand returns and they can
discern the difference between an attractive,
well thought out opportunity and hype. He
highlighted the importance of co-investment,
i.e. skin in the game, from those seeking
investment as an essential ingredient to establishing any investment relationship in the
Middle East. gif
We believe that the World

deserves a better future
Welcome to a sustainable
and ethical banking
Era
Islamic Finance Services
gif
Islamic Finance
ISLAMIC PROJECT FINANCING SETTING

the Agenda for Innovative Opportunities
Author: Tasnim Nazeer, Global Islamic Finance Magazine Editorial Team, United Kingdom
Abstract: Global Islamic Finance Magazine will present part 1 of the Islamic Project Finance Series which will be discussing the key components of project financing in adherence to the Shariah. This article aims to raise awareness of
the functions and Islamic financial instruments used in Islamic Project financing along with an overview of the various
opportunities presented in the sector primarily focusing on the UAE in Part 1 and then looking at various other countries
around the world throughout the series. Islamic Project Financing is a growing sector and provides the avid investor with
an excellent alternative to indulge in profitable projects through Islamic financial transactions which have the advantage
of dealing with a prohibition of interest and many other benefits. Part 1 of the Global Islamic Finance Project Finance
series outlines the various different types of Islamic financial instruments such as Mudaraba, Musharaka, Ijarah, Salam
and most popularly Istisna and the implementation of the instruments in Islamic financial transactions. We will also look
at the Insurance aspects of financing projects such as Takaful Islamic Insurance. All these components are vital to know
when making that lucrative financial deal.
Keywords: Islamic Project Financing, Islamic financial Instruments, Mudaraba, UAE, Musharaka, Istisna, Salam, Takaful,
Quard Hasan, Tranches, Saudi Arabia, Infrastructure, Energy
August 2011
Islamic Finance
gif
Global Islamic Project Financing taking the Nation by Storm

The global demand for Islamic project financing is growing at
an unprecedented rate where many investors around the world
are looking into major financial hubs to aid in funding lucrative
projects. As the Islamic financial market adheres to the principles
set out by Shariah law all investments and projects have to be
constructed in a Shariah compliant manner and authorised by
an Islamic financial governing or regulatory body of the country.
There are many lucrative sectors which provide scope for profitable projects across the spectrum of Islamic finance. Traditionally projects in the infrastructure sector proved more rewarding as
there were many opportunities especially in the Islamic financial
hub of the United Arab Emirates.
Presently there are other sectors for Islamic project financing
deals which are currently spearheading the market such as the
energy, education, health and the Takaful market amongst many
others which will be further discussed in this article. In this Islamic Project Finance Series Global Islamic Finance Magazine
will take you through a comprehensive look at the role of Islamic
Project Finance and its use in many countries around the world
such as the Middle East, Asia, Europe and America. In the first
part of Islamic Project Financing we will be focusing on opportunities and the role of Islamic financing in particularly in the United
Arab Emirates. GIF will also be giving you the vital information you
need so that you acquire the knowledge of utilising Shariah compliant transactions when making project financing deals.
Ian Cogswell, director of natural reserves, corporate finance division, Mizuho Corporate Bank, said: Increased liquidity in the
region means that financial institutions will have to diversify their
income streams on projects and be more innovative in their product offering. Current projects in the oil and gas sector in Qatar
alone amount to more than $60b, including Ras Laffans RasGas
Onshore Expansion Project Trains, expected to produce 15.6m
tonnes of LNG (Khaleej).
Knowing the Vital Financing Principles of Islamic Project Financing
Islamic project financing should be undertaken with adherence to
Shariah principles which include the following:
Figure 1:
Prohibition of Interest (Riba)
Profit and loss Sharing (PLS)
Specific Islamic Finance Instruments
By Tasnim Nazeer
43
gif
Islamic Finance
It is important for any prospective investor

or business professional to know the three
main Shariah compliant rulings in Islamic finance as outlined in Figure 1 and discussed
in more detail.
Four Conditions of Validity in Islamic

Financial Projects/Investments
1) A price should be agreed mutually and not
under duress
Prohibition of Interest (Riba)

2) The project should be between parties that
are sane and have the legal capacity to underThe prohibition of Interest in Islamic finanstand the implications of their actions;
cial transactions cannot be understated as
it plays a significant role in distinguishing
3) At the time of contracting, the subject matbetween a conventional transaction and an
ter of the contract should be in existence and
Islamic Shariah compliant one. In Islam it is
able to be delivered without uncertainty or deprohibited when lending money in an unjusception;
tified manner. In the context of Shariah it re4) The contract should not be based upon a
fers to the premium that must be paid by the
consideration (for the purposes of this broborrower to the lender along with the princhure, this is translated as counter-value) that
cipal amount, as a condition for the loan or
is itself prohibited under the Shariah (e.g. alcofor an extension in its maturity, which today
hol, pork products, etc.)
is commonly referred to as interest. The UAE
Federal Law No. 5 of 1985 Concerning Civil Table by Tasnim Nazeer Information from
Transactions (the Civil Code), which was Tamimi.com
issued with the aim of achieving
maximum compliance with the Figure 2:
Shariah, outlines this principle,
and states in Article 714:
Istisna ( To Manufacture)
If the contract of loan provides
for a benefit in excess of the essence of the contract otherwise
than a guarantee of the rights of
the lender, such provision shall
be void but the contract shall be
valid. (Tamimi.com)
Profit and Loss Sharing (PLS)
One vital concept in Islamic financing which you should be accustomed to is the role of profit
and loss sharing. This means that
two partners in an investment
must share their profits and losses on the basis of their capital
share and the effort that they put
into the project. PLS comprises
of equity based financing as the
justification for the PLS financiers
profits rely upon his effort and the
risk which he holds. If the investment or project makes a loss than
the PLS financier would also incur
loss.
Specific Islamic Financial Instruments
There are specific Islamic financial instruments when financing
Shariah compliant projects which
will be discussed further in this
article. The variety of Shariah
compliant instruments help to
aid with investments and comply
with the rulings laid out by the
Shariah. It is always important
to ensure you are utilising specific Islamic financial instruments
when carrying out an Islamic financing project.
Prohibition of Uncertainty or Suspicion

Gharar in Projects
Any transaction or investment project that
a person wishes to indulge in that involves
Gharar which is suspicion or uncertainty
about the project should be avoided and is
prohibited under Shariah Islamic law. For
example it would be prohibited to sell goods
for a project if those goods had been lost
and you are not able to supply it.
The Role of Islamic Financial Instruments
in Project Financing
It is vitally important to have thorough knowledge of the Islamic financial instruments
which you may wish to utilise when carrying
out project investments. Figure 2 outlines
all the major financial instruments that you
should refer to before carrying out an Islamic
financial project.
Istisna means commissioned manufacture which is to ask someone

to manufacture. It is a relatively modern form of Islamic finance used
globally by Islamic financial institutions and banks. Istisna involves one
party purchasing goods and the other undertakes the manufacturing of
the goods as agreed by both parties. Many Islamic financial institutions
use Istisna to finance construction projects.
Musharaka (Partnership Financing)
Musharaka is a traditional form of Islamic financing which is more widely used in small scale projects and investments. Profits are shared out
between two parties and both parties provide capital to the investment
project. In a typical Musharaka contract between a bank and a customer
the customer or partner will pay the bank its share in the profits and
also a pre-determined portion of his own profits, which then reduces
the banks shareholding in the investment. Eventually, the customer becomes the complete and sole owner of the investment.
Mudaraba (Cost Plus Financing)
In Mudaraba contracts it involves the financial institution such as bank
who will agree to fund the purchase of assets from a third party as requested by their client. The bank will then go on to resell the goods to its
client with a market profit. The client can then choose to purchase the
goods immediately or as a deferred payment which is particularly popular
Islamic financial instrument to use.
Ijarah (Leasing)
In the Ijarah contract it contains similarities to that of its conventional
counterparts as it is defined as a sale of leasing. The financial institution
or bank purchases an asset which is required by its client for a rental
fee. The ownership of the asset remains in the hands of the lesser who
is responsible for its maintenance so that it continues to give the service
for which it was rented. The lesser assumes the risk of ownership and
in practice seeks to mitigate such risk by insuring the asset in its own
name. Under an Ijarah contract, the lesser has the right to re-negotiate
the quantum of the lease payment at every agreed interval. This is to
ensure that the rental remains in line with prevailing market leasing rates
and the residual value of the leased asset.
Salam (Advanced Purchase)
If you did want to purchase a property or building for the means of project
financing then there is the Islamic financial instrument of Salam which
means advanced purchase. The Salam contract is defined as forward
purchase of specified goods for full forward payment. This contract is
regularly used for financing agricultural production and projects.
By Tasnim Nazeer with information from Tamimi.com
August 2011
In addition to the main forms of

Islamic project financing there
are various Islamic loans which
can be utilised such as the following:
Quard Hassan (Interest Free
Loan)
The Quard-Hasan instrument
is equivalent to an interest-free
loan either to corporate customers in financial distress, (which
later might be converted into an
equity stake in the enterprise), or
to individual clients for welfare
purposes. In making the loan
available, the bank may take security for the loan (e.g. mortgage
over the customers premises)
and some may charge a nominal fee. The service charges are
not for profit; they are the actual
costs recovered less than one important condition, (to prevent the
charges from becoming equivalent to interest), that the charge
cannot be made proportional to
the amount or to the term of the
loan.
Takaful (Insurance)
When financing any Islamic
project or investment it is worth
noting the Islamic financial concepts of insurance which is primarily Takaful Insurance. There
are many Takaful companies
around the world and particularly
successful ones in the United
Arab Emirates such as Takaful
Re. Takaful Islamic insurance
differs from conventional counterparts as the concept of Takaful relies upon providing security
to its customers in a way that is
seen to be socially responsible
Islamic Finance
and fair. It refers to the pool of payments
by a group of participants of an agreed sum
into a common fund that will be managed
in accordance with the Shariah, particularly
the Mudaraba contract. In the case of the insured event, the participant benefits through
Takaful by claiming compensation from the
fund. In the absence of the claim, the participants share the surplus of the invested
funds. Conventional insurance companies
manage the funds of its clients on their behalf. Similarly in takaful, the Islamic Bank is
a trustee (not to be confused with the legal
concept of trustee under English law) managing the funds of the participants for a fee.
Thus, each participant retains title over its
share of the funds, and under certain conditions may withdraw its share.
However, in practice, it is seen that the pure
Islamic Shariah compliant nature is detracted from the actual concept of takaful. The
reason behind this is because the takaful
funds are currently reinsured on a conventional basis due to the lack of a developed
Islamic reinsurance market and the need to
build up the reinsurance Takaful market.
To shed more light on the implementation
of specific Shariah compliant instruments
when dealing with Islamic financial projects
GIF has displayed figure 3 which shows the
process of Istisna from the construction
stage up until the operations stage whereby
Ijarah leasing can also be implemented.
1. Construction phases (Istisna) the borrower
procures construction of project assets and
then transfers title to assets to Islamic financiers. As consideration, Islamic financiers make
phased payments to the borrower (equivalent
to loan advances).
2. Operations phase (Ijarah) Islamic financiers lease project assets to the borrower. Borrower makes lease payments (equivalent to
debt service).
Source: Chadbourne.com
A Wealth of Islamic Project Finance Opportunities in the UAE

The United Arab Emirates hold a world of
Islamic project financial opportunities for
investors from all over the globe. Some of
the main sectors for Islamic financial investments are:
Infrastructure Projects
Agricultural
Construction and Energy
Educational
Charity Projects
Real Estate
What do experts say about UAE Islamic

Project Finance?
There is much scope in the UAE primarily
for infrastructure but the latest of deals
from top Islamic financial Abu Dhabi Islamic
Bank (ADIB) had undertaken the largest UAE
project financing deal for Emirates Steel Industries. It had been reported on ADIB that,
Emirates Steel Industries sought the facility to expand its steel production capacity
and diversify its product offering as part of
its strategic plan to become one of the largest integrated steel manufacturers in the
region, in line with Abu Dhabis vision 2030
(ADIB).
Tirad Mahmoud, CEO of ADIB had reportedly said, There are various reasons this is
a very important deal for the UAE, the key
one being that it is for the expansion of a
strategic project of national importance. It
will create additional employment opportunities and revenue sources for the UAE. In
addition, this deal signals that the financing
environment in Abu Dhabi is improving and
could grow this year. This also shows ADIBs
unique capabilities to structure and arrange large and complex financing for major
projects such as Emirates Steel Industries
expansion, with co-participation of Islamic
and conventional financiers to achieve an
optimal outcome for the client(ADIB).
Stephen Pope, CFO of Emirates Steel Industries, said, ADIB impressed us with
their innovation and flexibility in structuring
this large financing agreement. They were
initially chosen due to their robust financial
strength, commitment and experience in
customising financing for many UAE companies. We are pleased to note that their efforts and capabilities, that involved structuring this complex agreement with eight other
banks in a dual-tranche Islamic and Conventional Facility, have justified our confidence
in them. (ADIB).
Saudi Arabia had also made unprecedented
achievements in contributing to the Islamic
project finance sector such as the project
with Saudi Aramco in 2006 which was
named the Ragibh Project. The Rabigh complex was one of the worlds largest integrated export-oriented refinery and petrochemical complexes to be built in the United Arab
Emirates. The Rabigh complex has produced
18.4 million tons per annum of high value petroleum products which gives it much scope
for the industrial sector to further advance
and create more opportunities for Shariah
compliant project financing. In Saudi Arabia
they have successfully utilised the concept
of tranches which primarily uses the Istisna
instrument for the sale to be constructed and
the Ijarah instrument which has worked as a
successful partnership promoting profitable
successes in Islamic financial projects.
gif
The Rabigh Project had established a credible framework within the Saudi legal system for the inclusion of Islamic tranches in
multi-sourced transactions. Islamic financing products are most attractive to project finance sponsorship organisations especially
in large capital projects when they can deliver additional capital participation. Another
benefit is the inclusion of multiple financing
sources from export credit agencies, bond
or Sukuk which adds structural complexity
(and with complexity comes a time cost and
execution risk).
The Islamic financing therefore needs to
bring that additional benefit to overcome
the perceived process and structural burden
associated with the inclusion of an Islamic financing tranche. However in Islamic tranches there poses challenges of tenor and price.
Pricing which runs over a long period of time
in Islamic projects can often be unattractive
for domestic and Islamic banks. However despite challenges that Islamic Project finance
faces there has been unprecedented growth
especially in the United Arab Emirates.
The growth in Islamic project financing has
been phenomenal. It exemplifies the success of both the burgeoning Islamic finance
sector and the booming construction industry in the region, said MEED, organiser of
the upcoming Islamic Project Finance conference (Khaleej Times).
Ensuring that tranches of Islamic funding
work effectively with conventional finance,
that clients understand where the liability
lies in Islamic arrangements, and the implications this has for relationships between
conventional and Islamic investors is at the
heart of our current work in the sector. It is
an approach that is appreciated both by our
clients and by their stakeholders. said Oliver Agha, Global Head of Islamic Finance at
DLA Piper (Khaleej Times).
Not only do non conventional project sectors
such as steel incur lucrative deals in the UAE
but there is also scope for infrastructural
opportunities in the UAE. The energy sector saw a vast opportunity in the UAE from
Dolphin Energy whereby the government of
Abu Dhabi secured a project financing deal
for the construction of the Taweelah Fujairah
pipeline, as well as the expansion of storage
facilities at Ras Laffan, is progressing well,
with the final stage of the pipeline due to be
completed in the first quarter of 2011, and
storage substantially complete.
Tony Boon, director of project finance for Dolphin Energy, said that despite the increased
liquidity available in the market, project finance will continue to play a major part in financing options. It is prudent to spread the
risk across the types of finance available;
45
gif
Islamic Finance
Figure 3:
Islamic finance
providers
Intercreditor
agreement
Conventional
lenders
Investment agency
agreement
Purchase undertaking
Islamic facility
agent
Service
agency
agreement
Sale undertaking
Investment
agency
agreement
Ijara
Istisnaa
Project
company
Construction
contract
Construction
contractor
Source: Chadbourne.com
in addition, banks providing finance can

also validate the investment decision. Dolphin Energy has one of the largest financing deals in the UAE, with the $3.5 billion
deal to fund the construction of its Bridge
1 (Khaleej).
The UAE Steel industry has seen unprecedented demand following the largest project
financing deal as discussed above and
therefore any potential investor or business
professional may want to investigate the
options in the steel industry further in the
United Arab Emirates. There had also been
opportunities in the UAE to get involved in
Islamic law project such as the UAE Federal
Supreme Court Justice Project.
A plan has been chalked out to implement
the e-justice project in Ajman, Umm Al Qaiwain and Fujairah, the minister said during
a tour of the progress of the project in Sharjah courts. The e-management and archiving project, he added, aims at raising the
efficiency and competence of the federal

justice system under the ministrys strategy which primarily seeks to deliver best
judicial services (Global Arab Network).
As you can see there are many opportunities across the various sectors and some
opportunities in the UAE expand out into
many sectors of expertise. If you do have
an expertise or knowledge in the field of
infrastructure, energy or feel you can bring
your knowledge and expertise to the project
than the UAE may be the perfect place for
you to start your Islamic project financing
deal. In the next part of the Islamic Project
Finance Series Part 2 will be looking at the
Middle East and Africa and the various opportunities it holds for the potential investor.
The Future of Islamic Project Financing in
the UAE
There is much scope for an unprecedented
growth in Islamic Project financing in the
UAE especially since Islamic finance as
an industry is attracting investors from all

over the world. Islamic Finance as an institution has become a globally renowned
sector which caters for the demand of both
Muslims and Non Muslims. In a predominant Muslim population of the UAE it holds
the advantage for many numerous Islamic
projects to be undertaken through the various Islamic financial instruments discussed
in this article.
If you are considering participating in an
Islamic Project in the UAE then this article
will give you the comprehensive information you need to know the vital components of instruments you can use including
the type of insurance that you may want for
your project such as Takaful insurance. The
future of Islamic Project financing looks
bright for the UAE seeing lucrative deals
especially from the largest project finance
deal in the Emirates Steel sector which is
expected to see profitable returns for years
to come. gif
References and Further Reading:

Islamic Finance a UAE Legal Perspective (2010) Al Tamimi & Company, Article Retrieved from: http://www.tamimi.com/files/Legal%20Brochures/
IslamicFinance.pdf
ADIB leads the Islamic Tranche of the AED 4 Billion (2010) Abu Dhabi Islamic Bank, Article Retrieved from: http://www.adib.ae/adib-leads-islamictranche-aed-40-billion-project-finance-facility-prestigious-emirates-steel-indust
Islamic Project Finance Structure and Challenges (2010) Chadbourne, Article Retrieved from: http://www.chadbourne.com/files/Publication/
c4ae820b-24ba-4e5b-9f7d-186814289e7e/Presentation/PublicationAttachment/20d7847a-8644-4b0f-b3e7-19a496eebf22/pfn_Intl_0210.
pdf
UAE Federal Supreme Court Justice Project (2010) Global Arab Network, Retrieved from: http://www.english.globalarabnetwork.
com/201009047135/Related-news-from-UAE/uae-federal-supreme-court-completes-first-phase-of-e-justice-project.html
Islamic Finance Project in Saudi Arabia (2006) White & Case, Article Retrieved from: http://www.whitecase.com/files/Publication/5f53893ac38a-4d3b-873d-c7da9f181b27/Presentation/PublicationAttachment/536c71d1-05f5-4c04-a230-c8e647ca455e/article_Islamic_Project_Finance.pdf
$1 trillion project financing market spurs Islamic lending sector growth (2007) Khaleej Times, Article Retrieved from: http://www.khaleejtimes.
com/DisplayArticle.asp?xfile=/data/business/2007/June/business_June447.xml&section=business
August 2011
gif
Islamic Finance
DO CONVENTIONAL AND ISLAMIC FINANCE
SHARE COMMON EPISTEMOLOGY?

