Switzerland Joins Islamic Banking World

CAIRO – Switzerland became the latest Western country to join the booming Islamic finance system, offering a full range of Shari`ah-compliant banking products and services, reported Qatari daily The Peninsula on Friday, November 13.
“We are proud to be the first Swiss private bank to offer such a holistic range of opportunities in Islamic finance to the (Middle East) region and on a global scale,” Fidelis M Goetz, Head of Banking Division at Bank Sarasin, told a press conference in the Museum of Islamic Art in Doha.

The bank would offer a full spectrum of Shari`ah-compliant banking products and services for clients.

This includes Murabaha “sale on profit”, Wakala “fiduciary agreement between two parties” and Maraya “an Islamic structured product that is based on Murabaha or a series of Murabaha transactions”.

“The launch of our Islamic wealth management offering reflects our commitment to serving the diverse needs of our clients,” said Goetz.

Islam forbids Muslims from usury, receiving or paying interest on loans.


Islamic Banks Weather Global Crisis

Transactions by Islamic banks must be backed by real assets -- not shady repackaged subprime mortgages.
Shari`ah-compliant financing deals resemble lease-to-own arrangements, layaway plans, joint purchase and sale agreements, or partnerships.

Investors have a right to know how their funds are being used, and the sector is overseen by dedicated supervisory boards as well as the usual national regulatory authorities.

Booming Market

The Swiss bank, a leading private bank with a broad international footprint, hopes to get a share of the booming Islamic finance market.

“We have perceived in the past couple of years that we have been in the region real interest for these services,” Goetz said.

Islamic finance is one of the fastest growing sectors in the global financial industry.

Starting almost three decades ago, the Islamic banking industry has made substantial growth and attracted the attention of investors and bankers across the world.

"We are extremely delighted that the global launch of our Islamic products is taking place in the Middle East,” said Rohit Walia, Executive Vice Chairman & CEO, Bank Sarasin-Alpen Group, Middle East and South Asia.

Nearly 50 percent of the Islamic finance market is situated in the Gulf region.

“Islamic Finance is a fast growing concept in the region,” said Walia.

“Many of our clients have expressed interest in Islamic Wealth Management and we are very happy to offer the suite of Islamic products to meet their requirements.

“I am sure this will also add to our already strengthened position in the region."

A long list of international institutions, including Citigroup, HSBC and Deutsche Bank, are going into the Islamic banking business.

Currently, there are nearly 300 Islamic banks and financial institutions worldwide whose assets are predicted to grow to $1 trillion by 2013.

“Ultimately our aim is to operate on a global basis,” said Fares Mourad, Managing Director, Head of Islamic Finance at Bank Sarasin.

“But what we are doing is a step by step approach.”

(IslamOnline)

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Malaysia: Two Banks Shortlisted For Mega Islamic Bank Licences

KUALA LUMPUR, Nov 9 (Bernama) -- Two foreign banks have been shortlisted by Bank Negara Malaysia in their applications for new Islamic banking licenses, Deputy Finance Minister Datuk Dr Awang Adek Hussin said Monday.

"I was told a few had submitted," he told reporters after officiating the Islamic Financial Planning and Wealth Management Conference here.

He, however, declined to give further details.

As part of the financial sector liberalisation in April this year, the government announced that up to two new Islamic banking licences would be offered this year to foreign players to establish new Islamic banks with a paid-up capital of at least US$1 billion.

The aim is to enhance global interlinkages, leverage on global developments in Islamic finance and reinforce Malaysia's position as an international Islamic financial hub.

Asked whether there will be further liberalisation in the sector after the April announcement, Awang Adek said: "It is not the end of the liberalisation. It will come as we go along."

In his keynote address at the conference, Awang Adek said the high number of Malaysians' high net worth individuals could be a potential growth driver for the financial planning industry.

He noted that about 61 per cent of Malaysian population came under that group, with gross domestic product per capita income of over US$6,000 (US$1.00=RM3.386).

"The investing behaviour of high net worth individuals has become more global, driven by an increasing awareness of international developments and sophisticated investment products, better portfolio performance and risk mitigation techniques," he said.

He also said that the financial wealth of high net worth individuals had been projected to grow at an annual rate of 8.1 per cent by 2013 worldwide.

Within the Asia Pacific region, the wealthy held a combined US$9.5 trillion in financial assets, making up 23.3 per cent of the total global high net worth individuals' wealth.

"These investors are presented with greater opportunities to allocate capital across asset classes and diversify risks beyond geographic boundaries," Awang Adek said.

"Therefore, the demand for financial planning services will become even more significant as individuals seek professional expertise to assist them in framing asset accumulation strategies and selecting appropriate investments from the myriad of products from financial services providers," he said.

Awang Adek said with the Malaysian economy expected to continue its growth, the number of consumers in the middle-income group is likewise expected to increase.

"The emerging demographic structure is also favourable with the proportion of Malaysians above the age of 60 projected to grow to almost a quarter of the population by 2030," he said.