Author: Abbas Mirakhor, PhD in Economics, Iran
Edib Smolo, Researcher and Coordinator of Islamic Capital Market Unit, ISRA, Malaysia
Abstract: Simply stated, epistemology deals with the question of what we know about a phenomenon and how do we know it. The practitioners use the term Islamic finance industry (IFI) to refer to their activities in designing and trading Shariah-compliant ways and means
of financing. Taxonomically, industries in an economy belong to a sector and sectors belong to subsystems which in turn belong to a larger
system. For example, a bank belongs to a banking industry which belongs to the financial sector which belongs to the financial subsystem
which belongs to the larger economic system which, finally, belongs to an overall socio-political-economic system. Before the current inception of IFI, there was what could be called a market failure in the conventional financial system. There was substantial unmet demand
for Shariah-compliant financial products. IFI grew out of the conventional finance to meet this demand. Muslim scholars writing mostly
since the 1970s about Islamic finance focused on development of an Islamic finance system; they not only emphasised elimination of riba
contracts but urged their replacement with risk-sharing contracts. The practitioners, most of whom had been operating in the conventional
finance, were however interested in developing ways and means of finance that, while Shariah-compatible, would be familiar to and accepted by market players in the conventional finance. The former emphasised Profit-Loss Sharing (PLS), the latter focused on traditional
methods of conventional finance centred on risk transfer and risk shifting. This article argues that there are two ideal financial systems
based on risk sharing, conventional and Islamic, and one actual conventional system focused on risk transfer. There are two industries
within the actual system; conventional and Islamic finance industry. The paper then proceeds to discuss the epistemology and the main
characteristics of each of the two ideal systems.
Keywords: Conventional Economy, Arrow-Debreu, Financial Instruments, Islamic Finance Industry, Risk
August 2011
Islamic Finance
gif
The work of Arrow-Debreu (1954) is fundamentally about optimal risk sharing in a decentralised market economy. It addresses the question
of how best to allocate risk in an economy. The answer
is that risk should be allocated to those who can best
bear it.
sioned in the Wealth of Nations. That moralethical system was well-described in Smiths
book: The Theory of Moral Sentiments which
preceded his Wealth of Nation by a decade
and half (Mirakhor & Askari, 2010; Mirakhor
& Hamid, 2009). Whereas conventional economics considered Smiths notion of invisible hand as a coordinator of independent
decisions of market participants, in both
The Theory of Moral Sentiments and in the
Wealth of Nations the metaphor refers to
the design of the Supreme Creator who arranged the connecting principles such that
the actions of all those seeking their own advantage could produce the most efficient allocation of resources, and thus the greatest
possible wealth for the nation. This is indeed
a benevolent designer (Evensky, 1993, p.
9).
Epistemology of Conventional and Islamic

Finance
Major contribution of Smith in his Theory of

Moral Sentiments is to envision a coherent
moral-ethical social system consistent with
the Supreme Creators design and how each
member of society would enforce ethical positions. Recognition of human frailties led
Smith to recognition of a need for an organic
co-evolution of individual and society in a
stage-wise process of accumulation of ethical system of values from one generation to
next. Compliance with and commitment to a
set of values virtues of prudence, concern
for other people, justice and benevolence
would insure social order and cohesion (Mirakhor & Askari, 2010; Mirakhor & Hamid,
2009; Smith, 2006).
Smith and Arrow.
An Ideal Conventional Financial System

An overall socio-political-economic system
gives rise to an economic system out of
which grows a system of financing to facilitate production, trade and exchange.
The idea of the contemporary conventional
economic system is usually traced to Adam
Smiths conception of an economy as envisioned in his book, the Wealth of Nations.
What has been ignored until recently, however, the fact that, from an epistemological
point of view, Smiths vision of the economy
is embedded in his vision of a moral-ethical
system that gives rise to the economy envi-
It was not until the second half of the last century when attempts were made to present a
particular conception of Smiths vision of the
economy. This conception saw the economy
as a market system guided by the invisible
hand toward smooth functioning, coordinating autonomous individual choices in an
interdependent world (Evensky, 1993). Two
such attempts were the works of Arrow and
Debrau (1954) and Arrow and Hahn (1971)
that sought to show that a decentralised
economy motivated by self-interest would
allocate resources, such that it could be regarded, in a well-defined sense, as superior
to a large class of possible alternative dispositions (Arrow & Hahn, 1971, pp. vi-vii).
These attempts focused primarily on Smiths
idea of a decentralised market economy but
in the process it abstracted from much of
the well-spring of his thoughts represented
by the societal framework emphasising moral-ethical values envisioned in The Theory of
Moral Sentiments.
The work of Arrow-Debreu (1954) is fundamentally about optimal risk sharing in a
decentralised market economy. It addresses
the question of how best to allocate risk in
an economy. The answer is that risk should
be allocated to those who can best bear it.
It appears that Arrow-Debreu took for granted the existence of such institutions as property rights, contracts, trust, rule of law, and
moral-ethical values. Two key assumptions of
this work were complete contracts and complete markets. By the former it was meant
that it was possible to design contracts such
that all contingencies were covered. The latter assumption meant that there was a market for every conceivable risk. Crucially, all
future payoffs were contingent on specific
outcomes. Arrow-Debreu model did not include fixed, predetermined rates of interest
as payoffs to debt contracts.
Subsequently, Arrow made it clear that the
process of exchange requires or at least is
greatly facilitated by the presence of several
... virtues (not only truth, but also trust, loyalty and justice in future dealings) ... (Arrow, 1971, pp. 345-346). For example, if the
institution of trust is strong in an economy,
the universe of complete contracts can be
replicated by simple contracts entered into
by parties stipulating that terms and conditions of the contracts would be revised as
contingencies arise.
Arrow himself was to place emphasis on
trust as the lubricant of the economy (Arrow,
1974). Despite Arrows attention to some important elements of the institutional structure that were integral to Smiths vision of
an economy, such as its value system, the
economics profession developed its own vision of that economy focusing primarily on
49
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Islamic Finance
Dr. Abbas Mirakhor, born in Tehran, Islamic Republic of Iran, attended Kansas State University, where he received his Ph.D. in economics in 1969. From 1969 to 1984, he taught in various universities in the US and Iran. From 1984 until 1990, he served on the staff of the
IMF, and from 1990 to 2008, he served as the Executive Director at the IMF. Currently, he is The First Holder of International Centre For
Education in Islamic Finance (INCEIF) Chair of Islamic Finance. He has received several awards including Order of Companion of Volta for
service to Ghana, conferred by the President of Ghana in 2005; Islamic Development Bank Annual Price for Research in Islamic Economics, shared with Mohsin Khan in 2003; and Quaid-e-Azam star for service to Pakistan conferred by the President of Pakistan in 1997. Dr.
Mirakhor is the co-author of essays on Iqtisad: Islamic Approach to Economic Problems (1989), Theoretical Studies in Islamic Banking and
Finance (1987), Introduction to Islamic Finance: Theory and Practice (2007), New Issues in Islamic Finance and Economics: Progress and
Challenges (2009) and Globalization and Islamic Finance: Convergence, Prospects, and Challenges.
two concepts of invisible hand and self

interest. The first was mentioned only once
in The Wealth of Nations (see Smith, 1976,
p. 456) and the manner in which the second
was used by economists has been referred
to by Vivian Walsh (2000) as vulgar misunderstanding of what Smith meant by
self interest. This narrowing of Smiths
view has been subjected to rather sharp
criticism by Amartya Sen (Sen, 1977, 1987)
who suggests that: Indeed, it is precisely
the narrowing of the broad Smithian view
of human beings in modern economics that
can be seen as one of the major deficiencies of contemporary economic theory. This
impoverishment is closely related to the distancing of economics from ethics.
Consideration of the above quotation as well
as the rest of The Moral Sentiments, leads
to, at least, three observations. First, this is
the Smith that has been ignored by the economics profession. The Smith of economics
is the author of the self-interest motive that
is the basis of utility and profit maximisation
at any cost to the society, including the impoverishment and exploitation of fellow human beings. Second, Smith makes clear in
his Theory of Moral Sentiments that compliance with the rules prescribed by the Creator and with the rules of the market was essential to his vision. Third, it is also clear that
Smith considers the internalisation of rules
being consciously aware of ever-presence
of the Creator and acting accordingly - as
crucial to all human conduct, including economics.
Smith succinctly and clearly shares some of
the fundamental institutional scaffolding of
Islam: belief in One and Only Creator; belief
in accountability of the Day of Judgement;
belief in the necessity of compliance with the
rules prescribed by the Creator; and belief
that justice is achieved with full compliance
with rules. To paraphrase Sen, no space
need be made artificially for justice and fairness; it already exists in the rules prescribed
by the Law-Giver.
Arrow-Debreu economy
An economy in which there are contingent
markets for all commodities meaning that
there are buyers and sellers who promise to
August 2011
buy or sell given commodities if and only

if a specified state of the world occurs is
called an Arrow-Debreu economy. In such
an economy, it is the budget constraint of
the participants that determines how much
of each of the contingent commodities at
prices prevailing in the market they can buy.
Since these commodities are contingent on
future states, they are risky. Therefore, the
budget constraint of individuals determines
the risk-bearing ability of each market participant. Arrow himself recognised that requiring such a market is unrealistic. Clearly,
the contingent commodities called for do
not exist to extent required, but the variety
of securities available on the modern markets serve as a partial substitute (Arrow,
1971). Such securities, referred to as Arrow
Securities whose payoffs could be used to
purchase commodities, would reduce the
number of markets required while replicating the efficiency of risk allocation of complete contingent markets. Associated with
complete markets are complete contracts.
These are agreements contingent on all
states of nature. In the real world, not all
contracts can cover all future contingencies.
Therefore, they are said to be incomplete
contracts and may indicate inefficiencies
in exchange. However, as suggested above,
optimal contracts can be devised provided
there is mutual trust between the parties to
the contract. That would be a simple contract
with provisions for modification of terms and
conditions and should contingencies necessitate change.
From ideal to actual: conventional finance
But, as Evensky suggests, the Smithian
story told by Arrow and Hahn and they are
representative of modern economists is
an abridged edition. The spring that motivates action in Smiths story has been carried forward, but much of the rest of his tale
has been forgotten (Evensky, 1987, 1993).
It can be argued, as Arrow himself seems to
imply (1971), that the rest of Smiths tale
would have been his vision of the institutional infrastructure (rules of behaviour) that
is envisioned in The Theory of Moral Sentiments, and, as such, abstracting from them
would be unlikely to change the outcome of
the mathematical analysis of Arrow-Debreu
and/or Arrow-Hahn. Furthermore, had actual finance developed along the trajectory
discernible from these works, i.e., steps
taken toward completion of markets and of
contracts, keeping in mind the overall institutional framework for the economy as envisioned by Adam Smith, the result might have
been emergence of conventional finance different from the contemporary system. That
system would instead be dominated by contingent, equity, risk-sharing financial instruments.
Perhaps the most influential factor in derailing that trajectory is the existence and the
staying power of a fixed, predetermined rate
of interest for which there has never been
a rigorous theoretical explanation. All, so
called, theories of interest from the classical
economists to contemporary finance theories explain interest rate as the price that
brings demand for and supply of finance into
equilibrium. This clearly implies that interest
rates emerge only after demand and supply
forces have interacted in the market and not
ex ante prices. In fact, in some theoretical
models there is no room for a fixed, ex ante
predetermined rate of interest. For example,
introducing such a price into the Walras or
Arrow-Debreu-Hahn models of general equilibrium (GE) leads to the collapse of the
models as they become over-determined.
Even though no satisfactory theory of a positive, ex ante fixed rate of interest exists, all
financial theory development post ArrowDebreu-Hahn assumed its existence in the
form of a risk-free asset, usually Treasury
Bills, as a benchmark against which the
rates of return of all other assets, importantly equity returns, were measured. These
include theories such as the Capital Asset
Pricing Model (CAPM), Modern Portfolio
Theory (MPT); and the Black-Scholes option pricing formula for valuing options contracts and assessing risk. For all practical
purposes, the assumption of a risk-free rate
introduced an artificial floor into the pricing
structure of the real sector of the economy,
and into all financial decisions. It can be
argued that it is the existence of this exogenously imposed rate on the economy that
transformed Arrow-Debreu vision of a risksharing economy and finance. The resulting
Islamic Finance
gif
system became one focused on transferring

or shifting of risk rather than sharing it. Such
a system needed strong regulation to limit
the extent of both.
However, further developments in finance
theory provided analytic rationale for an ideologically aggressive deregulation. One was
the Modigliani-Miller Theorem of neutrality of capital structure of firms. In essence
this theorem asserted that the value of a
firm is independent of its capital structure.
This implied that since firms want to maximise their value and since Modigliani-Miller
showed that the value of the firm is indifferent whether the firm debt finances or equity
finances its capital structure, firms would
prefer to incur higher debt levels for the firm
rather than issue additional equity. Hence,
the risk of additional debt would be shifted
to other stakeholders (Jensen & Meckling,
1976).
Another was the development of the Efficient Market Hypothesis (EMH) that claimed
that in an economy similar to that of Arrow-
The work of Arrow-Debreu (1954) is fundamentally about optimal risk sharing in a decentralised market economy. It addresses the
question of how best to allocate risk in an economy. The
answer is that risk should be allocated to those who can
best bear it.
Debreu, prices prevailing in the market contained all relevant information such that
there would be no opportunity for arbitrage.
Hence, the Arrow-Debreu vision of an
economy in which risk was shared was first
transformed into an economy in which the
focus became risk transfer but which quickly
transformed into one in which risks were
shifted, ultimately, to tax payers (Mirakhor &
Krichene, 2009).
An Ideal Islamic Finance System
The ideal Islamic finance points to a fullspectrum menu of instruments serving a
financial sector imbedded in an Islamic
economy in which the institutional scaffolding (rules of behaviour as prescribed by
Allah swt and operationalised by the Noble
Messenger, including rules of market behaviour prescribed by Islam) is fully operational
(Chapra, 2000; Iqbal & Mirakhor, 2007).
The essential function of that spectrum
would be spreading and allocating risk
among market participants rather than allowing it to concentrate among the borrowing class. Islam proposes three sets of risksharing instruments:
1. muamalat risk-sharing instruments in

the financial sector;
2. redistributive risk-sharing instruments
through which the economically more able
segment of the society utilise in order to
share the risks facing the less able segment
of the population; and
3. the inheritance rules specified in the
Quran through which the wealth of a person
at the time of passing is distributed among
present and future generations of inheritors.
The spectrum of ideal Islamic finance instruments would run the gamut between shortterm liquid, low-risk financing of trade contracts to long-term financing of real sector
investment. The essence of the spectrum is
risk sharing. It is worth noting that transaction contracts permissible in Islam and the
financial instruments intended to facilitate
them are not the same thing. Islamic real
sector transactions contracts (uqud) that
have reached us are all permissible. However, it is possible that a financial instrument
designed to facilitate a given permissible
contract may itself be judged non-permissible.
As the proliferation of derivative instruments

in the period of run up to the global financial
crisis demonstrated, the number of financial
instruments that have some relation, even if
only nominal, to a real sector transaction is
limited only by the imagination of financial
engineers. This is the essence of the theory
of spanning developed in finance in the late
1960s and early 1970s which led to the
design and development of derivatives. It
is possible that a financial instrument may
have weaker risk-sharing characteristic than
the Islamic transaction contract it intends to
serve.
Since Islamic finance is all about risk sharing, then the risk characteristics of a given
instrument needs to become paramount in
decisions. One reason, inter alia, for nonpermissibility of the contract of riba is surely
due to the fact that this contract transfers
all, or at least a major portion, of risk to the
borrower. It is possible to imagine instruments that on their face are compatible
with the no-riba requirement, but are instruments of risk transfer and, ultimately, of
shifting risk to tax payers. An example would
be a sovereign ijarah sukuk based on the assets subject of ijarah but credit-enhanced by
other means, say collateral. All costs taken
into account, such a sukuk may well be more
expensive and involve stronger risk transfer
characteristic than a direct sovereign bond
(see Mirakhor & Zaidi, 2007).
It appears that at the present, the energies
of financiers and financial engineers are
focused on the design and development of
instruments to accommodate the low-end
of time and risk-return, liquid transactions.
51
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Islamic Finance
Gulf Islamic Finance Industry Set on

Single Shariah Board
The Gulf has made significant contribution the facilitation of Islamic finance and
banking and it now wants to see through
the launch of a single Shariah board.
The United Shariah Board, which began
drawing scholars from local Islamic institutions two years ago, now has two members
from Saudi Arabia and one scholar each
from Kuwait and Qatar, Scholar Hussein
Hamid Hassan said at the launch of a policy briefing on corporate governance in Islamic finance. It was also reported that the
Islamic finance industry is moving towards
a centralised Shariah board as scholars
from leading countries join a common UAE
entity, a leading Islamic scholar said.
We have almost one united Shariah board
for the Gulf, he said. I think within five to
10 years we will have one Shariah board
for everyone.
Shariah scholars serving the United Shariah Board also represent individual bank
Shariah boards, thereby transferring the
Islamic rulings, or fatwas, issued by the
centralised board to their individual institutions across borders.
While progress has been made, there are
still differences in interpretations of Islamic law that is preventing a quicker adoption
of a centralised Gulf board.
A unified Gulf-wide entity would boost
corporate governance within the growing
industry, said Nassar Saidi, executive director of Hawkamah, which issued 55 recommendations to Islamic financial institutions in its policy paper.
Saidi added that creating a centralised
board is a first step but would need support from regulators to give enforce its
fatwas.
The policy report, which was based on a
survey of 22 Islamic institutions across the
Middle East and North Africa, also determined that more should be done to limit
the number of the same Shariah scholars
serving on multiple boards.
You shouldnt have multiplicity which can
create a conflict of interest, he told reporters. If you have well recognised scholars
on one central board, that would help.
August 2011
Edib Smolo is a researcher and Coordinator of the Islamic Capital Market Unit, International
Shariah Research Academy (ISRA) for Islamic Finance. He is also a Ph.D. candidate at
the International Centre for Education in Islamic Finance (INCEIF), the Global University of
Islamic Finance, Malaysia. Mr. Smolo received his double degree, Bachelor of Economics
(Honours) and Bachelor of Islamic Revealed Knowledge and Heritage (Honours), as well as
Master of Economics from International Islamic University Malaysia (IIUM), Malaysia. He
also holds a Certificate for Professional Specialization in Political Management from Bulgarian School of Politics, jointly organized by the New Bulgarian University and the Council of
Europe.
Without effort at developing long-term investment instruments with appropriate riskreturn characteristics, there is a danger of
emergence of path-dependency where the
market will continue to see more albeit in
greater variety of the same. That is more
short-term, liquid and safe instruments.
risk of default. But it is not risk taking per

say that makes a transaction permissible.
A gambler takes risk as well but gambling
is non-permissible (haram). Instead what
seems to matter is opportunity for risk sharing. Riba is a contract of risk transfer or risk
shifting.
This is what led to the explosion of derivatives which played an influential role in the
recent global financial disaster. Similar development could be awaiting Islamic finance
if the ingenuity of financial engineers and
the creative imagination of Shariah scholars continue to serve the demand-driven appetite for liquid, low risk, and short-term instruments. In that case, the configuration of
Islamic finance would have failed to achieve
the hopes and aspirations evoked by the potential of the ideal Islamic financial system.
Epistemology of an Ideal Islamic Finance
System
Achieving the Ideal: Uncertainty, Risk and

Equity Markets
Uncertainty is a fact of human existence.
Humans live on the brink of an uncertain
future. Uncertainty stems from the fact that
the future is unknown and therefore unpredictable. If severe enough, uncertainty can
lead to anxiety, decision paralysis and inaction.
The fountainhead of all Islamic thought is

the Quran. Whatever the theory of Islamic
knowledge may be, any epistemology, including that of finance, must find its roots
in the Quran. The starting point of this discussion is therefore Verse 275 of Chapter
2 of the Quran, particularly the part of the
Verse that declares contract of bay permissible and that of riba non-permissible. Arguably, these few words can be considered as
constituting the organising principle the
fundamental theorem as it were of the Islamic economy.
It is worth noting also that all Islamic contractual forms, except spot exchange, involve time. From an economic point of view,
time transactions involve a commitment to
do something today in exchange for a promise of a commitment to do something in the
future. All transactions involving time are
subject to uncertainty. And, uncertainty involves risk. Risk exists whenever more than
one outcome is possible. Therefore, it can
be inferred that by mandating bay, Allah swt
ordained risk-sharing in all exchange activities. Furthermore, it appears that the reason
for the prohibition of the contract of riba is
the fact that opportunities for risk sharing
are non-existence in this contract. It may be
argued that the creditor does take risk the
Lack of certainty for an individual about the

future is exacerbated by ignorance of how
others behave in response to uncertainty.
Yet, individuals have to make decisions and
take actions that affect their own as well as
others lives. In other words, uncertainty is
converted into risk. Risk, therefore, is a consequence of choice under uncertainty.
Risk exists when more than one outcome is
possible. It is uncertainty about the future
that makes human lives full of risks. Risk
can arise because the decision maker has
little or no information regarding which state
of affairs will prevail in the future, the person, nevertheless, makes a decision and
takes action based on expectations.
It seems difficult, then, to imagine the idea
of testing without uncertainty and risk. Statistician David Bartholemu (2008) asserts
that: It could be plausibly argued that risk
is a necessary ingredient for full human development. It provides the richness and diversity of experience necessary to develop
our skills and personalities (p. 230).
Islam, in particular, has provided the ways
and means by which uncertainties of life can
be mitigated. First, it has provided rules of
behaviour and taxonomy of decisions actions and their commensurate payoffs in the
Quran. Complying with these rules reduces
uncertainty. Rules also promote cooperation
and coordination (Mirakhor, 2009). Second, Islam has provided ways and means
Islamic Finance
by which, those who are able to, mitigate
uncertainty by sharing the risks they face by
engaging in economic activities with fellow
human beings through exchange. Sharing allows risk to be spread and thus lowered for
individual participants. However, if a person
is unable to use any of the market means
of risk sharing because of poverty, Allah swt
has ordered a solution here as well: the rich
are commanded to share the risks of the life
of the poor by redeeming their rights derived
from the Islamic principles of property rights.
Islams laws of inheritance provide further
mechanism of risk sharing.
It is important to note a nuanced difference
between risk taking and risk sharing. The
former is an antecedent of the latter. The decision to take risk to produce a product precedes the decision on what to do with the
risk in financing the project. The decision to
share the risk in financing does not increase
the risks of the project but reduces the risks
for individuals involved in financing it as it is
spread over larger number of participants. It
is also to be noted that the Islamic contract
modes that have reached us are all bilateral
real sector contracts. What the contemporary IFI has accomplished is to:
1. Multilateral the bilateral contracts as
the latter move from the real sector to the
finance sector, and
2. Employ instruments of risk transfer available in the conventional finance but made
them Shariah-compatible.
Summary and Conclusion

This article has sought to trace the epistemological roots of conventional and Islamic
finance. The reason for interest in the two
fields, the articles contends, is that the
present IFI evolved over the past three decades from conventional finance to address
a market failure to meet the demand for
Shariah-compliant finance products. Most
practitioners of Islamic finance were bankers and market players well familiar and often well established in conventional finance
sector.
Their focus was, and is, to develop financial
instruments familiar to conventional finance
market albeit with Shariah compatibility as
an objective. Their ingenuity combined with
active and creative imagination of leading
Shariah scholars has managed to develop
a rich array of synthetic and structured products all of which, in one form or another, are
replicated, retrofitted or reverse engineered
from the conventional finance.
This article contents, however, that this is
only meeting the second half of the part of
verse 275 of chapter 2 of the Quran. It is
crucial to note that in this Verse Allah swt
first ordains exchange contracts and, second, He swt prohibits riba contracts.
The present approach of focussing on the
second part of the Verse (prohibition of
interest rate based debt contracts) while
ignoring the first part, i.e., risk sharing has
gif
further entrenched the present IFI within the

conventional financial system rendering IFI
a new asset class within the conventional
system. The IFI could have taken a different course as a number of pioneer scholars
had defined a trajectory for its development
based on risk sharing (PLS). In the event, it
was the conventional finance that gave IFI
its take-off platform, thus making the study
of the epistemology of conventional finance
relevant.
A related concern is that by focusing solely
on short-termism, there is the possibility of
emergence of path dependency. There is a
concern that such path dependency may
well emerge that conveys a message that
short-termism, safety and liquidity, as well
as no riba, are all there is to Islamic finance.
The thrust of this paper is that this is not so.
Islamic finance is more about risk spreading
and risk sharing.
That said, the current lack of equity and other risk sharing instruments within the menu
of Islamic finance is akin to a market failure.
For a number of decades now, economic
theory has made a compelling case for government intervention when and where there
is a market failure. In this case too, a strong
case can be made for government intervention to remedy the current failure of the market to develop long-term, more risky, higher
return risk-sharing instruments. gif

Arrow, K. J. (1971). Essays in the Theory of Risk-Bearing. Chicago: Markham Publishing Company.
Arrow, K. J. (1974). The Limits of Organizations. New York: Norton.
Arrow, K. J., & Debreu, G. (1954). The Existence of an Equilibrium for a Competitive Economy. Econometrica 22(3), 265-290.
Arrow, K. J., & Hahn, F. (1971). General Competitive Analysis. San Francisco: Holder Day.
Bartholomeu, D. J. (2008). God, Chance and Purpose: Can God Have It Both Ways? Cambridge: Cambridge University Press.
Chapra, M. U. (2000). The Future of Economics: An Islamic Perspective. Leicester: The Islamic Foundation.
Evensky, J. (1987). The Two Voices of Adam Smith. History of Political Economy, 19(3), 447-468.
Evensky, J. (1993). Ethics and the invisible hand. Journal of Economic Perspectives, 7(2), 197-205.
Iqbal, Z., & Mirakhor, A. (2007). An Introduction to Islamic Finance: Theory and Practice. Singapore: John Willey & Sons (Asia).
Jensen, M. C., & Meckling, W. H. (1976). Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics, 3(4), 305-360.
Mirakhor, A. (2009). Islamic Economics and Finance: An Institutional Perspective. [Keynote Address II]. IIUM Journal of Economics and Management,
17(1), 31-72.
Mirakhor, A., & Askari, H. (2010). Islam and the Path to Human and Economic Development. New York: Palgrave Macmillan.
Mirakhor, A., & Hamid, I. S. (2009). Islam and Development: The Institutional Framework. New York: Global Scholarly Publications.
Mirakhor, A., & Krichene, N. (2009). The Recent Crisis: Lessons for Islamic Finance. IFSB 2nd Public Lecture on Financial Policy and Stability, Kuala
Lumpur: Islamic Financial Services Board (IFSB).
Mirakhor, A., & Zaidi, I. (2007). Profit-and-Loss Sharing Contracts in Islamic Finance. In M. K. Hassan & M. K. Lewis (Eds.), Handbook of Islamic Banking (pp. 49-63). Cheltenham, UK: Edward Elgar Publishing Ltd.
Sen, A. K. (1977). Rational Fools: A Critique of the Behavioral Foundations of Economic. Philosophy and Public Affairs, 6(4), 317-344.
Sen, A. K. (1987). On Ethics and Economics. Oxford: Blackwell.
Smith, A. (1976). An Inquiry into the Nature and Causes of the Wealth of Nations (1776/1976). Edited in two volumes by W.B. Todd. See vol. 2 of the
Glasgow Edition of the Works and Correspondence of Adam Smith. Oxford: Clarendon Press.
Smith, A. (2006). The Theory of Moral Sentiments (Dover Philosophical Classics). Mineola, New York: Dover Publications.
Walsh, V. (2000). Smith after Sen. Review of Political Economy, 12(1), 5-25.
53
gif
Market Review
RUSSIA NEEDS CHANGES

TO LAW TO FACILITATE SUKUK
Source: GlobalIslamicFinanceMagazine.com
We are not supported by the government or by the legislators. The regulators and the government today for different reasons are almost ignoring this phenomenon.
As the Islamic finance industry is growing

at an unprecedented speed, Russia still remains to have changed laws in order to facilitate sukuk. Russian borrowers are pitching
plans to sell the nations first Islamic bonds
even as regulators lag behind in customising
laws for the industry.
Executives from Gazprom bank, the lending
arm of gas export monopoly Gazprom, are in
Southeast Asia to seek support for issuance
by as many as five companies, Alexander
Kazakov, director of structured and syndicated finance at the bank, said in Jakarta.
Tatarstan, a Muslim-majority Russian republic, will announce a dollar denominated sale
soon, according to Kuala Lumpur-based adviser Amanah Raya Investment Bank, which
is working on the proposal. Russia would
join Thailand and Senegal in planning debut sukuk this year, helping accelerate glo54 Global Islamic Finance
August 2011
bal sales that increased 24 percent to $7.8

billion in 2011. Russia needs to change its
legal framework to ensure Shariah compliant transactions get the same tax treatment
as non-Islamic finance, said Aznan Hasan,
associate professor at the International Islamic University Malaysia.
The Russian tax code and legislation in general create obstacles for Islamic finance,
Djabiev said. We are not supported by the
government or by the legislators. The regulators and the government today for different
reasons are almost ignoring this phenomenon.
Its still very early days for Russia, Aznan

said. A lot needs to be done before the first
sale can happen. They need to level the playing field mainly for taxes.
Amanah Raya Investment Bank, part of

Kuala Lumpur-based Amanah Raya Capital
Group, together with Kazan based financial
advisory firm Linova and Kuwait Finance
House (Malaysia) are finalising the official
mandate for the sukuk issuance after conducting preliminary studies, Abas A. Jalil,
chief operating officer at Amanah Raya Capital Group, said .
Islamic bonds pay a return on assets and

may attract double charges on stamp duties due to the sale and purchase of goods
to back the debt, Aznan, who was in Russia
to speak at a conference last month, said on
the 8th of June. Profits or capital gains incur
taxes whereas interest is tax deductible, he
said.
VTB bank aims to raise about $200 million
this year selling debt that complies with Islams ban on interest, Herbert Moos, the
lenders deputy chairman, said in April.
The debut sale from Tatarstan will happen
even as tax regulation issues linger, Adalet
Djabiev, chief executive of Al Shams Capital
Group, a Moscow-based Shariah-compliant
advisory firm, said on the 8th of June from
Astana, Kazakhstan.
The sukuk will be offered to investors in

Southeast Asia, Europe and the Middle East,
Abas said. We expect the sukuk would be
fully subscribed by Shariah-compliant funds
across the targeted market. Amanah Raya
expects regulatory changes to be made to
enable the offering, Abas said.
Shariah-compliant notes have gained 5.5
percent in 2011, according to the HSBC/
NASDAQ Dubai U.S. Dollar Sukuk Index, while
debt in developing markets has climbed 4.5
percent, JPMorgan Chases EMBI Global Diversified Index shows. gif
gif
UNLEASH THE POWER OF

INTERNAL MARKETING IN YOUR
ISLAMIC FINANCIAL INSTITUTION

Author: Tasnim Nazeer, Global Islamic Finance Magazine Editorial Team, United Kingdom
Abstract: In this edition of the marketing and branding series, Global Islamic Finance Magazine is going to show you the key
ways to unleash the power of internal marketing in your Islamic financial institution. Effective internal marketing can help
to spur growth in your business and also aid in further promoting the growing Islamic financial and banking industry. Global
Islamic Finance Magazine will discuss the various different ways that internal marketing can be implemented in your Islamic
financial institution. This article will give you a thorough insight into the internal marketing industry and would be beneficial
to professionals, students and anyone wishing to know the key to unleashing the power of marketing. We will be discussing
marketing in the consensus of Shariah compliancy adhering to the principles of Islam in order to ensure that all promotion of
the institution is done in a Halal way. This is an important part of marketing in the Islamic finance and banking industry. Many
Islamic financial hubs across the world have been successful due to effective and strategically planned internal marketing
processes which have helped to aid their development in the Islamic finance and banking sector. This article aims to explain
the various ways development of internal marketing can be facilitated in your company or institution to ensure success and
further spur the Islamic finance and banking industry which is expected to reach to over $2 trillion dollars by the year 2012. So
if you want to know the key to success in internal marketing then this article is for you.
Keywords: Internal Marketing, Islamic Branding, Islamic Financial Institutions, Islamic Banks, Promoting Islamic Finance, Process, Strategies, Media, Imagery
55
Firstly it is important to establish the rules

and regulations of Shariah compliancy within Islamic financial institutions in order to effectively market your product or services to
any given company. Global Islamic Finance
Magazine will go through the rules of Shariah
compliancy which all companies, individuals
and businesses should adhere to in order to
ensure successful internal marketing.
A marketing professional or sponsor of Islamic finance marketing has to be aware of
avoiding non Shariah compliant markets as
figure 1 outlines the principles underlying Islamic finance and which markets should be
avoided in order to remain Shariah compliant.
There are various forms and ways for internal marketing strategies and both can be
applied to Islamic banking institutions in
addition to conventional Islamic financial institutions. It is important for any business,
professional or corporate of a company to
familiarise themselves and their employees
with the key concepts of internal marketing.
Once familiarised with the key concepts your
company can be equipped with the understanding of the processes and many benefits that it will have in spurring your mar56 Global Islamic Finance
August 2011
It also gives room for existing employees

to be involved in the process of hiring new
employees to further prosper the company.
Internal marketing ensures equitable recognition and reward whereby businesses
must exercise employee recognition with
reward to what the employee has achieved
which will further motivate your employees
Figure 1: Shariah compliancy rules and
regulations
KEY PRINCIPLES UNDERLYING

ISLAMIC FINANCE
Prohibition
of riba
Prohibition
of uncertainty
Prohibition of
forbidden assets
(e.g. alcohol,
gambling)
Islamic
Finance
Profit sharing and

risk sharing
Existence of an
underlying asset
Source: Melbourne APEC Finance Centre
Figure 2:
Develop internal marketing strategies
within your department
When a company is considering imploring internal marketing strategies it needs to closely look at the ways in which performance of
their company can be improved in order to
ensure sustainable growth of their products
and services. It is imperative that companies, businesses and Islamic financial institutions place importance in assessing their
effectiveness of their marketing strategies.
Internal marketing helps to retain a positive

customer focused outlook in achieving the
main business objectives. Some of the key
features of internal marketing that you and
your company should be acquainted with is
that it gives room for creativity and innovation. All employees are individuals responsible for his or her decisions in marketing
processes and will have to retain accountability and responsibility for the decisions
which they decide to make.
Divide your departments into business units

focusing on different aspects of marketing
strategies from promotion to events
These business units control factors such

as expenditure of marketing material. Businesses that effectively use internal marketing ensure that their employees gain significantly by treating them as customers to
internal marketing with the goal of increasing their motivation to meet targets and focus on customer needs.
keting strategies for your company forward.

So what are the key concepts and features
of internal marketing? One of the main concepts of the internal marketing is that it
arouses an ethos of employees promoting
the core values of the organisation. It motivates employees reframing them and empowering them with responsibility to change
their attitudes positively.
Ensure Shariah compliancy rules and

regulations are discussed and clarified
with employees
An Introduction to Internal Marketing in

Islamic Financial Institutions
There are various forms of marketing techniques and strategies that can help to spur
the Islamic finance industry forward. However one such technique which cannot be
understated is the effectiveness of using
internal marketing strategies. So what exactly is the concept of internal marketing?
Internal marketing is the application of processes and principles within the marketing
framework of financial institutions. Internal
marketing therefore involves a business or
company using various different methods
and dividing marketing roles within their departments transforming them into business
units.
Increase employees motivation to meet

targets and focus on customer needs
gif
Diagram by Tasnim Nazeer
to get the best results from your campaign.

Another key feature of internal marketing is
that it demonstrates fairness during hard
times including fair treatment of employees
when faced with difficulty. It further creates
an excellent organisational structure which
promotes quality management, learning,
educating and significant results.
How can you use internal marketing to
spur your company forward?
This is a question asked by many corporate
investors and students wishing to know
more about the benefits of internal marketing in promoting Islamic financial institutional products and services. Figure 2 outlines
the ways in which internal marketing can be
used in your company to spur further growth
of your businesss products, services and
events.
Internal marketing strategies can further
help to educate and increase awareness
amongst their employees by employing internal marketing strategies. Especially in Islamic banking institutions many Islamic banks
find that internal marketing is imperative in
order to help build up the relationship between business clients and the individual.
This will provide the following advantages to
your company as outlined in Figure 3:
As outlined in Figure 3 there are countless
advantages to develop internal marketing
strategies in your business. These advantages outweigh the option of not developing
internal market plans as any form of effective ways to promote your company should
be developed at the earliest. If you take a
laid back approach to creating an internal
market then all other processes in the marketing strategy could hinder the profits of
your company.
It is especially important in Islamic financial
institutions and Islamic banks that such
measures are seriously considered in order
to increase rewards and engage in excellent
customer service which will not only benefit
the company but also increase the reputation. An Islamic financial institution which
has built up a good rapport with its customers and has used effective techniques
with employees working hard to focus on
customer needs undoubtedly will prosper in
success.
So there is nothing stopping you as an individual business, company or corporate considering implanting changes in the approach
to marketing in order to dedicate time to this
important field. In addition to complying with
Shariah principles it is also equally important to market your product effectively and it
can be guaranteed that the effectiveness of
internal marketing is unprecedented.
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gif
Figure 3: Advantages of Internal Marketing for your Company

Increased competitive advantages between
other financial institutions in establishing excellent customer relations
A chance to gain insights through customer collaborations and essential feedback
Will help to create solutions in fulfilling customer needs and wants
Will educate employees which will create motivation to generate higher demands for Islamic
financial products
Will establish significant business units focusing on various aspects of marketing such as
expenditure
Dedicated business units will create more quality promotional marketing material and ensure
smooth reviews of profits and expenditure
Figure 4: Companies Strategic Planning in

Marketing Islamic Financial Products
Increase understanding of Islamic financial
products so that the customer knows and understands what they are getting
Dedicated to the Shariah compliant consumers
needs
Leaves scope for re designing products and
services
Can spur innovative to fulfil the expectations of
the target customer
Can put strategies and targets into focus so that
marketing material can be facilitated effectively
Avoids replication or the absence of certain
marketing tools which can be followed in a plan
of action
Resistance to change.
August 2011
The importance of Strategic Planning in

Internal Marketing
Processes of strategic planning in Islamic
financial institutions cannot be understated
as being the key to developing your company
forward. Strategic planning involves reviewing and setting targets which need to be
analysed in order to further spur successful
customer relations. It also helps to identify
and target customer needs focusing on a
step by step route to successful marketing
of products.
The Halal branding of Islamic financial institutions has come a long way and many Islamic financial institutions are tapping into
the sector of promoting its worth as a fully
fledged Shariah compliant institution. Creating strategic plans will help companies and
businesses to do the following as outlined
in Figure 4:
The emergence of Islamic Finance into
mainstream finance and the growing interest in the industry globally coupled with the
rising demand for Shariah compliant product
seems to present the Islamic finance Industry a unique opportunity to develop a sound
customer centric sustainable competitive
advantage.
In order to further develop this advantage, a
re-look at just the product build up or marketing communications in addition to the
companys operational standards would not
be enough to sustain success in marketing.
To create and deliver a sustainable competitive advantage the entire process of business planning and operations would need
to be reviewed. This review is imperative in
ensuring identification of key operational efficiency areas coupled with strategic development which will identify the brand value
benefit that the Islamic financial global market wants to see developed and would like to
further utilise.
Internal Marketing Focusing on Customers Needs
Internal marketing is totally customer focused to ensure excellent standards are met
and provisions are made which will hope to
spur success within the company threshold
and beyond. Especially in the Islamic retail banking sector, banks are increasingly
aware that customers are the inspiration
of the industry. Islamic banks therefore try
their utmost best to actively engage consumers in order to attract a wider customer
base and generate a broad and stable revenue stream.
Islamic banking institutions are increasingly adopting a consumer-centric strategy,
with an aim of tapping into the increased
potential of the market. The Islamic finance
industry is at its peak indulging in lucrative
investments which are all tailored to attract
the consumer.
Educating customers about Islamic finance
is imperative to ensure that the Islamic financial institution understands their needs
and delivers products and solutions that are
innovative and adhere to Shariah principles.
It has also been the aim of many Shariah
compliant financial institutions to offer costeffective, solutions in order to develop the
sector more fully and enlarge their share especially in the Islamic retail banking sector.
Internal marketing is totally customer focused to ensure excellent standards are met and provisions are made which will
hope to spur success within the company threshold and beyond. Especially in the Islamic retail banking sector, banks are
increasingly aware that customers are the inspiration of the industry.
Islamic banks therefore try their utmost best to actively engage consumers in order to attract a wider customer base and generate a broad and
stable revenue stream
Players across the conventional sphere are
moving away from product selling to solutions based on customer needs, and Islamic
banks are doing this too, says Wasim Saifi,
the global head of Islamic banking for the
consumer banking division of Standard
Chartered Bank. We take the same approach as on the conventional banking side.
We encourage staff to engage customers
in need-based conversation rather than engage in product pushing - thats the need of
the day. (Islamic Finance Asia)
gif
The question remains as to how Islamic financial institutions and banks can further
adopt methods to target the customer/
consumer base. The answer lies in the fact
that internal marketing strategies focused
on customer needs can solve the question.
There are various methods of focusing on
customers needs as described by Amman
Mohammed the managing director of Absa
Islamic Bank in South Africa.
Mr Mohammed says in regards to achieving customer satisfaction from marketing that, To educate via a customer focus
group where we invite people from a certain
area to congregate, and invite international
Shariah scholars and members of our Shariah board to interact with them and answer
questions. He further went on to say that
One of the challenges we face is creating
enough awareness amongst Muslim and
non-Muslim customers, potential customers
and bank staff (Islamic Finance Asia).
59
gif
Figure 5: Identifying Potential Constraints

in Marketing your Islamic Financial
Product
Language barriers It is important to ensure
that the language barriers are broken down
and all internal marketing material is catered
for the customer base and given with language
options for them to understand.
Standardisation of Shariah compliancy - This

has been one key challenge of the Islamic financial industry as a whole as what is deemed
Shariah compliant in one country may not be
compliant in another. Therefore it is best to
stick to the overall consensus when making
Shariah compliant decisions.
Assess to data - It has often been a problem
for Islamic financial institutions to have readily available data on their lists due to problems
with technological software. Thankfully Islamic
software providers such as Path solutions have
provided innovative Shariah compliant software.
Table by Tasnim Nazeer
Figure 6: Constraints of Implementing

Internal Marketing
Managerial incompetence in interpersonal,
technical and conceptual skills is some of the
stumbling blocks against successful internal
marketing.
Poor understanding of internal marketing concept.
Individual conflict and conflict between departments makes the implementation of internal
marketing difficult.
Rigid organisational structure coupled by bureaucratic leadership hinders success of internal marketing.
Ignoring and not listening to subordinate staff.
The tendency of ignoring employees importance and treating them like any other tools of
the business.
Unnecessary protection of information against
employees.
Resistance to change.
Source: Wickepedia
August 2011
Many conventional banking institutions have

been rushing to facilitate and open up Islamic windows within their branches to cater for
the growing demand of customers wishing
to use Shariah compliant financing. Islamic
financial institutions have an edge over conventional banks for catering for fully fledged,
dedicated Islamic financial services.
This advantage could be highlighted in all
marketing aspects as the employees which
are involved in helping customers to get the
best Shariah compliant service are expected
to know and educate customers in order for
them to understand the principles of Islamic
banking efficiently.
Of course if employees in a conventional
Islamic window were trained to be specialists in the Islamic finance or have adequate
knowledge to sell the products sufficiently
then customers would consider it as a viable
option. However Islamic banking and financial institutions are a reliable source for fully
fledged Islamic products and services and
many customers will be attracted by this aspect.
Highlighting and promoting customer centric
advantages of products and services can
further spur success. Enabling and educating staff and employees by sending them on
courses, conferences and events can also
aid in the successful facilitation of internal
marketing.
Overcoming Constraints and Challenges
with Internal Marketing
All Islamic financial institutions including
their conventional peers will undergo challenges and constraints when dealing with
marketing their services. However as a simple rule of thumb it can be reassuring to
know that a strategy of action can be used
to deal with the level of constraints that may
be causing a delay in facilitation or marketing of an Islamic product and service.
Firstly it is important to identify the potential
constraints and challenges that may occur
when looking to the global Islamic financial
market in promoting your company or services. These constraints are outlined in Figure 5.
As outlined in Figure 5 there are some potential constraints of the Islamic financial industry that can often hinder success, however internal marketing can help to overcome
the challenges and constraints of marketing
your Islamic financial products or services.