The wealth of individuals is also expected to rise at a rapid pace, particularly given Malaysia's aspirations to achieve developed nation status and become a high-income society by 2020, he added.

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Waqf Can Be Another Source Of Financing, Says Raja Nazrin

LABUAN, Nov 6 (Bernama) -- The use of Waqf, more commonly known as Islamic endowment, can be another source of financing and also a mechanism for wealth distribution in Islamic Finance, the Raja Muda of Perak, Raja Dr Nazrin Shah said on Friday.

He said from an economic point of view, waqf could be looked upon as a savings-investment mechanism where funds are diverted from consumption and invested in productive assets that provide revenue for future consumption.

"The proceeds can be used for building hospitals, universities, commercial complexes and even facilitate micro-financing.

"Such innovative uses have assisted in unlocking its economic potential, as well as its philantrophic objectives. Nonetheless, waqf has not been given due recognition," said Raja Nazrin, who is also the financial ambassador of the Malaysian International Islamic Financial Centre (MIIFC).

He said this in his keynote address at the Labuan International Islamic Finance Series VI here.

Raja Nazrin noted that contemporary Islamic finance has been largely disengaged from its socio-economic aspects and waqf was one instrument that tied the two together.

He added that the principle of perpetuity embedded in the waqf structure creates a distinction from other foundations and charity funds as widely practiced in western countries.

In further propogating Islamic Finance, Raja Nazrin said there was a need for continual product innovation if there was to be a different model of financial intermediation.

"It has to stand out especially at a time when even the strongest conventional banks have suffered a great loss of reputation," he explained.

He said product innovation was the first challenge, as the country takes a step into the third stage of developing Islamic Finance, which is deepening its acceptibility not only to the Muslim community but also to the non-Muslim world.

However, he cautioned that the innovation of Islamic finance products, in reflecting its uniqueness, should trump any imitation of conventional products, and must not replicate conventional structures which could be destabilising in the long run.

"As new Islamic financial instruments continue to pervade the global financial markets, it is important that innovation in turn does not dilute the authenticity of Syariah," he said.

The second challenge, he said, was to harmonise Syariah standards and regulatory practices, or there would be an absence of consistency and predictability needed to ensure deep and liquid international financial markets.

According to Raja Nazrin, with an increased integration of Islamic markets into the global financial system, comes the added possibility of contagion effects.

"This poses a new set of challenges for Islamic financal regulators and industry to rethink stability as well as governance policies," he noted.

The third challenge he stated is to fortify the institutional foundations that will sustain the Islamic financial sector.

"As Islamic finance becomes more integrated into the international financial system, it will not escape the effects of impeded growth and diminished liquidity that comes with recession.

"Therefore, a sound liquidity management infrastructure is also required to effectively manage our risks.This is another area of potential collaboration among the Islamic financial community," he said.

Raja Nazrin also noted that Islamic Finance has not only gained a strong foothold in western economies, but was also assuming growing importance within mainstream international finance.

"Financial centres such as London, Hong Kong and Singapore have already made the raising of Islamic Finance a part of their activities and were aspiring to join the ranks of more established financial centres like Kuala Lumpur, Dubai and Bahrain," he highlighted.

He added that the assets of Islamic financial instituions worldwide are currently valued at between US$700 billion and US$1 trillion, with the Syariah-Fortune database listing 810 firms, operating in 50 countries globally.

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Islamic Banks Weather Global Crisis

LONDON — Thanks to its ethical low-risk approach, Islamic banks have managed to weather the global financial crisis, achieving high growth rates in 2009, a new study has found.
"A conservative approach to risk and close links between the financial sector and real assets has helped shield the sector from the worst of the credit crisis," Brian Caplen, editor of the Banker Magazine, said in the study cited by Agence France-Presse (AFP).

The study, commissioned by the London-based magazine and a unit of HSBC Bank, said Islamic finance institutions have overcome the crisis that harshly hit conventional banks.

A financial firestorm swept the US and the world in September 2008, after the demise of Lehman Brothers, one of the Wall Street giants.

It has knocked down many major companies worldwide, causing mounting job losses, falling household wealth and forcing consumers to hold back on spending.

The study attributes success of the Islamic banks to rules that forbid investing in collateralized debt obligations and other toxic assets that caused the financial crisis.

The rules of Islamic banking and finance read like a how-to guide on avoiding the kind of disaster that is currently gripping world markets.

Islam forbids Muslims from usury, receiving or paying interest on loans.

Transactions by Islamic banks must be backed by real assets -- not shady repackaged subprime mortgages.

Shari`ah-compliant financing deals resemble lease-to-own arrangements, layaway plans, joint purchase and sale agreements, or partnerships.

Investors have a right to know how their funds are being used, and the sector is overseen by dedicated supervisory boards as well as the usual national regulatory authorities.

Booming

Due to its safety, the Islamic finance industry is building a “solid track record," on the global market, the study says.

“At the moment there is a great demand for capital guaranteed or capital secured products," David Dew, Deputy CEO of HSBC Amanah, told Reuters.