Figure 6 outlines further problems which
may affect successful implementation of internal marketing. It is important to identify
these problems at the earliest to ensure that
constraints are overcome and necessary
measures are taken to improve the overall
service and delivery from your company. As
internal marketing involves all employees of
managerial level taking up employer branding in addition to employer brand management it is particularly important that they
know what they may need to overcome and
deal with it.
As outlined in Figure 6 you may experience
one or more of the potential constraints of
implementing internal marketing. However
addressing these problems at the earliest
by working to overcome your objectives can
help your employees to have a good understanding and work towards an ideal goal. A
resistance to change by employees shows a
lack of understanding of the benefits of internal marketing.
It is always best if you are in a managerial
position to discuss the possible changes and
benefits that internal marketing strategies
can bring. Explaining the various rewards
of internal marketing to your employees can
help them to understand the reasons behind following an internal marketing procedure and they may come round to enjoying
the perks from its profitable success.
Islamic financial institutions in particular will
have benefits of using this form of marketing
which the whole company can get involved
in considering that Shariah compliant financing is a unique and ethical alternative
to conventional financing methods. An understanding of internal strengths within the
company can further help to spur success
within your business which will benefit it
both internally and externally in every stage
of marketing.
If you are a manager considering implementing internal marketing strategies for
your company in order to facilitate Islamic financial services then it is important to have
a thorough review of your employees and the
cooperation between departments.
If you are confident that your departments
and employees can work together in collaborating with internal marketing strategies
then the most confident move would be to
discuss and implement internal marketing within your company. You should also
ensure that if you are in a managerial position the ethos of internal marketing which
to promote equality and designate tasks of
responsibility in your work force is done in
a way which does not treat your employees
like tools. You have to give your employees
the freedom to express their creativity, making the decisions and advising accordingly
on matters that would benefit the company
overall.
How can internal marketing help me to
overcome constraints and challenges?
There are many ways in which internal marketing can help your company or business
to overcome constraints and challenges of
the growing Islamic financial market and attract key consumers into your league. Firstly
internal marketing provides your business
with the framework to review expenditure
and data effectively.
This tackles the problem of assess to readily available data. If you dedicate a business
unit to deal with expenditure of marketing
Islamic financial services then your team
will be responsible for all entries of profits,
losses, investments, marketing expenses
and so forth.
The managing director or CEO will therefore
have a little flexibility in having the reassurance of assess to data when needed and
reviewing their expenses accordingly to plan
marketing campaigns for the present and
future. If you know exactly how much a campaign will cost, how much tools you will need
and the overall costs then you are more likely
not to go over budget and you can even save
money. Therefore internal marketing can
make this a realistic proposition for dealing
with expenses of the marketing essence.
The training and education of staff in the
Islamic Finance and banking arena can further help to give them a clear understanding
of the concepts and principles of Shariah
compliant financing. This will provide the
employee and the customer with a basis of
an easy relationship to communicate and
foresee their customers needs effectively.
Understanding Shariah compliant financing
is key in achieving success in your marketing
strategies as if you do market your product
in a Non Shariah compliant manner you are
more likely to lose consumers at the first instance or potentially put them off.
You cannot risk this happening and therefore it is important to invest a little time and
money in training and educating employees

in your chosen business of Islamic finance or
banking. Once trained a diverse network of
players or translators can cater to overcome
language barriers. If you identify the potential for Islamic finance which has reached a
global scale an employee with the skills of
knowing more than one language can clearly
help your cause.
In addition any marketing material that is
brought out into a country could have translations for the native languages of the population of that particular town, village or city.
Making language accessible can break down
the barriers and inform more people about
your services who may not have English as
their first mother tongue language.
component of any company and attracting

them means your half way to success and
profitability. Internal marketing may just be
the answer you have been searching for in
successful implementation of a broad marketing strategy which will affect your whole
company at large. It holds many benefits
for the Islamic financial institution of today
and GIF hopes that you would have fully acquainted yourself with the necessary knowlgif
edge and study to implement internal marketing strategies in your company today.

Harnessing internal marketing practices can

further help to create innovative new design
structures which will attract the existing
market in addition to further attracting other
clients from around the world.
Unlocking the Keys to Internal Marketing

for Your Islamic Financial Institution
Global Islamic Finance Magazine has discussed in this first for the marketing and
branding series the ways in which you can
unleash the power of internal marketing to
ensure effective progression of your company in the highly competitive financial world.
As discussed there are numerous benefits
of making the change of implementing internal marketing into the core essence of your
company.
These positive changes range from motivating employees to one marketing target, giving and sharing responsibilities of tasks and
creating an overview of expenditure for your
successful marketing campaign.
Of course like with any strategy there will

be limitations and as discussed there is inevitably going to be constraints that need to
be overcome before facilitating the internal
marketing strategies. Once discussed with
your employees and everyone understands
the key concepts and benefits of internal
marketing than you can really unlock the key
to promoting a successful Islamic financial
institution.
Internal marketing provides the new age experience for all Islamic financial institutions
and widens the scope for attracting quality
employees and motivating your company to
do well in every possible customer focused
driven task. After all customers are the vital
gif
Internal Marketing (2009) Marketing, Q

Finance the Ultimate Financial Resource,
Retrieved from: http://www.qfinance.
com/dictionary/internal-marketing
Professor S. Haron (2005) Marketing
Strategies of Islamic Banks, A Lesson
from Malaysia, Retrieved from: http://
docs.google.com/viewer?a=v&q=cac
he:sHykm6dUUdkJ:klbs.com.my/Pdf/
Marketing%2520Strategy.pdf+Marketing
+in+Islamic+Finance&hl=en&gl=uk&pid
=bl&
M Kabir Hassan & M. K Lewis (2007)
Handbook of Islamic Banking, Edward Elgar Publishing, Pg 125- 126
The International Role of Islamic Finance
(2009) Q Finance the Ultimate Financial
Resource: Retrieved from: http://www.
qfinance.com/capital-markets-bestpractice/the-international-role-of-islamicfinance?full
Strategic Planning in Islamic Finance
(2009) Daily Bakara EU, Retrieved from:
http://dailybaraka.eu/2011/03/isstrategic-planning-necessary-in-islamicfinance/
C. Klass (2009) All about the customer,
Islamic Finance Asia, Retrieved from:
http://www.islamicfinanceasia.com/article.asp?nm_id=18904
U.S Marshall (2010) International Marketing, Country Decisions and Strategies,
Retrieved from: http://www.consumerpsychologist.com/international_marketing.
html
Internal Marketing (2011) Definition
by Wickpedia, Retrieved from: http://
en.wikipedia.org/wiki/Internal_marketing
61
gif
Sukuk
ANALYSIS
OF SALE/DEBT BASED SUKUK:
THE MALAYSIAN SAGA, PART II

Author: Mughees Shaukat, PhD researcher and assistant researcher in INCEIF & ISRA, Malaysia
Abstract: The success of the sukuk markets growth rate in the past few years has brought along
itself many scrutinising questions over its authenticity with Islamic law, all over the Middle eastern
countries. In Part one of The Analysis of Sale/Debt based Sukuk: The Malaysian Saga, we expalined
the meaning of sale/debt based sukuk by detaching it from its stigmas and understanding it in
its true light. Also GIF discussed, in detail, the acceptance of Sukuk in Malaysia and their version
of sukuk with its legal codes and conducts, to keep sukuk controversy free. In the second part of
the article, Global Islamic Finance Magazine will be looking closely into the depth of the issues
surrounding Sale/Debt based sukuk, to be able to understand the contention better and therefore
have an analytical point of view over its legitimacy.
Keywords: Sukuk, Sale/Debt based sukuk, Malaysian Islamic Finance, Malaysian sukuk Practice.
August 2011
Sukuk
gif
Author: Mughees Shaukat,

PhD researcher and
assistant researcher in
INCEIF & ISRA, Malaysia
Underlying Issues: Sale/Debt Based Sukuk Legitimacy

The absence of bonds instruments in most al-murabaha project finance particularly in
the ever liquid Middle-East countries may be explained by the controversy on the validity
of using bai al-inah in the securitisation process and the application of bai al-dayn at a
discount in bonds in secondary trading. The question now is; what are the underlying
issues behind this controversy about the legitimacy of bai al-inah and bai al-dayn in
Islamic law? What could explain its rejection in the Middle-East countries while gaining
acceptance in Malaysia?
Analysis conducted on more than 300 sale/debt based sukuk issuance identifying a
number of Shariah issues. Those issues had been classified into two categories, firstly
termed as Primary or Common issues in term of the main principles which govern the
issuance of most structures. Two most controversial principles namely, Bai al-Dayn and
Bai al-Inah fall within this category. The BIMB Securities Sdn Bhd, outlines that the Malaysian Islamic bonds are structured on the basis of Bai al-inah (refinancing of assets)
and subsequently traded on the basis of Bai al-dayn (debt-trading) which are commonly
found in almost all structure. The second category of the possible Shariah issues termed
as Secondary Issues or those involving secondary features of the sukuk issuance. The
Shariah viability of issues like the position of SPV in sukuk issuance, hibah clause by a
third party and re-hibah, proceed payment, collateral and guarantee, usage of proceed,
and event of default clause will be put under the Shariah microscope.
Foremost Issues
The Issue of Bai Al-Dayn
THE SAC RESOLUTION
At its 2nd meeting on 21 August 1996, the Shariah Advisory Council (SAC) unanimously agreed to accept the principle of bai` al-dayn i.e. debt trading as one of the concepts
for developing Islamic capital market instruments. This was based on the views of
some of the Islamic jurists who allowed this concept subject to certain conditions.
In the context of the capital market, these conditions are met when there is a transparent regulatory system which can safeguard the maslahah (interest) of the market
participants.
From the Islamic jurisprudence point of view, dayn encompasses a wide scope, including payment for product, qardh (loan) payment, mahr (dowry) payment before or after
cohabitation, that is mahr which has not been given after the marriage àqd (contract),
rental, compensation for crime committed (arsy), compensation for damages, money to
be paid for divorce (khulu`) and for purchase orders which have not yet arrived (muslam
fih). In the context of the Islamic capital market, bai al-dayn is the sale principle i.e. the
dayn which results from muàwadhat maliyyah contracts (exchange contracts).
The sale of debt or bai al-dayn is one of the key elements in the development of Malaysian Islamic Capital Market (ICM), as the trading of bonds in the capital market is mainly
based on bai al-dayn. This is the consequence of the opinion of the Malaysian jurists as
to the permissibility of the sale of debt. On the other hand, the majority of the scholars
around the world and particularly the jurists from the Middle East opposed to the permissibility of bai al-dayn or trading of debt. The main ground for its impermissibility as
argued by opponent is due to the elements of gharar and riba. Whereas the proponents
claimed that in the context of modern practice of bai al-dayn in the capital market, these
two major prohibitions in Islamic financial laws could be eliminated. Bai is the Arabic
term for sale. Thus, the literal meaning of bai al-dayn can be translated as the sale of
debt. Scholars have technically defined bai al-dayn in different ways.
63
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Sukuk
Case Study
SWEETWATER SPV SDN BHD

(BBA SUKUK ISSUANCE)
Issuer: Sweetwater Sdn Bhd [SPV]
Lead Arrangers: Securities Sdn Bhd (ASSB)
Trustee: Bank Trustees Berhad
SSPV used here as an SPV (Special Purpose Vehicle) is a wholly owned subsidiary of
The Sweet Water Alliance (TSWA) incorporated in 0805 with the sole purpose of issuing
purposed BaIDs. It also obtained approval from SC the security commission of Malaysia
to raise funds of as much as RM195,000,000 through issuing BaIDS in October 2005
based on Bai Bithaman Ajil-BBA. This Sukuk deal is interesting because it contains not
only all the common practices of other such issuances like the application of Bai al-Inah,
Hibah and re-Hibah the practice of Bai al-Dayn but it has even gone one step further
by violating the basic requirement of an SPV that it should be a completely independent
entity, but in this case the SPV in the form of SSPV is in fact a wholly owned subsidiary
of TSWA i.e. the holding company. No wonder the underlying assets used in this deal are
actually the very shares of the company in another company named SPLASH.
Prior to the issuance date the asset owner (TSWA) who is the holding company of SSPV
which is also the SPV, will Hibah the underlying assets to the issuer SSPV. For this purpose TSWA and the issuer will enter into a deed of Hibah (deed of gift) whereby TSWA
will give and convey to the issuer the beneficial interest in the identified assets thus
entitling the issuer to deal with the beneficial interest in the identified assets.
Once this process is over, the issuer (SSPV) will then sell these hibah assets to the primary subscribers through asset purchase agreements (APAs). Then Primary Subscribers
will straight away then sell these assets back to the issuer through asset sale agreements at a price higher than what they were purchased the first time. This unconditional
obligation of the issuer to pay the selling price will be evidenced by the issuance of
BaIDs. These BaIDS as normal with such other Malaysian deals is also tradable in the
secondary market on the basis of Bai al-dayn. Figure 6.10 depicts the structure of the
deal.
1. 3rd party (TSWA) will first hibah the underlying assets to be used for this deal to
SSPV.
2. The Issuer (SSPV) will sell these assets to the investors at a purchase price through
Asset Purchase Agreements (APAs). The payment will be made to the issuer on
spot.
3. The Investors will then sell back the same assets straight away to the issuer but at
a higher price including a profit margin through asset sale agreements based on
Bai al-Inah.
4. The issuer (SSPV) will issue sukuk (BaIDS) to evidence his obligation to pay the sale
price.
5. Once the Sukuk has grown to Maturity The Very underlying assets will then be given
back to the 3rd party (which by the way is not the real owner but the beneficial
owner of the assets) through the process of re-hibah.
Third party
TSWA hibah asset to issuer
The Shariah Advisory Council of Security

Commission in Malaysia provided a specific
definition of bai al-dayn which is being practiced in Malaysia. They stated: Baiàl- dayn
is the principle of selling the dayn which results from muàwadhat maliyyah contracts
(exchange contracts), such as murabahah,
bai` bithaman ajil (BBA), ijarah, ijarah munthiyah bi tamlik, istisna` and others. It means
that the debt in Malaysias capital market is
traded which originated from different types
of exchange contracts like murabahah, bai`
bithaman ajil, ijarah, istisna and others.
There are three opinions on the permissibility of sale of debt to a third party:
1. Some scholars from Shafie and Hanbali
schools like Ibn Taimiyah and Ibn Qayyim
opined that this type of sale is permissible.
According to some scholars like Ibn al-Qayyim, the creditor has the right to sell only confirmed debt to the debtor or to a third party.
This is based on the grounds that if he is allowed to sell it to the debtor, he can also sell
the same to a third party too. This opinion is
based on the following arguments:

2. This type of sale is permissible with condition by some Shafie and Maliki scholars.
The Maliki School imposed eight conditions
to permit this type of sale which are as follows:

Issuer hibah back to TSWA
Issuer (SSPV)

2. Primary Subscribers Purchase
asset at Purchase
Price (APAs)
3. Payment of
proceed
4. Sell asset at
Sale Price, deferred (ASAs)
4a. Issue BalDS to

evidence obligation
to pay sale price
Primary Subscribers
Figure.6.10: Sweetwater Spv Sdn Bhd (BBA Sukuk Issuance)
August 2011
There is no authentic source that prohibits such kinds of selling or giving.

Thus, it should be allowed and permitted;
Creditor has full right on possession
and full right to sell it to a third party;
and
Based on a legal maxim which states
that all transactions are permissible
until they are proven non-permissible
by an authentic source. Since there
is no authentic source prohibiting this
transaction, then, it should be allowed.
Expediting the payment of the purchase;

The debtor is present at the point of
sale;
The debtor confirms the debt;
The debtor belongs to the group that is
bound by law so that he is able to redeem his debt;
Payment is not of the same type as
dayn, and if it is so, the rate should be
the same to avoid Riba;
The debt cannot be created from the
sale of currency (gold and silver) to be
delivered in the future;
The dayn should be goods that are saleable, even before they are received.
This is to ensure that the dayn is not of
the food type which cannot be traded
before the occurrence of qabadh; and
there should be no enmity between
Sukuk

gif
buyer and seller, which can create difficulties to the madin (debtor).
There should be no enmity between
buyer and seller, which can create difficulties to the madin (debtor).
On the other hand, the conditions imposed

by Shafie jurists are the followings:

The dayn must be a spot debt in nature

otherwise it will not be allowed;
The debtor must be a rich person and
he has to accept the sale or there must
be strong evidence to prove the existence of the debt in case of any denials
from the debtor. Otherwise the sale
should not take place; and
The buyer must pay the price of the debt
on spot basis otherwise, the sale will be
considered as invalid and illegal.
The summary of the evidences that they provided is that the sale of debt contains some
kind of gharar or uncertainty which may create conflict between the contractors, therefore, these types of conditions should be
fulfilled to avoid gharar and other prohibited
elements like riba and others.
The majority of the scholars around the world and particularly the jurists from the Middle East opposed to the permissibility of bai al-dayn or trading of debt. The main ground
for its impermissibility as argued by opponent is due to the elements of
gharar and riba. Whereas the proponents claimed that in the context of
modern practice of bai al-dayn in the capital market, these two major
prohibitions in Islamic financial laws could be eliminated
3. The majority of scholars at the Hanafi
School of jurisprudence and some Hanbali
and Shafie scholars and Ibn Hazm did not
permit selling debt to the third party with
cash price at all. The arguments supporting
their opinions are the followings:

The creditor is not able to submit the

sold item to the purchaser as the debt
is under the liability of the debtor and to
possess what is under others responsibility cannot be imagined, therefore, it
is not permitted as it is not capable of
submission, subsequently contains risk
to the sale.
The risk might also arise from the fact
that the debtor may deny his debt or delay in payment or he may become poor.
In those cases, it is not possible to get
the debt from him.
In the same line of argument, Koutoub Mustafa had listed more evidences supporting
the view of this group which are summarised
in the following:
There is a Hadith of the Prophet (peace

be upon him) which clearly states:
(Dont sell what you do not possess).
It also based on another Hadith of the
Prophet (peace be upon him) which
prohibits selling or giving an item that
the seller or giver is unable to deliver
to the buyer or given: (Dont sell the
fish while they are in the water) On the
same ground, there is a Hadith, which
states: (The Prophet prohibited the sale
of a missing slave or the offspring of the
offspring).
It is clear that the scholars held different

opinion to the issue of bai al-dayn especially
in the case of selling it to a third party. With
these many opinions and arguments of the
scholars, the task is now to find out the most
accurate opinion. In fact, the contemporary
scholars have looked into these arguments
and disagreed on deciding the preferred
opinion. Some scholars mostly from Malaysia preferred that selling debt with cash
price to the third party is permissible. The
Maqasidi approach was adopted in coming
into this conclusion by looking into the reason
for the prohibition itself, and to avoid these

reasons in the current scenario of bai al-dayn.
They pointed out that the main reason for
prohibiting bai al-dayn by the Hanafies and
also conditions imposed by the Malikies and
Shafies is mainly because of the element of
risk and uncertainty for the buyer as the debtor may not pay the debt.
It follows that if this uncertainty could be avoided by having strong regulatory, supervision and
control by the government then it should be
permitted. Resolutions of the Securities Commission Shariah Advisory Council stated that:
The argument of the Islamic jurists that prohibited bai al-dayn to a third party for fear that
the buyer will have to bear great risks (Hanafi
Mazhab) has some truth in it.
This is especially true if there is an absence
of supervision and control. In this context,
the buyers maslahah should be safeguarded
because he is the party that has to bear the
risks of acquiring the debt sale while making
the sale contract. In the Malaysian context,
the debt securities instruments based on the
principle of bai al-dayn are regulated by Bank
Negara Malaysia and the Commission to safeguard the rights of the parties involved in the
contract.
Therefore, the conditions set by the Maliki
Mazhab and the fears of risks by the Hanafi
Mazhab can be overcome by regulation and
surveillance. Another important issue is riba
when the debt securities are traded in the
secondary market at discounted price. Riba
65
gif
Sukuk
might arise due to the rule of parity in the

exchange of money with money in the same
denomination. However, in Malaysian context,
it is claimed that there is no riba element involved and the rule of parity does not apply
in this context: In the context of the sale of
securitised debt, the characteristics of securities differentiate it from currency, and hence,
it is not bound by the conditions for exchanging goods.
that riba al- fadl and riba al-nasiah. He stated

that: In fact, the prohibition of baial-dayn is
a logical consequence of the prohibition of
riba or interest. A debt receivable in monetary terms corresponds to money, and every
transaction where money is exchanged from
the same denomination of money, the price
must be at par value. Any increase or decrease from one side is tantamount to riba
and can never be allowed in Shariah.
Adawiah forwarded 3 arguments to discard

the element of riba and allowing debt discounting:
According to the Organization of the Islamic

Conference (OIC) Islamic Fiqh Academys
ruling, sale of debt is permissible so long as
it is free from any element of riba and gharar.
Following such ruling, it is pertinent to determine the nature and status of the debt. If
the receivables of the debt are in the monetary form, the debt is considered as similar
to money and the rules in the exchange of
money will apply.
1) Securitisation of the debt has changed its

nature into an independent financial right
(haq maliyy) that is in itself an independent
asset (mal). It means that after the Securitisation process, it becomes an asset which is
capable of being bought and sold, at whatever price agreed by the parties. Hence, the
2) Securitised debt is no longer bearing the
nature of money but analogous to financial
rights such as shares, copyrights and patent
rights. It follows that the sale of Securitised
debt is no longer governed by the rule of sarf
or currency exchange, therefore discount is
allowed.
3) The debt discounting also allowed on
the basis of the principle of da wa taajjal.
Originally, this principle refers to an arrangement between debtor and creditor whereby
the later gives discount to the former on his
debt due to the acceleration of the date of
payment. The principle had been approved
by some scholars like Ibn Qayyim and Ibn
Taimiyyah. Though the original application of
the principle is between debtor and creditor,
it can also be extended to other than debtor
or the third party. Thus, the case of debt
discounting for trading of securitised debt
could be allowed under the extended principle of da wa tajjal.
4) The third argument to allow debt discounting in the sale of debt to the third party
is based on logical reasoning. It was argued
that a debt which originated from deferred
payment sales is different from straight
loans. In the straight loans, the creditor is
only allowed to take his principal amount.
Thus, discounting the amount will cause
a loss to the lender. On the other hand, in
deferred payment sales, normally as in the
banking practice there is a difference in
terms of amount between the cost price and
the selling price, such as in Murabaha sales.
Therefore, if the creditor sells his debt to a
party with discount, he is actually sharing
his profit portion with the buyer of the debt.
However, these arguments were rejected by
the majority of the contemporary scholars.
For example, one of the famous scholars
Mufti Taqi Usmani has obviously pointed out
that bai al-dayn is in fact, selling the ribawi
item with discount price which is not other
August 2011
This means the transaction will have to adhere to the rule of parity and it must be carried out on the spot. If the receivables are in
the forms of non-ribawi goods, it is considered as a non-monetary financial right and
the rules in the exchange of money or ribawi
items will not apply currency exchange and
THE SAC RESOLUTION
The SAC, at its 5th meeting on 29 January
1997, passed a resolution that bai` inah
is a principle that is permissible in the Islamic capital market in Malaysia.
the practice of discounting in the sale of

debt is allowed. Although it has to be noted
that the SACs ruling merely represents the
minority view in the market. Although the
sale of debt with a discount is allowed in
Malaysia, such practice may not pass the
more stringent requirements of such sale as
imposed by the classical and majority of the
contemporary jurists.
The Issue of Bai Al-Inah
The Meaning of Bai al-Inah
Bai al-inah is generally known as sale based
on the transaction of Nasiah (delay). The
majority of Islamic jurists state that there
are three forms of trading categorised as
bai` ìnah, whereby it can be concluded that
all the assets sold come from the financier.
The financier will sell a product to the buyer
at an agreed price to be paid later.
The financier then immediately buys back
the asset at a cash price lower than the deferred selling price. The difference between
the two prices represents the interest. Such
contract was evolved in the early period of
Islam and it exists for the fundamental rea-
son that a loan for interest is forbidden because it is equivalent to usury (riba). In this
contract, there is an economic interest for
both the borrower and the lender, which at
the same time circumvents the prohibition
of usury.
The issue which concerns us here is how
Islamic law views such contract: The majority was of the opinion that baiàl inah was
not permissible because it was the zariah
(way) or hilah (legal excuse) to legitimise riba
(usury). The majority of the jurists rejected
the validity of Bai al Inah and considered it
as a back door riba or using sales which at
the end resulted in riba. Abdullah Ibn Umar
reported that the prophet said:
When men become frugal with money (gold
and silver) and trade on the basis of Inah
and (when they) follow the tails of the cows
and leave jihad in the path of Allah, Allah will
send down a trial that he would not remove
until they revert to their religion.
On the other hand, the Shafies and Zahiris
approved the legality of Inah sales on the basis of the completion of all requirements of
sales, irrespective of the intention of the parties. Imam Shafie said in his book al Umm:
When one purchases a commodity from
another and takes its delivery and the price
happens to be on deferred terms, it is not
objectionable for him to sell it to the person
from whom he had purchased it or to someone else, for a cash price or on credit or
against another commodity. The hadith relied by the majority was considered as weak
hadith for this group of jurists.
Another important hadith on bai al-inah is
a famous narration from Aishah whereby 2
women came to her and asked: O mother
of believers, I sold a slave to Zayd ibn Arqam
for eight hundred silver coins deferred until receipt of the grant, and I purchased him
again for six hundred cash.
Aishah replied: It was an evil purchase that
you did and an evil sale, convey to Zayd that
his jihad in the company of the Messanger
of Allah is annulled, unless if he repents.
Imam al Shafei was of the opinion that the
issue is one in which 2 companions (Aishah
and Zayd Ibn Arqam) have different opinions
pertaining to the validity of the contract.
When the companions have conflicting opinions, according to Shafei the matter must
be resorted to qiyas, which is in favor of the
position taken by Zayd. This is because a
person is free to sell his asset to anybody he
wishes. By applying qiyas, he may also sell
it to the person from whom he bought the
same asset. Another qiyas applicable here is
if the person who bought a property may sell
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Sukuk
it back at any time, whether after a

passage of time or immediately after
the purchase. The Maliki and Hanbali
Mazhab, on the other hand, rejected
bai` inah and considered it invalid,
because according to them the motive of the parties to the contract determines the legality or illegality of the
contracts, and in the sale under consideration the motive of the parties is
illegal and, therefore, the sales are
not valid because they constitutes a
legal device (Hilah) to get a loan with
interest which should be averted at
all costs according to the Shariah.
the relevant Shariah experts may

have differently applied Shariah
laws, which implies now that the legitimacy of Islamic bonds issued using bai al-inah is suspect.
The Other Issues in Sale/Debt
Based Sukuk
Alongside the very foundational and
prominent issues of Bai al-Inah and
Bai al-dayn as detailed previously,
a number of other issues which we
have termed as secondary issues
have also been pointed out which
could be as controversial as the
ones explained, if not more.
Ibn Qayyim, a Hanbali scholar states

that intention influences legal acts:
the formality of legal act can be the
same but end results depend on the
intention. The Maliki and Hanbali
opinion was based on the principle
of sadd zariah that aims to prevent
practices that can lead to forbidden
acts such as, in this case, riba.
These issues have certainly added

more to the gloom over these sukuk
and have made the debate even
more furious on their Shariah compatibility which makes them worthy to be voiced and discussed. A
number of such issues have been
brought up from our research based
on the study of more than 300 term
sheets of these sukuk including the
case studies integrated with the article. These secondary issues are:
The basis for the opinion of the majority of the Islamic jurists was the
hadith dialogue between Aishah and
the slave Zaid bin al-Arqam which
showed the prohibition of bai` ìnah.
They also held to the hadith of the
Prophet (p.b.u.h) in which he warned
that those who practiced bai` inah
would suffer scorn.
From the above discussion on this issue, the
following conclusion can be drawn.
1. It is obvious that Bai al-inah is a legal device in order to overcome the prohibition of
riba, (no person would affect such sale if he
cannot realize profit), and is not deemed to
be an act of sale, as there is clear evidence
that such act amounts, in effect, to a contract of loan. Thus, it is forbidden as it is
based on unjustified enrichment or receiving a monetary advantage without giving a
counter value (Saiful & Sanusi 1999).
2. Al-Shafiis recognition of the validity (sahih) of Bai al-inah not based on interpretation of any authentic Islamic authority and
is ones own view. However, according to
other schools the prohibition of such sale
was based on the consensus of the jurists
(Ijma al-ulama) on the authority of Islamic
law sources. As Ibn Qayyim prohibited Bai alinah quoting the following Hadith that Allahs
messenger says: A time is certainty coming
to mankind when they legalise the Riba under the name of Bai (trade concerning that
intending usury by words of a sale).
3. There is hardly any satisfactory evidence
which enables one to say that al Shafii has
expressly declared that al-Inah to be (Ha
August 2011
lal). It should be pointed out that al Shafiis

method of determining the validity of any
contract by its formal evidence that they are
legally concluded, cannot be cancelled on
account of the intention of the parties, the
Shafii may, thus permits contracts because
its legal preconditions are fulfilled, but forbids the transacting act of the parties when
it conflicts with Shariah principle (Saiful &
Sanusi 1999). Al-Qaradawi states; Bai alinah is a clear case of usury and the device:
why should one practice transaction which
contains elements of devices while one is in
position to have a clear and apparent alternative transaction?
To echo further Saiful & Sanusi (1999): The
use of legal device is therefore evidence that
the niyyah factor is undermined or made
secondary in the securitisation process of
Islamic bonds in Malaysia. It is apparently
clear that most underlying assets used in
the Malaysian Islamic bond securitisation have no direct relation with the actual
project itself.
These assets were simply collaterals that
serve as guarantees to the debt issued.
To retain the basic structure of traditional
bonds in Islamic finance, that is providing
fixed return to investors, practitioners and
1. The issues of SPV which directly

links to the general and legal status
of it i.e. on its degree of independence from the sukuk issuing company and on its basic requirement
of being bankruptcy remote. Both
of these basic requirements has been frivolously violated, where the SPV is in many
issuance have actually been a subsidiary of
the issuer which has been given a status of
SPV only meant for the purpose of the sukuk issuance which eventually makes it nonbankruptcy remote.
2. The frequent use of Hibah and re-Hibah
in these forms of sukuk where a third party
agrees in some way to hibah the relevant assets, which are to be used as underlying for
the issuance of the required sukuk, in order
to make the issuer who has no ownership
of the asset the beneficial owner so that he
can use the assets just for the purpose of
the issuance to raise funds.
Eventually at the end of all when the sukuk
is matured, those very assets after fulfilling
the required purposes are then Hibah back
to the real owner. This whole process raises
some serious issues which directly link to
the concept of ownership of the relevant assets for the purpose of sale in the view of
Shariah.
Shariah requires the seller to own the assets
before he can sell them to the other party.
This is the basic requirement before entering into any sale contract. The asset should
Sukuk
be owned in such a way that the owner should have a full and real
procession of them. In other words he should be the real owner and
not a beneficial one meaning he should have full control over it so
that he can run the risk of any loss or gain or even damage to it. The
owner should be able to practice his/her free will over the assets
meaning he can do whatever he wants and use it the way he likes
but within the ambit of Shariah.
Beneficial ownership as is the case in a number of these sukuk contradicts all of these basic Shariah requirements and hence it violates
and invalidates the whole Islamic concept of Sale. The whole transaction will be invalid and hence contradictory to Shariah which is the
most severe consequence to a so called Islamic transaction.
It means in such transaction the real ownership of the assets has
never been transferred at any point be it to the issuer from the real
owner or to the investors when it is further sold to the investors in
an extensive approach and then re-sold back to the issuer using AlInah as mentioned previously.
Thus it is very clear that although it is a sale transaction and the
assets are sold, they are just used rather fictitiously to raise fund
under the Islamic banner but in an un-Islamic way through financial
artifice or Hilah (legal stratagem). The question is that how can you
call this practice Islamic, how can one term it an Islamic Sukuk or
even Islamic finance for that matter?
3. The issue here relates to the presence of collateral and often guarantee by a third which has not even been found independent of the
sukuk issuing party particularly when the issuance is not a sovereign
one as has been the case in most of the sale based sukuk issuance
in Malaysia. This issue can be seen in all the credit enhancement
clauses given in the term sheets of majority of these sukuk. Before
we explore any further, very briefly we understand what credit enhancement is in sukuk?
This sort of Sukuk receives an irrevocable third-party guarantee,
usually by a parent or original owner of the underlying collateral. The
guarantor provides Shariah compliant shortfall amounts in case the
issuing vehicle (usually a special purpose vehicle or SPV) cannot
make payment. The ratings on this type of Sukuk largely depend on
the creditworthiness of the guarantor or entity providing the credit
enhancement mechanisms and other financial obligations of the
guarantor.
When it comes to the act of Guarantee, Shariah has some basic
rulings. It says very clearly that guaranteeing is a voluntary act and
should not be a conditional one; it can be performed in form of a gift
or donation also, hence the guarantor should not ask for any fee or
compensation in any way for such guarantee as it will violate the very
concept of a voluntary act. Therefore it must and cannot be stated in
contract either implicitly or explicitly as a pre-condition or even after
the contract has been concluded.
In other words the conclusion of a sale contract as in here should
not be based or concluded on a decision of offering such a guarantee. The contract should be abrogated as a result of the absence of
such voluntary offer of guarantee has been made conditional of the
contract.
The practitioners as is the case in these sukuk should abstain from
making such conditional guaranteeing recur, for its recurrence would
mean that it has become an established custom, which would have
the force of a condition according to the general Shariah rule. Nevertheless there is no harm in such guarantees being offered as a pure
gift or donation meaning that they are voluntarily done. Shariah also
further ordains that such guarantees alongside being done volun-
gif
Case Study
OXBRIDGE HEIGHT SDN BERHAD MURABAHA MUNIF/IMTN SUKUK FACILITY.

Issuer: Oxbridge Height Sdn Bhd-OHSB
Lead Arrangers: Amanah Short Deposits Berhad (ASD)
Trustee: AmTrustee Berhad
Incorporated in September 2003 with principal activities of property development, based in Malaysia Oxbridge was permitted by
the SC to raise funds up to RM154million through MUNIF issuance based on Murabaha in April 2005 with tenure of 7 years.
This deal is even more interesting because it not only involves the
application of Bai al-Inah it also includes the process of Hibah
and re-Hibah of the underlying assets involved in the issuance
which on the first occasion are owned beneficially before being
used in hibah and re-hibah of it.
First Trade wind Sdn Bhd will make Oxbridge either the beneficial
owner of the assets or will hibah-gift the underlying assets which
in this case are pieces of lands to the issuer Oxbridge Sdn Bhd
to be used for the whole facility. In this case the assets are gifted
to the issuer. The investor(s) shall then purchase the Assets from
the Issuer (APAs). The investor(s) shall thereafter sell back the Assets to the Issuer (OHSB) at a Selling Price (ASAs) comprising the
original Purchase Price and an agreed profit margin on a deferred
payment basis. The obligation of the Issuer (OHSB) to pay the
Selling Price shall be evidenced through the issuance of the negotiable and non-profit bearing promissory notes (MUNIF Notes
or IMTNs). The Issuer (OHSB) shall give back the Assets to the
said Beneficial Land Owner base on the concept of Hibah once
the sale and purchase transactions are executed-i.e. the process
of re-hibah. See figure 6.9.
1. 3rd party (Trade Wind) will first hibah the underlying assets
to be used for this deal to Oxbridge.
2. The Issuer (Oxbridge) will sell these assets to the investors
at a purchase price through Asset Purchase Agreements
(APAs). The payment will be made to the issuer on spot.
3. The Investors will then sell back the same assets straight
away to the issuer but at a higher price including a profit margin through asset sale agreements based on Bai al-Inah.
4. The issuer (Oxbridge) will issue sukuk (MUNIF/IMTNs) to evidence his obligation to pay the sale price.
5. Once the Sukuk has grown to Maturity The Very underlying
assets will then be given back to the 3rd party (which by the
way is not the real owner but the beneficial owner of the assets) through the process of re-hibah
TW (Beneficial owner)
hibah asset to issuer
Third party
1. Issuer hibah bank to

TW (Beneficial owner)
Issuer (OXBRIDGE)
2. Investors
Purchase asset
at Purchase
Price (APAs)
3. Payment of
proceed
4. Issue MUNIF/
4. Sell asset at
IMTNs to evidence
Sale Price, deferred (ASAs) obligation to pay sale
price.
INVESTORS
Figure.6.9: Oxbridge Height Sdn Berhad Murabaha MUNIF/IMTN
69
gif
Sukuk
tarily should be done by third party, a party

who is completely independent to the other
concerned parties, meaning this third party
should not be a party having an interest or
stake in the deal in anyway. However in the
sukuk that we have studied the third party
i.e. the guaranteeing party envisaged have
most likely been an interested party somehow or the other. Such party is no longer
considered a third party any longer and thus
would not serve as a legally acceptable donor of the guarantee in the eyes of Shariah.
Not only this, they also seek certain amount
of fee (Ujrah) for their guarantee.
Ujrah refers to rental or fees for usage of labour and benefits. In the current economic
context, it may be applied to salaries, wages,
fees, commission and the like. The majority
of past Islamic jurists were of the view that
the charging of fees on kafalah is not permissible.
This view is based on the argument that a kafalah contract falls under ùqud tabarruàt
which is voluntary and benevolent in nature.
Hence, no fee is to be charged. Wahbah AlZuhaili was of the view that to charge ujrah
on kafalah is permissible based on maslahah and societys needs.
Syeikh Ahmad Ali Abdullah was of the view
that when there is a condition that the kafalah bears a fee, the said condition is
considered valid. He also emphasised that
kafalah contract is not qardh. He supported
his views with qiyas, referring to fees that
are permissible to be collected on utilising
someones reputation and also on performing incantation using Quranic verses.
Some of the past Islamic jurists allowed both
situations and can be used as fees on the
guarantee since it is similar from the aspect
of work done. The OIC Fiqh Academy and
the Shariah Council AAOIFI resolved that ujrah on kafalah/dhaman is not permissible.
However, the guarantor may claim for actual
expenses incurred on the guarantee.
4. The issue of whether the proceeds, which
has been raised from the sukuk issuance,
have been used in a Shariah complaint or a
Shariah contradictory way. In the case study
of TESCO MALAYSIA MURABAHA NOTES (as
published in Part one of the Article), it is evident from its term sheets that a significant
portion of the proceeds raised from the issuance has been used to refinance existing
external debt (up to RM410 million).
Another example of such a case is in the murabaha sukuk deal of Bumiputra-Commerce
Holdings Berhad (BCHB) where again a part
of the proceeds raised were used to settle
the already existing borrowings of the issuer.
The question is how valid is it to raise another debt to settle the previously existing one?
Were the investors aware of such usage of
proceeds beforehand? Is it not a financial
artifice to raise fund to settle pervious debt
by not letting the investors know? It seems a
clear case of legal stratagem to raise money
in a so called Shariah complaint manner
which it seems not to be.
The sukuk issued by the International Finance Center and the World Bank based on
BBA deal also rings the bell with such issue,
where the proceeds raised from BaIDS were
just used for general operations of International Finance Corporation (IFC).
The challenge to Shariah is that IFC and neither the World Bank has an Islamic portfolio,
so for which general operations were the
proceeds applied? The point to stress here
is that not only raising the proceeds should
be Shariah compliant but also the end use

of them in the same manner is what completes the circle for a true Shariah complaint
product. The above examples miss not one
but both the points substantiating a clear
effort of Them molding Shariah accordingly
rather than the other way round.
5. One of the more contentious topics in the
market today is the rights of sukuk holders
in the event of non-payment or default. Do
they have a claim on the underlying assets
in the sukuk formation?
Where do they stand in the line-up of creditors, given the general belief that sukuk are
the more secured investments compared to
their conventional counterparts. Given the
Shariah emphasis that financing should be
raised with respect to an economic activity,
all sukuk shares a common feature in that
they often take shape with an asset (or assets) at their core.
Where there has been a real (true) transfer
of asset ownership to a special-purpose vehicle (SPV) that has been formed to issue
the sukuk, then the investors would have a
legitimate claim on that particular asset that
has been sold to them, but not so without
a true sale (i.e. assets have not been transferred to the sukuk holders), and if the asset
is present simply for the purpose of Shariah
compliance, we believe that the legal recourse and cure for the sukuk holders are
likely to be no more than those of unsecured
creditors.
Even from the rating perspective, an analysis
of the asset will be inconsequential; instead,
we will focus on the creditworthiness of the
corporate obligor, with the final assigned rating depending on the ranking of the sukuk
vis-a-vis the obligors existing senior unsecured obligations.
Primary/Common Shariah Issues
Secondary/Specific Shariah Issues
Issues
Description
Issues
Bai al-Dayn
This issue arises from trading of SPV

the sukuk at discount. Secondly,
This may also include the issue of Hibah and re-hibah clauses
type of asset used for securitisation whereby the assets securitized
are financial receivables (debt).
Proceed payment
Analysis on the legal position of the SPV from Shariah perspective, independence of SPV from the originator.
Sale and buy back arrangement Collateral and guarantee

between the same parties on the
same asset, one with cash price Usage of the proceed
which is lower and another with deferred higher price. Investors made
profit on the difference between Event of Default Clauses
the two prices
Credit enhancement for the sukuk whether in Shariah compliant manner, guarantee of third party with fees.
Bai al-Inah
August 2011
Description
Hibah clause from a third party as a legal device to enable

the sale and subsequently re-hibah to return to the original
position
Flow of the fund and the stages of the Shariah contracts. The
issue of which contract performed first. The APAs or ASAs the
whole transaction is simultaneous.
Usage of the proceed whether for Shariah compliant purposes?

What constitute the event of default clause, whether the conditions imposed contrary to the sale contract and compliant
with the Shariah requirement, effect of the event of default on
the sale contract.
Sukuk
Asset ownership, in this instance, would strengthen the investors rights on the underlying asset(s)
in the event of default or liquidation. However, in
the Malaysian Sale/Debt based sukuk the issuer
customarily declares a trust over the assets in
favor of the sukuk holders, with the latter having
beneficial ownership of the underlying asset(s).
Legal ownership, however, remains with the original asset owner as has been made clear earlier.
The intent of the issuer in this instance is to have
an unsecured funding source.
However, the event of default clauses in nearly
all the sukuk deals studied add further to the
gravity of the controversy when/where it clearly
also states that if the issuer even defaults on any
other of his obligation which may have no direct
or indirect link to the concerned deal will also
render the issuer as similar to defaulting in the
sukuk deal. The exact wordings of the clauses in
a condensed form are as follows:

Any indebtedness of the Issuer becomes

(after the expiration of any applicable grace
period) due or is declared due before its
stated maturity as a result of default or is
not paid on its due date;
Any guarantee or similar obligation of the Issuer is not discharged at maturity or when
called;
Any security for such indebtedness becomes enforceable.
The legal documentation governing the transaction firmly renders the sukuk a financial obligation, listing the sukuk holders as creditors (as
opposed to owners or equity holders) and ranking them pari passu with conventional creditors
(within the same class of creditors).
No wonder the investors are provided with even
a Recourse Clause in the deal where the investors are provided a full recourse and in some
deals partial if the issuer defaults as per the
above Events of Default clauses.
The Table 6.2 depicts in a summarised form all
the Primary and Secondary Issues that our study
has raised after researching through more than
300 of such sukuk deals. By understanding the
origins of the practices that give birth to Shariah
issues involving sukuk, the nature of Islamic
bonds issued in Malaysia can be very transparently understood and its heavy structuring also
becomes understandable.
All of the great criticism that Malaysia bore due
to its strict structure involving sale/debt based
sukuk has been vain and it has been able to
prove the criticism wrong by becoming a leader
in the global islamic finance sector, which in its
effect shows that sukuk in itself is not questionable, it is how it is structured and practiced is
what makes it abiding by the Islamic law. gif
gif

Wahbah Al-Zuhaili, Al-Fiqh al-Islami wa Adillatuhu, Dar al-Fikr, Damascus, 1989, vol. 4,
p. 432.
Usmani, Taqi. What Shariah Experts Say about Bai al-Dayn, Dealings in Shares. International journal of Islamic financial Services, Vol. 1, No2.
Securities Commission Malaysia, Resolutions of the Securities Commission Shariah Advisory Council, (Kuala Lumpur, 2nd edition, 2007) p. 16.
Al-Nawawi, Yahya Ibn Sharaf, Rawdat al-Talibin wa Amdat al-Muftin, (Beirut: al-Makhtab
al-Islami, 1985) vol. 3, p. 514; Ibn Taymiyyah, Majmuwatu Fatwa, vol. 29, p. 506; Ibn
al-Qayyam, Mohammad Bin Abi Bakr, Ilamu al-Muqiwin an Rabb al-Alamin, (Cairo: Daru
al-Hadith, 1st edition, 1993) vol. 4, p. 5.
Amin, Hanudin, An Analysis Of The Classical And Contemporary Juristic Opinions On Bay
Al- Dayn, Labuan e-Journal of Muamalat and Society, Vol. 1, 2007, pp. 29-40.
Al-Nawawi, Rawdat al-Talibin wa Amdat al-Muftin, vol. 3, p. 516; Al-Hattab, Mohammad
Bin Abdu al-Rahman, Mawahib al-Jalil Sharh Mukhtasar al-Khalil, (Beirut: Daru al-Fikr,
1978) vol. 4, p. 368.
See: Al-Hattab, Mohammad Bin Abdu al-Rahman, Mawahib al-Jalil Sharh Mukhtasar alKhalil, (Beirut: Daru al-Fikr, 1978) vol. 4, p. 368; Translated version of these conditions are
adopted from: Securities Commission Malaysia, Resolutions of the Securities Commission
Shariah Advisory Council, (Kuala Lumpur, 2nd edition, 2007) p. 17-18.
These conditions are adopted from: Amin, Hanudin, An Analysis of The Classical and Contemporary Juristic Opinions on Bay Al- Dayn, Labuan e-Journal of Muamalat and Society,
Vol. 1, 2007, pp. 29-40.
Al-Sharkhasi, Samsuddin, al-Mabsut, (Beirut: Dar al-Marifah, 1986) vol. 5, p. 141; alKasani, Badawe wa al-Sanawe fi Tartib al-Sarawe, vol. 5, p. 148; al-Suyuti, Zalalu al-Din
Abdu al-Rahman, al-Ashbah wa al-Nazair, (Beirut: Dar al-Kutub al-Ilmiyyah, 1983) p. 331;
Al-Sharbini, Mohammad al-Khatib, Mughni al-Mahtaj, (Beirut: Daru al-Fikr, without date)
vol. 2, p. 466-467; Ibn Hajm, al-Muhalla, vol. 9, p. 6.
Al-Sharkhasi, al-Mabsut, vol. 12, p. 71.
Koutoub Mustafa, The sale of Debt as Implemented by the Islamic Financial Institutions
in Malaysia, p. 49.
Sunan al-Tirmidi, Hadith no. 1153.
Sunan Ibn Majah, Hadith no. 2178.
Sunan al-Tirmidi, Hadith no. 115
Securities Commission Malaysia, Resolutions of the Securities Commission Shariah Advisory Council, (Kuala Lumpur, 2nd edition, 2007) p. 19.Ibid.
Engku Rabiah Adawiah Engku Ali, Issues in Islamic Debt Securitisation, in Mohd Daud
Bakar and Engku Rabiah, Essential Readings in Islamic Finance, Kuala Lumpur: Cert Publication Sdn Bhd, 2008, pp 482-484
Ibnu Àbidin, Hasyiah Rad al-Mukhtar, Dar al-Fikr, Beirut, 1992, vol. 5, pp. 273, 325.
Al-Syaukani, Nail al-Authar, Dar al-Fikr, Beirut, 1994, vol. 5, p. 294. Al-Sanani, Subul alSalam, Dar al-Kitab al-Arabi, Beirut, 1987, vol. 3, pp. 7677. Yusuf al-Qaradhawi, Bai` alMurabahah li al-Amir bi al-Syira, Maktabah Wahbah, Cairo, 1987, p. 64. Al-Zuhaili, Al-Fiqh
al-Islami, vol. 4, pp. 466467.
Ibnu Àbidin, Hasyiah Rad al-Mukhtar, vol. 5, pp. 273 & 325. Al-Syaukani, Nail al-Authar,
vol. 5, p. 294.
Al-Sanani, Subul al-Salam, vol. 3, pp. 7677. Yusuf al-Qaradhawi, Bai` al-Murabahah, p.
64. Al-Zuhaili,Al-Fiqh al-Islami, vol. 4, pp. 466467.
The Hanafi, Maliki and Hanbali Mazhab.
Narrated by Darulqutni and Baihaqy
Ibn Qayyim al-Jawziyya-Iclam al-muwaqqicin, vol. 3, pp 98-99; and see for example the
saying of the Prophet (saw) deeds are judged according to intentions and every human
being will have to take responsibility for what he intended Sahih al-Bukhari.
Ibnu Àbidin, Hasyiah Rad al-Mukhtar, vol. 5, pp. 273 & 325. Al-Shaukani, Nailul Authar,
vol. 5, p. 294.
Al-Sanani, Subul al-Salam, vol. 3, pp. 7677. Yusuf al-Qaradhawi, Bai` al-Murabahah, p.
64. Al-Zuhaili,
Al-Sanàni, Subul al-Salam, vol. 3, pp. 7677, see also Al-Fiqh al-Islami, vol. 4, pp. 466
467.
Ighatha al-Lahfan, vol. 1, p.352.
Al-Qaradawi, Islam and Current Issues pp. 40-42
OIC, Majallah Majma` al-Fiqh al-Islami, no. 4, vol. 3, p. 1980). However, the OIC Fiqh
Academy, disagrees with the basis of third-party guarantees that are based on debt and
resolved that third-party guarantees have to be in the form of tabarru`. Otherwise, the
contract is deemed to be an interest-bearing debt which is not permissible.
Securities Commission, Guidelines on the Offering of Islamic Securities.
Al-Hattab, Mawahib al-Jalil, Beirut, Dar al-Fikr, 1992, vol. 5, pp. 111, 113.
Al-Zuhaili, Al-Fiqh al-Islami, vol. 5, p. 161.
OIC, Majallah Majma` al-Fiqh al-Islami, Jeddah, 1986, no. 2, vol. 2, pp. 11461147.
OIC, Majallah Majma` al-Fiqh al-Islami, no. 2, vol. 2, pp. 11341135.
OIC, Majallah Majma` al-Fiqh al-Islami, no. 2, vol. 2, pp. 12091210. AAOIFI, Al-Maayir
al-Syariyyah,
71
gif
Market Review
OMAN TO ADD A STAGGERING

$6 BILLION WORTH
OF ISLAMIC FINANCIAL ASSETS
The Islamic banking window operation is accepted as a

successful model and in many markets such as Saudi Arabia, where Islamic windows account for nearly half of the Shariah
assets, and UAE where they have an 11 per cent share. Given the
similarities in the demographic landscape and appetite for these
services, we see great potential in the Omani market for Islamic
offerings
It has been reported that Oman is to add a

staggering $6 Billion worth of assets for the
development over the next few years, according to estimates by Ernst & Youngs Islamic Financial Services Group (IFSG). Total
banking assets in Oman in 2010 were estimated to be $42 billion. Shariah-compliant
financial institutions, which are expected to
commence operation in the country within
a short period, are expected to capture a
substantial share of this market and of total
banking assets within a few years.
Speaking at Ernst & Youngs Islamic Banking session at the Muscat Holiday Hotel,
Ashar Nazim, Executive Director and Head
of Islamic Financial Services, Ernst & Young
Mena said The Islamic banking opportunity
could be substantial as we expect the industry to reflect its performance in other GCC
markets.
August 2011
As an indication of how Islamic banking

would evolve in Oman, we can look at the
neighbouring UAE market, where it has captured a significant share in a short period of
time. New Islamic banks and Islamic banking windows in banks are set to capture a
significant share of the market over the
coming months. Global Shariah-compliant
assets are estimated to have crossed $1 trillion in 2010, growing at a sustainable 15-30
per cent per annum. He added Given the
size of the local market, early movers are set
to create a strong advantage in both Islamic
banking and takaful. The next 18 months
could materially change the competitive
landscape in favour of Islamic windows
and banks. The Central Bank of Oman has
permitted conventional banks to operate
their Islamic banking business through a
window operation. As a result, the market
could see a number of conventional banks
entering the Islamic finance space in the
next couple of years. Ahmed el Esry, Senior
Director, Tax, Ernst & Young Oman, said The
Islamic banking window operation is accepted as a successful model and in many
markets such as Saudi Arabia, where Islamic windows account for nearly half of the
Shariah assets, and UAE where they have an
11 per cent share. Given the similarities in
the demographic landscape and appetite

for these services, we see great potential
in the Omani market for Islamic offerings.
Successful Islamic windows understand the
various Shariah implications on the banking
business and are able to apply its requirements in their strategy, operations, product,
and governance and risk management functions.
The concept of Islamic banking window requires the conventional financial institution
to have a distinct operational infrastructure for its Islamic business. Compliance is
monitored by the regulator as well as the
Shariah authorities and further strengthened through independent Shariah audits
conducted by professional firms. Oman is
expected to benefit from the most notable
development in the Islamic finance market
in 2010 the growth of the Sukuk market.
Sukuks are the Shariah-compliant form of
conventional bonds and have a growing acceptability in international markets. Omani
Sukuk instruments could be used for financing infrastructure projects and stimulating
corporate activity, which would add to the
growth of Omans buoyant economy. gif
Business News
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Market Review
ISLAMIC COUNTRIES URGED TO ADOPT

ECONOMIC FINANCIAL REFORMS
Al-Assaf called for greater efforts for manpower development and achieving sustainable
economic progress in the member countries. The ministers call
is significant in the backdrop
of anti-government protests in
some Arab countries as a result
of unemployment, poverty and
political corruption.
Saudi Arabia is the largest contributor to
the IDB, holding 25 percent of its capital.
We have also contributed immensely to the
capital of other regional and international
development organisations. Moreover, we
have been at the forefront of donors providing emergency assistance to countries hit by
natural calamities, the minister said. Referring to IDBs annual report, Al-Assaf highlighted the assistance offered by the bank
to member countries to help them overcome
the global economic crisis.
The minister welcomed a joint IDB-World
Bank initiative to finance infrastructure
projects. He supported the program proposed by IDB President Ahmed Mohamed Ali
to transform the bank into a source of knowledge and efficiency to mobilise resources.
The opening session at Jeddah Hilton was
attended by more than 1,000 delegates
including ministers, businessmen, bankers
and economists. Abdul Karim Al-Arhabi,
August 2011
Saudi Arabias finance minister has reportedly urged Muslim countries to adopt suitable
economic reform programs and
adapt to the changing global
financial economic changes to
confront the challenges of facing them and building solutions.
We should also strengthen our
joint efforts to overcome development obstacles, Finance
Minister Ibrahim Al Assaf told
the annual conference of the
Jeddah-based Islamic Development Bank.
O u r
confused world is in
dire need for financial,
economic and social systems that are more balanced
and more responsive to
mans material, moral and
spiritual requirements
Yemeni deputy prime minister for economic

affairs and minister of planning and international cooperation, presided over the meeting. IDB Chief Ali said Muslim countries were
incurring heavy losses due to lack of cooperation among them.
If we take Maghreb Union as an example,
the figures are really frightening. Some studies indicate that the stagnating level of economic cooperation among these countries
cost them 2 percent of their annual growth
and lowered their GDP by 5 percent. It is indeed surprising that trade among the countries of this group constitutes less than 2
percent, he explained.
The president also spelled out IDBs plans
and initiatives for the next four years. We
would like to improve the economic development facilities offered by the bank and
stimulate the Islamic Solidarity Fund, he
said and urged more cooperation among
member countries in the fields of

knowledge economy and trade.
Who will lead the world in the
21st century is the question
raised by Arab youth, Ali said,
and urged Muslim countries to
play a leading role on the world
stage. He said the global financial
crisis proved the relevance of Islamic banking and finance. Our
confused world is in dire need for
financial, economic and social
systems that are more balanced
and more responsive to mans
material, moral and spiritual requirements. Ali said the renaissance of the Ummah sought by
the youth was not different from
the IDBs Vision 2020. Ours is
a vision for human dignity and
is inspired by the resolutions of
the emergency Islamic summit
in Makkah in 2005. The IDB has
taken strategic initiatives aimed
at combating poverty and unemployment, he said referring to
the Solidarity Fund.
The IDB chief pinpointed some of the major
shortcomings, calling for urgent remedial
action. The development models in member
countries are based on outdated systems;
the role of the Zakat and Awkaf has become
ineffective in containing economic upheavals; there is a lack of strategic orientation toward knowledge economy; and debt-based
products outweigh financing tools and investments in the real economy, he said.
Ali said the IDB had signed an agreement
with the UNDP to establish an effective
mechanism for monitoring and taking preventive action in times of crises and disasters in favour of the citizens of member
countries. The IDB has signed a memorandum of understanding with Jeffrey Sachs,
head of the Earth Institute at Columbia University, with the objective of benefiting from
its millennium village experience. gif
Market Review
gif
ISLAMIC FINANCE TRADE SECTOR EXPANDS

IN ASIA AND MIDDLE EAST
Total trade finance among the

57 members of the Organisation of the Islamic Conference,
which includes Saudi Arabia,
Malaysia and Turkey, is expected to reach
$4 trillion by 2012, said Mohamad Nedal
Alchaar, secretary general of the Accounting
& Auditing Organization for Islamic Financial
Institutions (AAOIFI). (Islamic finance) could
tap 20 per cent of the total trading financing, thats very reasonable, Alchaar said,
adding that while the current Islamic trade
finance market remains fragmented and
non-competitive, there has been a shift towards pushing trade finance among Islamic
practitioners. Part of the increased interest
in Islamic trade finance is that the Islamic finance industry, which prohibits interest, has
matured and can provide complicated instruments, such as Shariah-compliant hedging
products to protect trade transactions, said
Yakub Bobat, global head of HSBC Amanah
commercial banking. If you dont have access to Islamic hedging, there will be a currency conversion impact. In the absence of
ment Bank. There is a very compelling reason to promote this

product given that the returns of
trade financing can be very attractive, much more than real estate
financing, for example, he said.
Providers of this product have
not been as aggressive in promoting it. But with increasing
cross-border trade among Asian
and Middle Eastern countries, deBut with
mand for more Shariah compliant
financing from Muslims is still exincreasing
pected to increase. Asia to Middle
cross-border trade among
East trade flows more than douAsian and Middle Eastern counbled between 2005 and 2008,
according to the World Trade
tries, demand for more Shariah
Organization. If I compare three
compliant financing from Muslims
years back, volumes have gone
is still expected to increase. Asia
up overall in the Islamic trade finance market, said Ghazanfar
to Middle East trade flows more
Naqvi, managing director, Islamic
than doubled between 2005
origination and client coverage at
and 2008, according to the
Standard Chartered Saadiq. Its
a function of more awareness and
World Trade Organimore offerings. Today we are seezation
ing customer preference changing
and trade finance is a key component of growth in Islamic finance.
Naqvi said it was difficult to pin
those solutions, people go for conventional, down tangible global figures for Islamic trade
Bobat said. But the proposition is now com- finance as the majority of deals are not pubplete and you can now use Islamic hedges lic transactions.
for trade transactions. Bobat said such innovations in the industry will help persuade The International Islamic Trade Finance
people inclined toward Shariah-compliant Corp. (ITFC), an independent entity within
business to opt for Islamic trade finance the Islamic Development Bank, said in its
over conventional forms. In Islamic trade fi- annual report that it approved $2.17 billion
nance, a bank will provide a letter of credit, in Islamic trade finance transactions at the
guaranteeing import payments using its own end of 2009. That grew to around $2.55 bilfunds, for a client based on sharing the profit lion in 2010, with a majority of transactions
from the sale of the item. But some banks taking place in OIC member nations. HSBC
are still wary of providing Islamic trade fi- Amanahs Bobat said Islamic trade finance
nance services, citing it as more costly and will be a significant contributor to growth in
time consuming. In addition, some see lit- Islamic finance but the industry will have to
tle difference between conventional and look beyond asset finance. The industry toIslamic trade finance as both are fee-based day is pretty much focused on asset finance
products, resulting in lower demand for the and it needs to have the ability to capitalise
Islamic product. Changing that view will be on trade, he said. (Islamic trade finance)
key for the industry, said Shabir Randeree, should be as much bread and butter busichairman of the European Islamic Invest- ness as it is for conventional trade flows. gif
Islamic trade finance has grown

progressively towards Shariahcompliant banking and could
serve as one of the key growth
drivers to aid the $1 trillion
Islamic finance industry in its
growing global expansion. The
global Islamic finance industry,
which has been growing between 15 to 20 per cent a year
is widely expected to reach $2
trillion in the next three to five
years. While Islamic banking
and Islamic bonds, or sukuk,
are expected to lead growth,
bankers say Islamic trade finance could serve as the dark
horse emerging to propel the
industry further. Trade finance,
the lifeblood of global commerce, underpins 60-80 per
cent of the $12-13 trillion trade
in global merchandise and
practitioners say it is safer than
other forms of lending.
75
gif
Event Review
IFN Europe Forum opens its doors

to investors and issuers
Author: Tajah Brown, Global Islamic Finance Magazine Editorial Team, United Kingdom
The growing Muslim population, financial regulations and infrastructure within

Europe contributes to boost the growth
of Islamic finance in the region. The IFN
Europe forum hosted by Islamic Finance
News (IFN) located at One Bishop Square,
London took place on the 7th and 8th of
July 2011. The purpose of the event was
to generate fresh ideas, views and solid
plans to take advantage of Islamic finance
opportunities within the region.
The Investors day took place on the 8th

of July and covered a range of topics such
as takaful and re-takaful in the developing
Islamic finance industry and crucial issues
for investors in the UK and European Islamic financial markets. The day also included
a presentation from Rafael Dalmau, global
head of Shariah compliant management
from BNP Paribas covering the topic of Sukuk as part of a global portfolio allocation
strategy
The event endorsed by the London

There are already major financial centStock Exchange, UKIFS/TheCityUK
Global takaful contributions rose to USD 3.4 ers in regions such as Luxembourg
also included a range of sponsors
billion in 2007, compared with USD 2.5 billion and London which have a collection of
such as Allen & Overy, BLME, Busi51 Shariah-compliant funds adding to
in 2006. This shows the success in the Takaful
ness Bermuda, CIMA, CIMB Islamic,
US$500 million in assets and 16 listed
industry, the contributions have currently surpassed the
Gatehouse Bank, IFAAS, Trasset and
Sukuk issuances totalling to US$5.5 bil$10 billion mark and have been predicted to go beyond
Vinson & Elkins. It is only a matter
lion. There is also proof that there has
$12 billion by the end of the year
of time before Europe becomes a
been an increase in the market interest
significant player within the Islamic
and participation in these sectors and
financial industry, with the growing
countries such as France and Ireland
Muslim population and boost in cross-boardhave been seeking changes in their regulatoIslamic, Neil D Miller global head of Islamic
er trade and investments with the Middle
ry system in order to integrate Islamic finance
finance from KPMG and other major players
East. European countries can offer a variinto the economy. The Chartered Institute of
within the industry. The Issuers day ended
ety of strengths such as regulation, expertise
Management Accountants (CIMA) the worlds
with the Shariah Scholars roundtable includand knowledge. The IFN Europe Forum covlargest professional body of management acing Dr Humayon Dar, Chief Executive Officer
ered a wide range of topics for issuers and
countants used the IFN Europe Forum as a
from BMB Islamic, Mufti Abdul Kadir Barkatinvestors. The Issuers day commenced on the
platform to launch its certificate, diploma and
ulla, Shariah Advisor from Islamic Bank of
7th of July and gave influential people in the
advanced diploma in Islamic Finance. The
Britain, Sheikh Bilal Khan, Executive Director
industry a chance to express their views. The
purpose of their launch was to expand the Isand Shariah Scholar from Islamic Finance
first panel of speakers spoke about Islamic
lamic Finance qualifications market in order
Education Council and Sheikh Muddassir Sidfinance and capital market developments in
to increase human capital and improve the
diqui, Partner and Shariah scholar from SNR
Europe, the panel included Badlisyah Abdul
talent pool.
Denton & Co.
Ghani, Chief Executive Officer from CIMB
Event Review
gif
takaful providers to utilise retakaful

capacity as a first option, takaful provision for long term care needs and
Shariah issues in the Mudharabah,
Wakalah and Waqf modes in Takaful. Datuk Noripah Kamso, CEO from
CIMB-Principal Islamic Asset Management gave her views on an asset
managers take on optimising investment returns from contribution pools she
says today, Islamic investment product has
shown evidence that it is resilient. Global
takaful contributions rose to USD 3.4 billion
in 2007, compared with USD 2.5 billion in
2006. This shows the success in the Takaful
industry, the contributions have currently surpassed the $10 billion mark and have been
predicted to go beyond $12 billion by the end
of the year.
The International Takaful Summit fills the gap

between takaful and insurance industries
Author: Tajah Brown, Global Islamic Finance Magazine Editorial Team, United Kingdom
The International Takaful Summit 2011 commenced on the 12th and 13th of July located at Jumeirah Carlton Tower, London. The
theme mainstreaming and globalising takaful gave the panel speakers the opportunity
to voice a range of topics such as challenges
in making takaful the default option in Muslim countries and capital analysis of takaful
companies. Economies around the world are
showing signs of stability and growing enthusiasm for the niche and specialist insurance
markets. Takaful is predicted to become one
of the fastest growing sectors within the insurance industry.
The Takaful Summit aimed to discuss issues
such as the education and acceptance of
the consumer and the lack of experienced
human resources. The Summits goal was
to solve the problems between the takaful
and insurance industries. The Summits first
day included major players within the industry such as Ajmal Bhatty, president and CEO
from Tokio Marine Middle East, Dawood Taylor, senior regional executive from Takaful,
Middle East, prudential corporation Asia and
Chakib Abouzaid, CEO from Takaful Re Limited. The first speaker at the Summits second
day Dr Ludwig Stiftl, Head of Center of Competence Retakaful from Munich Reinsurance
Company gives his views about the Summit.
There is a message to convey, London is a
very focal point and the summit consisted of
all the scholars gathering and having dense
discussions, sharing fresh ideas and food for
thought.
Dr Stiftl gave his presentation about the reflections on long term Qard al Hassan in Takaful/
Retakaful. He says it doesnt depend what
you put in the fund it depends on the size of
the fund. The companies that sponsored
the Summit are Norton Rose, AON Benfield,
Dar Al Takaful and Hannover Re. Organiser
Mohaned Abdullah is very pleased with the
outcome of the Summit saying, the feedback
is fantastic with a collection of international
discussions about a sector that is more relevant in Non-Muslim and Muslim countries
He added Takaful is Shariah compliant but
its for everyone. The Summits second day
covered a range of topics such as getting
Maulana Faizal Manjoo gives his views on the

need for longevity Sukuk for takaful-based
pension provision. He shares his knowledge
saying an average of 3 months is added to
life expectancy each year, there would be a
million centenarians worldwide by 2030 he
added people are living longer than data
shows. Media partners also attended the
event and took part in the networking opportunities and maintaining business relationships. The companies included Islamic
Finance News, Global Islamic Finance Magazine, Islamic Business and Finance and Mena
Insurance Review. gif
Islamic Finance Ltd.

Islamic Finance Ltd offers a comprehensive range
of Islamic nance solutions to help expedite your
international business, trade and risk mitigation.
Islamic Finance Ltd is committed to providing its
business customers with a range of innovative
Islamic banking solutions. We do our best to arrange
a wide range of nancing that you can be certain your
nance is structured in full accordance with Shariah
requirements.
Visit our website for more information:

www. ukislamicnance.co.uk
gif
Business News
Book
Review
Attracting the World of Small and Medium Enterprises
for Islamic Banking
Part of Article Collection, individual article 4.99/
Attracting the world of enterprises for Islamic banking services discusses the various options available for Small and Medium sized
enterprises (SMEs). It also ensures that all business professionals
and those SMEs wishing to tap into the market are familiarised
with the Shariah compliant principles and various methods of Islamic financing contracts. These contracts range from the successful and popular Ijarah
contract through to Istisna, Mudaraba, Musharaka, Salam and many others which will be
discussed comprehensively in this article.
Global Islamic Finance Magazine aims to establish the various ways SMEs can successfully attract the numerous benefits of Islamic financial options and contracts which provide an ethical alternative to conventional methods of financing.
Order Number: 2011g069
Global Islamic Finance on Increasing Customer Loyalty

Part of Article Collection, individual article 4.99 /
$7.99
Financial industry might be viewed as one of the most global sectors

yet the reality is otherwise. Irrespective of the globally accepted financial product base the industry is highly dependent on a key success
factor: Customer relationship management. This intangible success
factor is a key differentiating factor for both mainstream and Islamic financial institutions
and is highly subject to regional dynamics. The article sheds light on the Islamic Financial
Institutions (IFI) service offerings and IFI customer expectations.
Islamic Capital Markets
Products and Strategies

by Kabir Hassan & Michael Mahlknecht
Islamic finance has experienced rapid growth in
recent years, showing significant innovation and
sophistication, and producing a broad range of
investment products which are not limited to the
complete replication of conventional fixed-income
instruments, derivatives and fund structures.
Islamic finance represents an elemental departure
from traditional interest-based and speculative
practices, relying instead on real economic transactions, such as trade, investment based on profit
sharing, and other solidary ways of doing business,
and aims to incorporate Islamic principles, such
as social justice, ecology and kindness, to create
investment products and financial markets which
are both ethical and sustainable. Products created according to Islamic principles have shown
a low correlation to other market segments and
are relatively independent even from market turbulences like the subprime crisis. Therefore, they
have become increasingly popular with secular
Muslims and non-Muslim investors, as highly useful alternative investments for the diversification
of portfolios. In Islamic Capital Markets: Products
and Strategies, international experts on Islamic
Finance and Shariaa Law focus on the most imminent issues surrounding the evolution of Islamic
capital markets and the development of Shariaacompliant products. The book is separated into
four parts, covering:

Order Number: 2010g068

Islamic Finance 3 Volume Set

by Brian Kettell
John Wiley & Sons Ltd. /90.00
Islamic finance is the fastest growing sector within the financial market place, a growth rate which has not been matched by the vast need
for educational and training publications. This set is an all in-one
learning package for anyone interested in Islamic banking and finance, bringing together the
core textbook Introduction to Islamic Banking and Finance, The Islamic Banking and Finance
Workbook and Case Studies in Islamic Banking and Finance.
The set combines coverage of a wide range of products and issues in Islamic finance with
a series of real life case studies which follow the themes in the introductory text, illustrating
Islamic concepts and transactions in the real world. The workbook contains questions and
answers, chapter summaries and key learning outcomes, enabling readers to test their understanding of the main principles of Islamic banking and finance.
August 2011
General concepts and legal issues, including

Rahn concepts in Saudi Arabia, the Shariaa
process in product development and the integration of social responsibility in financial
communities;
Global Islamic capital market trends, such as
the evolution of Takaful products and the past,
present and future of Islamic derivatives;
National and regional experiences, from the
worlds largest Islamic financial market, Malaysia, to Islamic finance in other countries,
including Germany, France and the US;
Learning from Islamic finance after the global financial crisis; analysis of the risks and
strengths of Islamic capital markets compared to the conventional system, financial
engineering from an Islamic perspective,
Shariaa-compliant equity investments and
Islamic microfinance.
Islamic Capital Markets: Products and Strategies is

the complete investors guide to Islamic finance.
978-0-470-68957-8 Hardback March 2011
45.00 / 54.00
Event
gif
Event Calendar
September
October
2nd Fraud & Compliance Forum
2nd Annual Retail Banking Asia Pacific
8th Annual CEE Retail Banking
SME Conference
3rd Annual World Islamic Retail Banking
Petrochem Arabia
Islamic Investment and finance forum
19th-20th September 2011

Doha Qatar
Organised by Fleming Gulf
2nd 5th October 2011

Kuala-Lampur, Malaysia
2nd Abu Dhabi Investments Forum

26th - 27th September 2011
Abu Dhabi
3rd 4th October 2011-07-18

Abu Dhabi
2nd Annual Investment Opportunities in

Abu Dhabi
26th - 27th September 2011
Abu Dhabi
United Arab Emirates
9th & 11th October 2011

Dammam, Saudi Arabia
3rd Operational Risk Forum
Quant Invest Middle East 2011

26th - 28th September 2011,
Dubai, UAE
Organised by Terrainn
10th 11th October 2011

Dubai
Strengthening the Arab-African Cooperation
11th & 12th October 2011

Budapest
Organised by Fleming Europe

Dubai
Organised by Fleming Europe

Istanbul
Organised by IIR
Solar Investment Summit Middle East

2011
Abu Dhabi
Organised by Datamatrix

Abu Dhabi
November
December
7th Operational Excellence in Banking OPEX 2011

November 2011, Dubai
Risk Management in Oil & Gas

November 2011, Qatar
Islamic Finance Conference

11th November 2011
Frankfurt, Germany
Organised by Maleki Group
Kurdistan Iraq Oil & Gas

11th 15th November 2011
Kurdistan
Organise by CWC GROUP
18th Annual World Islamic Banking Conference (WIBC 2011)

20th & 22nd November 2011
Republic of Bahrain
Organised by MegaEvents
Advanced Well Integrity Management

21st 23rd November 2011, Qatar
Private Equity World MENA 2011
21th -24th November 2011, Dubai, UAE

Russian Power: Finance and Investment

22nd- 24th November 2011
Moscow Russia
Organised by Adam Smith Conference
Russian Banking Forum
22nd November- 1st Dec 2011

Moscow Russia
Organised by Adam Smith Conference
8th GCC Financial Markets Listed Companies conference

29th 30th November 2011
Dubai
Organised by Datamatrix
Saudi Water & Power Forum

4th - 6th December 2011-07-18
Jeddah, Saudi Arabia
Organised by CWC group
Saudi Infrastructure
11th 14th December 2011

Jeddah, Saudi Arabia
Organised by CWC group
Commodities Week Middle East

5th-7th December 2011
Dubai, UAE
1st Annual Islamic Project Finance &

Trade Finance Conference
10th & 11th December 2011

Organised by Global Islamic Finance Magazine
For more information and full events details,

please visit www.globalislamicfinancemagazine.com/events
gif
Market Review
Gulf Banks Tackle Challenges

to Boost Shariah Investments
Gulf Banks are makThe lack of standardisation has hindered growth executive officer at Asian
ing significant efforts to
Bank, said in an
in the Islamic finance industry, which has around Finance
boost Arabian Gulf banks
interview. Weve been
$1tn of assets and is expanding by about 15% a year, ac- discussing with Malaysaying that they are more
ready to accept Asian
cording to the Kuala Lumpur-based Islamic Financial Serv- sian companies how to
Islamic debt as Shariahadvantage of the
ices Board. Scholars at the Auditing and Accounting Organ- take
compliant, allowing them
infrastructure projects
isation of Islamic Financial Institutions, a standard-setting in Qatar, he said on the
to invest in a market that
has issued twice as much
body based in Manama, are making efforts to develop glo- 4th of June. Theres
sukuk as the Middle East
abundant liquidity in the
bal rules for the industry
this year. Institutions from
Middle East for these
the two regions are workcompanies to tap. Malaying to overcome differsian firms would need to
ences over whether Southeast Asian notes
structure the sukuk and loans to meet the
comply with Islams ban on interest, accordShariah standards required by the scholars
ing to Albaraka Banking Group, Bahrains
in that region. The lack of standardisation
biggest publicly traded lender, and Asian Fihas hindered growth in the Islamic finance innance Bank, the Malaysian arm of Qatar Isdustry, which has around $1tn of assets and
lamic Bank. Last year, Saudi Arabias Al Rais expanding by about 15% a year, according
jhi Group helped Cagamas Bhd, Malaysias
to the Kuala Lumpur-based Islamic Financial
largest mortgage holder, structure a sukuk
Services Board. Scholars at the Auditing and
after Gulf investors balked at debt sold by
Accounting Organisation of Islamic Financial
the same issuer in 2009.
Institutions, a standard-setting body based
in Manama, are making efforts to develop
The co-operative approach is a change for
global rules for the industry.
investors from the Gulf who are seeking to
diversify their investments amid political upGlobal sales of sukuk reached $7.7bn so
heaval in the Middle East. It may also help
far this year, from $6.2bn in the same peMalaysia to raise more funds from oil-rich
riod in 2010, according to data compiled
nations to support a 10-year $444bn de- growth. Both Albaraka and QIB, the Gulf na- by Bloomberg. Offerings reached a record
velopment plan announced last year. Gulf tions largest Shariah-compliant lender, said $31bn in 2007. Shariah-compliant bonds
investors arent allergic to Asian sukuk any- this year they plan to acquire Islamic banks gained 5.4% this year, according to the
more, Malek Khodr Temsah, assistant vice in Indonesia. The Shariah gap between HSBC/Nasdaq Dubai US Dollar Sukuk Index.
president of treasury and investments at Al- Malaysia and the Middle East has started Debt in developing markets rose 4.4%, JPbaraka, said in an interview from Manama to narrow but there are still significant dif- Morgan Chase & Cos EMBI Global Diversion the 2nd of June.
ferences, Rohit Chawdhry, who helps man- fied Index shows.
age $350mn of assets at Bahrain Islamic
Middle East and Asian financial institutions Bank, the countrys second-largest Islamic Dubai Department of Finances 6.396%
have a better understanding of each others lender, said Im sure that within the next 6 note due November 2014 widened three baregulatory framework so we are more com- to 12 months the issues will be sorted out, sis points to 238, data compiled by Bloombfortable with exposure to Asian credits. he said. Its a general recognition from the erg show. The fundamental Shariah issues
Sales of sukuk from Asia have amounted Malaysians that they need to make some arent going to change, Jawad Ali, the Duto $5bn so far this year, more than double compromises if they want to attract Gulf in- bai-based global deputy head of the Islamic
the $2.2bn from the Gulf, according to data vestors, but there is also an understanding finance practice at King & Spalding, said on
compiled by Bloomberg.
that regional investors are starting to warm the 6th of June. Islamic finance fatwas, judgments of scholars based on their interpretaup to the norms in Malaysia.
Malaysia accounts for about 60% of the glotion of Shariah, from Malaysia arent generbal Islamic debt market. Issuance of ringgit- Qatar plans to spend $88bn on building ally accepted in the Middle East, he said.
denominated Islamic bonds increased 70% roads, hotels and other infrastructure beto 13.9bn ringgit ($4.6bn) this year, the data fore it hosts the soccer world cup in 2022, Gulf-based Islamic finance institutions
show. Malaysia and Indonesia plan to issue QNB assistant general manager Enrico penetrating the Malaysian market will no
sovereign global Islamic bonds in 2011. Al- Grino, who oversees project finance, said doubt help bridge the gap between the two
barakas Temsah said he bought Malaysian on the 16th of May. Malaysian companies Islamic finance centers, he said. Whether
government sukuk in the fourth quarter of seeking to win contracts in Qatar may need this understanding is going to lead to more
last year to diversify his holdings and take to raise funds in the Middle East, Mohamed harmonisation will depend on the particular
advantage of Southeast Asias economic Azahari Kamil, Kuala Lumpur-based chief product in question.
August 2011
Glossary
Business Directory
gif
Business Directory
Banks
European Islamic Investment Bank
Arab Banking Corporation
Bank of London and Middle East
Contact person/ department: Keith McLeod

Address:
European Office
131 Finsbury Pavement
London EC2A 1NT
England
Telephone: +44 20 78479900
Fax: +44 20 78479901
E-mail: reception@eiib.co.uk
Website: www.eiib.co.uk
Contact person/ department: Nadia Mehdid

Address:
Station House, Station Court, Rawtenstall
Rossendale BB4 6AJ, UK
Telephone: +44 1706237900
Fax: +44 1706237909
E-mail: nadia.mehdid@arabbanking.com
Website: www.arabbanking.co
Contact person/ department: Michelle Arnold

Address:
Sherborne House
119 Cannon Street
London, EC4N 5AT
United Kingdom
Telephone: +44 20 7618 0000
Fax: +44 20 7618 0001
E-mail: Michelle.Arnold@blme.com
Website: www.blme.com
Description: EIIB seeks to service a market for Shariaa compliant investment

banking services in Europe, the Middle East and Asia that it believes has
been under-exploited by conventional and Islamic banks, and by non-banking
institutions. EIIB intends to become a major participant in the market for Islamic
securities, treasury and investment products, which is currently experiencing
rapid growth.
Description: Arab Banking Corporation, popularly known as ABC, is an

international Universal bank headquartered in Manama, Kingdom of Bahrain.
Our network spreads over 21 countries in the MENA and GCC, Europe,
the Americas and Asia. ABC is a leading regional bank in Trade Finance &
Forfaiting, Treasury, Project & Structured Finance, Syndications, Corporate &
Institutional Banking as well as Islamic Banking. We also provide Retail Banking
services in the MENA region
Description: Bank of London and The Middle East plc (BLME) is a fully Shariaa
compliant wholesale bank in the heart of the City of London. BLME is managed
by a quality team bringing together a combination of highly experienced international financiers and leading experts in Islamic finance. The majority of our
Corporate Banking client base is located mainly in the UK, US and Europe.
ABN AMRO Bank N.V.
Dubai Islamic Bank PSJ
Al Baraka Islamic Investment Bank
(ABN AMRO Bank N.V. is an authorised agent of The Royal Bank of Scotland
plc.)
Contact person: Abbas Yousafzai - Head of Islamic Banking
Address: Khalid Bin Waleed Road, PO Box 2567, Dubai, UAE
Telephone: +971 4 506 2260
Fax: +971 4 506 2028
E-mail: Abbas.Yousafzai@rbs.com
Website: www.rbsbank.ae
Address:
P.O.Box 1080 Dubai
Telephone: + 9714 2953000
Fax: +971 4 295 411
E-mail: contactus@alislami.co.ae
Website: www.alislami.ae/en/
Al Baraka Tower , P.O. Box 1882

Manama , Bahrain
Telephone: + 973 250 363
Fax: + 973 274 364
E-mail: baraka@batelco.com.bh
Website: www.albaraka.com
Description: RBS within its Retail Banking Unit offers its clients competitive
Islamic Banking Solutions. They have one of the largest options for Islamic
Wealth Management Products and are also a distributor of the Takaful Product
developed by Aman (Dubai Islamic Insurance & Re-Insurance Company). They
are presently engaged in launching a full Retail Banking proposition with a
Shariah Based Credit Card and Liability Accounts in 2010.
Description: Dubai Islamic Bank has the unique distinction of being the worlds
first fully-fledged Islamic bank, a pioneering institution that has combined
the best of traditional Islamic values with the technology and innovation that
characterise the best of modern banking. Since its formation in 1975, Dubai
Islamic Bank has established itself as the undisputed leader in its field, setting
the standards for others to follow as the trend towards Islamic banking gathers
momentum in the Arab world and internationally.
Description: Al Baraka Banking Group offers retail, corporate and investment

banking and treasury services strictly in accordance with the principles of the
Sharia. The authorized capital of ABG is US$1.5 billion, while the total equity
amounts to about US$1.52 billion. The Group has a wide geographical presence
in the form of banking Units and representative offices in twelve countries, which
in turn provide their services through 300 branches.
Accountancy firms
Abbas Accounting
Baker Tilly MKM
HLB HAMT Chartered Accountants
Address:
ABBAS ACCOUNTING
P.O.Box : 78142
Dubai, U.A.E
Telephone: +971 4 2820300
Fax: +971 4 2820322
E-mail: info@abbasaccounting.com
Website: www.abbasaccounting.com
Address:
Epico Safar Building
Liwa Street
Abu Dhabi
Telephone: +97 1506226719
Fax: +971 26226088
E-mail: sumchart@eim.ae
Website: www.bakertillymkm.com
Address:
106, Al Nayali Building
Abuhail Road, P.O. Box: 32665
Dubai - United Arab Emirates
Telephone: +97142627147
Fax: +971 4 2627148
E-mail: dubai@hlbhamt.com
Website: www.hlbhamt.com/
Description: sad Abbas & Co is an audit and accounting consultancy firm in

Dubai, United Arab Emirates. Services rendered by the firm include statutory,
external and internal audit, accounting and financial management consultancy,
accounting and finance outsourcing, project evaluation, feasibility studies and
allied services. The firm is led by a team of qualified and widely experienced
professionals dedicated to practice of the profession in the highest standards
and committed to providing the best services to the clients.
Morison Menon
BDO International
Address:
204 Tower- A, Gulf Towers,
Oud Metha,
P. O. Box 55535, Dubai, UAE
Telephone: +971 4 33 66 990
Fax: +971 4 33 66 992
E-mail: dubai@morisonmenon.com
Website: www.morisonmenon.com/
Address:
BDO - London
55 Baker Street
London
W1U 7EU
Telephone: +44 207 486 5888
Fax: +44 0207 487 3686
E-mail: j.polin@bdo.co.uk
Website: www.bdo.uk.com/
Description: Morison Menon Group is a group of firms offering professional

advisory services in Financial Audit, Compliance and Accounting, Consulting
(Business Plan, Company setup and business incorporation, Financial Consulting, Property Consulting, HR Solutions, BPO, IT and Web Solutions) since
the year 1994. Headquartered in Dubai,UAE armed with a license to operate in
DIFC, Dubai. The group has offices in Abu Dhabi, Jebel Ali, Sharjah and Ras
Al Khaimah apart from overseas operations in Oman, Qatar, Bahrain, Iran and
India. Morison Menon currently is a team of over 150 Professionals.
Description: We offer a wide range of service including auditing, accounting,

consultancy, financial-management, profit-enhancement, feasibility studies,
company-secretarial, offshore-company registration, and trademark-registration.
You will receive a prompt response to every question or request. We serve our
clients as a partner in order to help them make the best possible decisions for
their business.
August 2011
Description: BDO is an award-winning, UK Member Firm of BDO International,

the worlds fifth largest accountancy network with more than 1,000 offices in
over 100 countries, including affiliates. We specialise in helping businesses,
whether start-ups or multinationals, to achieve their goals. Through our own
professional expertise and by working directly with organisations, weve
developed a robust understanding of the factors that govern business growth.
Our objective is to use this to help our clients maximise their potential.
Description: We have a full range of accounts and audit services to meet your
business needs. A professional firm with regional focus and having global representation, HLB Hamt, Chartered Public Accountants spectrum of services cover
all aspects of doing business in the UAE and the GCC countries. While based in
the UAE, we offer comprehensive services for doing business in the Middle East
including all the Free Trade Zones, right from company formation.
Barber Harrison and Platt

Address:
2 Rutland Park
Sheffield
S10 2PD
Telephone: +44 114 266 7171
Fax: +44 114 2669846
E-mail: info@bhp.co.uk
Website: www.bhp.co.uk
Description: Barber Harrison & Platt is committed to building professional
relationships founded on the personal responsibility of a partner for a clients
affairs. As a Top 60 firm and the largest independent firm of chartered accountants in South Yorkshire and Derbyshire our continued success owes much
to our dynamic approach and ability to fulfil client demands. This requires the
highest level of commitment and performance. Barber Harrison & Platt provide
advice to plcs, private companies, partnerships, sole traders, individuals and
trusts. The close working relationship we enjoy with clients provides a deep
insight into a far wider range of business situations and problems than are
traditionally associated with accountancy.
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Law firms
Norton Rose (Middle East) LLP
Contact person/department: Neil D. Miller, Partner
Address:
4th Floor, Gate Precinct Building 3, Dubai International Financial Centre, Dubai,
UAE PO Box 103747
Telephone: +971 (0)4 369 6300
Fax: +971 (0)4 369 6350
Email: neil.d.miller@nortonrose.com
Website: www.nortonrose.com
Description: We offer a full business law service and work in teams that cut
across national and jurisdictional boundaries. In everything we work on, we
provide expert advice, innovation and a commercial outlook. Our practice areas
cover banking and Islamic finance, construction, corporate finance, dispute
resolution, PPP, project finance, real estate
Allen & Overy

Contact person/ department: Michael Duncan
Address:
Bishops Square
Allen & Overy LLP
One Bishops Square
London
E1 6AD
United Kingdom
Telephone: +44 20 3088 4197
E-mail: michael.duncan@allenovery.com
Website: www.allenovery.com
Description: Allen & Overy is one of a small group of truly international and
integrated law firms with approximately 5,000 staff, including over 450 partners,
working in 31 major centres worldwide. Allen & Overy also operates in regions
where we do not have an office via our network of International Desks.
Lawrence Graham LLP (LG)

Contact person/ department: James Foster, head of LGs Dubai office
Address:
PO Box 33090
8th Floor
Convention Tower
Zabeel Road
Dubai, UAE
Telephone: +971 4 329 2420
Fax: +971 4 329 2430
E-mail: dubaioffice@lg-legal.com
Website: www.lg-legal.com
Description: LG is a firm of business lawyers, advising clients around the
world. The opening of the firms Dubai office at the end of 2007 and the
Moscow office earlier this year cemented its global growth and focus on clients
internationally.
King and Spalding
Clifford Chance
Contact person/ department: Anna Ward
Address:
10 Upper Bank Street
Canary Wharf
London E14 5JJ
Telephone: +44 20 7006 1000
E-mail: info@cliffordchance.com
Website: www.cliffordchance.com
Description: Clifford Chance is one of the worlds leading law firms, helping
clients achieve their goals by combining the highest global standards with local
expertise. The firm has unrivalled scale and depth of legal resources across the
three key markets of the Americas, Asia and Europe and focuses on the core
areas of commercial activity. Clifford Chance lawyers advise internationally
and domestically.
Trowers & Hamlins
Contact person/ department: Jawad l Ali

Address:
125 Old Broad Street
London
EN EC2N 1AR
Telephone: +44 2075517500
Fax: +44 2075517575
E-mail: jali@kslaw.com
Website: www.kslaw.com
Contact person/ department: Nicholas Edmondes

Address:
Sceptre Court
40 Tower Hill
London EC3N 4DX
Telephone: +44 20 7423 8000
Fax: +44 20 7423 8000
E-mail: nedmondes@trowers.com
Website: www.trowers.com
Description: King & Spalding has provided the highest quality legal services
to its clients for over a century. Today, with more than 800 lawyers and offices
in Abu Dhabi, Atlanta, Austin, Charlotte, Dubai, Frankfurt, Houston, London,
New York, Paris, Riyadh (affiliated office), San Francisco, Silicon Valley and
Washington, D.C.
Description: We believe lawyers exist to serve their clients - not vice versa. We
also believe that every task we undertake on your behalf is unique.We expect to be
judged on results, on the added value we provide, the quality of our service, and our
cost-effectiveness. These attributes have led to us being voted Law Firm of the Year
2007 by the Lawyer.
Advisory and Consultancy firms

AR Business Consultants
Chartered Certified Accountants
Tel: + 44 (0) 208 776 9500
Fax: + 44(0) 208 778 8966
Regent House Business Centre
Suite No: 209
291 Kirkdale
London SE26 4QD U.K.
Web: www.arconsultants.co.uk
Description: Saving tax & building business. We providing a personalised
service to business owners and individuals. For help with any of your
accountancy and tax needs, please give us a call. All initial consultations are
free of charge.
Dubai International Financial Centre (DIFC)

Address:
The Gate, Level 14
P.O. Box 74777, Dubai, UAE
Telephone: +971 4 362 2222
Fax: +971 4 362 2333
E-mail: info@difc.ae
Website: www.difc.ae
Description: DIFC Authority establishes and develops a suitable Quality
Management System that is the foundation of the Service Excellence strategic
theme, focusing on DIFCs journey towards achieving its vision To shape
tomorrows financial map as a global gateway for capital and investment.DIFC
Authority is committed to meeting and exceeding customers expectations in
providing consistent and competitive high quality services, through continuously
improving the effectiveness of the Quality Managements System as per ISO
9001. This is carried out in compliance with DIFC Law and applicable statutory
and regulatory requirements.
Chahine Capital Group

Contact person/ department: Andrew Pell
Address:
43, Avenue Monterey
Luxembourg, L-2163
Telephone: +44 20 7 1270001
+352 260 955
Fax: +44 20 7127 4611
E-mail: Andrew.pell@chahinecapital.com
Website: www.chahinecapital.com
Description: Specialists in quantitative equity investment strategies. Digital
Stars Europe (Bloomberg: BILDSCELX) available as Chahine Islamic Stars Europe, with Fatwa from Sharia board headed by Dr Elgari. Bespoke investment
strategies under mandate and client branded funds also available.
Qatar Financial Centre

Address:
P.O. Box : 23245, Doha
Telephone: +974 496 7777
Fax: +974 496 7676
E-mail: info@qfc.com.qa
Website: www.qfc.com.qa
Description: Qatar is one of the worlds fastest growing economies, and the wealthiest country in the world measured by GDP per capita. The Qatar Financial
Centre (QFC) lies at the heart of this small but dynamic countrys ambitious
investment and development strategy.By attracting many of the worlds leading
financial institutions to establish operations in Qatar, the QFC is supporting
both the development of Qatars economy. The QFC Authority is committed to
maintaining the highest international standards in its operations and activities.
We welcome firms who will contribute to the development and success of
Qatars financial sector and we will support them in achieving success.
Overseas Trade Finance Ltd

Address:
Bilton Tower
London
W1h 7LE
Telephone: + 207 859 8201
Fax: +44 845 862 1220
E-mail: info@otfonline.co.uk
Website: www.otfonline.co.uk
Description: Specialises in sourcing trade finance, and arrange funding for
export transactions on behalf of exporters, and international trade finance
professionals world wide. Company arrange the finance for Trade related business and forfeiting. Specialise also in arranging non-recourse discounting of
domestic and export receivables, based on the purchase of Bills of Exchange,
Promissory Notes and invoices. Overseas Trade Finance is dealing with Trade
Finance related business and Forfeiting
Malaysia International Islamic

Financial Centre (MIFC)
Address:
MIFC Secretariat
Bank Negara Malaysia
Jalan Dato Onn
50480 Kuala Lumpur
Malaysia
Telephone: +603 2692 3481
Fax: +603 2692 6024
E-mail: mifc@bnm.gov.my
Website: www.mifc.com/
Description: In August 2006, the Malaysia International Islamic Financial
Centre (MIFC) initiative was launched to promote Malaysia as a major hub
for international Islamic finance. The MIFC initiative comprises a community
network of financial and market regulatory bodies, Government ministries and
agencies, financial institutions, human capital development institutions and
professional services companies that are participating in the field of Islamic
finance. Malaysia has also the distinction of being the worlds first country
to have a full-fledged Islamic financial system operating in parallel to the
conventional banking system.
If you would like to list your company in Financial Directory, please send your order to marketing@gifmagazine.co.uk. Claim your
25% discount by giving the following discount code: X10G01. Please note that only limited space is available in the directory.
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Prosperitus Capital Partners

Contact person/department: Kamran H. Khan Co-Managing Partner
Address:
Berkeley Square House London
W1J 6BD
Telephone: +44 207 193 5755
Mobile: +44 7943 866 552
E-mail: kamran.khan@prosperituspartners.com
They are the first of their kind to launch a private equity fund. Their
ideal drive and focus is centred on Sharia complaint funding and
connecting the markets in the west to the markets in the Middle
East. They are doing this by translating the message of Islamic
Finance. Prospertious business approach is connected to both innovation and management of the individual asset classes. They intend
to foster operations in the Middle East, North Africa. Porsperitus,
also have a parallel conventional platform.
Commander Fund Asset Management

Ltd
Contact person/department: Mark Randall
Address:
4 Creed Court
5 Ludgate Hill
London
EC4M 7AA
Telephone: +44 (0) 20 7246 9940
Fax: +44 (0) 20 7246 9944
E-mail: mark.randall@commanderfund.co.uk
Website: www.commanderfund.co.uk
Commander fund is primarily a conventional based asset management and operations corporation. Yet, in recent years they have
been working on pioneering the closes thing to a Sharia compliant
Hedge fund. They are also promoting the Middle East and developing a strong client base and market presence there.
Capitala
Contact Person. Department : Patricia Assaad
Address:
Al Moroor Street
PO Box 30398
Email: patricia.assaad@capitala.ae
Telephone: +971 2 412 1111
Fax: +971 2 412 1222
Description: Capitala are the masterminds behind some of the
most beautiful and nubile real estate development in the Middle
East. They are focused on striking the balance between community
cohesion and good business decision making. There main project
Arzanah, is a US$6 billion development on Abu Dhabi island.
Located in the Zayed Grand Mosque District
Islamic Finance Glossary

A
Aaqilah
Mutual Help, which was an arrangement of mutual help or indemnification customary in some tribes at the time of the Prophet Muhammad (pbuh). This is a foundation doctrine
based on which Islamic insurance practices, known as Takaful, have been developed.
Adl
A general term which conveys the meaning of justice, equity and fairness.
Ajr
A payment or compensation such as commission, fees or wages charged for services.
Ajr-un-kareem
A generous reward.
Al-Ghurm bil
Ghunm
The principle that one is entitled to a gain only if one agrees to bear the responsibility for the loss. Earning profit is legitimised only by risk-sharing and engaging in an economic
venture. This provides the rationale and the principle of profit-sharing in Shirkah(partnership) arrangements.
Al-kharaj bil
daman
Link of exposure to risk, one can claim profit only if one is ready to bear the business risk, if any. The principle in Islamic jurisprudence that entitlement to return or yield ( al-kharaj) is
for the one who bears the liability ( daman) for something, say an asset, and one who does not bear the liability has no claim to the yield.
Amanah
Trust. Lit.: reliability, trustworthiness, loyalty, honesty. Technically, an important value of Islamic society in mutual dealings; it also refers to deposits in trust. A person may hold property in trust for another, it entails the absence of any liability for loss, except for breach of duty. By extension, the term can also be used to describe different financial or commercial
activities such as deposit taking, custody or goods on consignment. Deposits in current accounts (usually non-interest bearing) with Islamic banks are regarded as Amanah. If the
bank obtains authority to use the funds in the current accounts to invest in its business,Amanah transforms into a loan from the depositor to the bank and the bank is liable to repay
the full amount in the current account, irrespective of profit or loss made by the bank.
Amil
Literally it means worker. One who performs a task, an agent. One who deserves compensation for performing a task, such as the mudarib (manager) in a mudarabah contract or a
zakat collector. However, inFiqh it also refers to the working partner inmudarabah contract. Under this contract, one partner provides the capital and the other provides the labour
who is called amilor mudarib.
Amin
One who holds honestly the trusts of other people; trustworthy.
Amwal
Plural of Mal which means worldly possessions including both property and money (wealth).
Aqd
Contract, Agreement, Bond. Synonymous with the word contract in modern law.
Aqd-al-Muawadah
A contract of exchange in which compensation is given against the goods or services received.
Aqd Ghair Lazim
A contract in which any one of the parties has a unilateral right to revoke it with the consent of the other(s).
Aqd Lazim
A contract in which none of the parties has a unilateral right to revoke it without the consent of the other(s).
Ariya
Loan, which means to give any non-fungible commodity to another for use, without taking any return for its use.
Arbun
A non-refundable down payment or deposit paid by a buyer for the right to purchase goods at a certain time and certain price in future; if the right is exercised, it becomes part of the
purchase price. If the buyer does not complete the purchase or backs out for any reason, the seller has the option to forfeit the deposit. Also known as Urboun and Bai al-Arbun. Also
see Hamish Jiddiyah.
Ayn
Monetary wealth. A tangible (physical) asset. Also, refers to currency or ready money. Ayn is often contrasted with Dayn.
August 2011
Global Islamic Finance
Awards
of the Decade
Now Open For Submissions
Our primary aim is to reward institutions and individuals for demonstrable achievement in promoting and developing Islamic finance market regionally and internationally. The Awards are open to everyone involved in Islamic finance and banking industry.
Winning a Global Islamic Finance Awards demonstrates that your company is leading
the world in its innovative thinking, ethical approach, and that your team is delivering
effective, impactful solutions to Islamic finance market.
Important dates:
September 2011 Entry Deadline

October 2011 Shortlist Announced
December 2011 Awards Ceremony
For more information, please visit
www.globalislamicfinanceawards.com
Business News
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Next issue:
TAKAFUL: CONCEPT, CHALLENGES, AND

OPPORTUNITIES
Through desktop research, one can get a plethora

of materials and papers on Takaful, but most tend
to focus either on the fundamentals of Takaful or
on Takaful models. In contrast, the objective of
this report is to highlight the key issues and challenges facing the world of Takaful and suggested
areas where work is required to find solutions.
Therefore this report is intended to provide useful
reference material for practioners by summarising
the following key items:

An overview of Takaful and the intricacies of

the models
Insights into the issues and challenges facing the Takaful industry
Finding sustainable solutions to some of
these challenges...
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GIF will give you a comprehensive insight into
the various franchising opportunities that the Islamic finance sector has across the globe. We will
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in dealing with franchises in addition to presenting the best 10 franchising opportunities in the
Islamic Finance sector...
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Islamic Project Financing Setting the

Islamic Finance gains momentum in

Global Risk Management Group provides Banks,

9 Islamic Finance News

Interview with Mahmood Hasan, CEO of Rasul Group of Companies

World Islamic Finance Review

32 Part 1: Islamic Finance gains momentum in Europe

48 Do Conventional and Islamic Finance Share Common Epistemology?

4 Global Islamic Finance

Marketing and Branding

55 Unleash the Power of Internal Marketing in your Islamic Financial Institution

72 Oman to Add a Staggering $6 Billion Worth of Islamic Financial

74 Islamic Countries Urged To Adopt Economic Financial Reforms

75 Islamic Finance Trade Sector Expands in Asia and Middle East

80 Gulf Banks Tackle Challenges to Boost Shariah Investments

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ment depositors. Islamic banks have more than

Islamic finance news

Imagine that in 1998 gold was around Rp

Its chief executive officer said, We plan to

The product utilises two Shariah contracts,

There will be demand for Tenagas sukuk

week. Sarawak Energy Bhd., a Malaysian

of the sale. Murabaha can be used for local

ing a wholesale Islamic bank headquartered

sukuk secondary market to act as a market

We firmly believe the bank is poised to not

Elaf Bank is a closed shareholding company

Visit our website

It has been quite a challenge for the UAE

Malaysian Islamic Banks See A Brighter

ercise for banks, including for Islamic banks,

lations on how banks in the second largest

Institutional and corporate banking

Director, Dow Jones

Deputy Minister of Finance Datuk Dr Awang

risk management; quality of their assets,

There are 11 domestic Islamic banks; six

Bahrain Takaful Industry Prospering in

The takaful industry in Bahrain is said to

according to the Central Bank of Bahrain

To prosper and grow, the Islamic financial

compared to BD157.2m in the first quarter

Seetharaman, however, noted that Islamic

The Chief Executive delivered the inaugural

In the UK, there is a full-fledged Islamic