The study notes that assets held by Shari`ah-compliant banks or the Islamic units of conventional banks rose by 28.6 percent to 822 billion dollars in 2009, up from 639 billion dollars in 2008.

This contrasts sharply with the stagnation in the conventional banking sector.

A Banker's survey of the top 1,000 world banks published in July showed annual asset growth of just 6.8 percent.

Islamic finance is one of the fastest growing sectors in the global financial industry.

Starting almost three decades ago, the Islamic banking industry has made substantial growth and attracted the attention of investors and bankers across the world.

A long list of international institutions, including Citigroup, HSBC and Deutsche Bank, are going into the Islamic banking business.

Currently, there are nearly 300 Islamic banks and financial institutions worldwide whose assets are predicted to grow to $1 trillion by 2013.

(IslamOnline)

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Seminar on Islamic Wealth Management and Financial Planning - Kuala Lumpur (Dec '09)

GlobalPro Consulting is organising the Seminar on Islamic Wealth Management and Financial Planning as follows:

Date: 15-16 December 2009
Venue: Ballroom, Legend Hotel Kuala Lumpur

Coverage:
- wealth creation and accumulation
- wealth protection
- wealth distribution
- wealth purification
- Shariah principles

For further information, please visit www.globalpro.com.my

Top 500 Islamic Financial Institutions ranking shows Islamic finance continues double digit growth despite global crisis

Islamic banking assets continued double-digit growth this year, even as conventional bank growth stagnated, according to The Banker's "Top 500 Islamic Financial Institutions" survey, published in association with HSBC Amanah.

Now in its third year, the report is the only annual benchmark of its kind, which ranks over 600 retail, commercial and investment banks, insurance companies and asset managers according to their Shariah-compliant assets.

Assets held by fully Shariah-compliant banks or Islamic banking windows of conventional banks, rose by 28.6%, to $822bn from $639bn in 2008. This is in striking contrast to The Banker's 2009 "Top 1000 World Bank Rankings" released in July, which showed annual asset growth of just 6.8% at conventional banks.

The Islamic finance industry continues to build a solid track record: the compound annual growth rate for 2006-2009 is 27.86%, with assets forecast to hit $1033bn in 2010.

Mr Brian Caplen, Editor of The Banker Magazine, said, "A conservative approach to risk and a close link between the financial sector and real assets has helped shield the sector from the worst of the credit crisis. But finding improved ways to manage liquidity at Islamic banks, as well as harmonising Shariah and prudential compliance between institutions and markets, remain significant hurdles."

David Dew, Deputy CEO of HSBC Amanah, said:

"It is important that the Islamic Finance industry continues to analyse its growth critically if it is to become a truly credible alternative to conventional banking in a significant number of markets."


Dew added, "Our support for this global benchmark reflects HSBC Amanah's status as the premier cross-border provider of Shariah compliant financial services to retail, corporate and institutional clients. It also illustrates our commitment to continue to meet customer needs, which we believe will enable the industry to achieve meaningful scale and mainstream relevance in a growing number of international markets."

The Gulf Cooperation Council (GCC) states remained the dominant segment of Islamic finance, with $353.2bn or 42.9% of the total global aggregate. Iran remains the largest single market for Shariah-compliant assets, accounting for 35.6% of the global aggregate.

Outside the Middle East, Malaysia remains by far the largest player, accounting for 10.5% of the global aggregate, but other markets are expanding rapidly. The UK now accounts for just under 2.5% of global Shariah-compliant assets, and the Syrian Islamic finance market expanded an eye-catching 500%.

Mr Caplen added, "An extra 30 or so banks reported up-to-date data for this year, but transparency and financial reporting remain challenges for the Islamic banking industry if it is to continue its impressive growth rate."

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Jordan: Government eyes Islamic sukuks

AMMAN –– The Ministry of Finance (MoF) is planning to tap Islamic sukuks (bonds) in a bid to attract more capital to finance government projects.


Essa Saleh, the assistant secretary general and spokesperson of the MoF, told The Jordan Times on Monday that the plan seeks to encourage Islamic banks and financial institutions in Jordan to invest in sukuks as interest-bearing bonds are not permissible under Islamic investment principles.


Declining to set a specific date for starting such financing instruments, Saleh said the ministry is reviewing financial legislations, in cooperation with the International Monetary Fund, to issue sukuks, saying that once the project is ready, it will be presented to the iftaa department.


“Issuing a fatwa [religious edict] in this regard will attract companies dealing in Islamic finance to invest in such instruments,” the official noted.


Views of experts differed on the government plan as some said it will increase the government debt while others considered it as an important tool to raise money.


Banker Mefleh Aqel, ex-chairman of the former Industrial Development Bank which is now Jordan Dubai Islamic Bank, described the plan as a step in the right direction, saying Islamic finance has been untapped by the government due to legislative issues.


“It is important to open the market to Islamic bonds as Islamic banks in Jordan enjoy high liquidity,” he said, adding that large numbers of investors also seek Islamic finance for their projects.


However, Aqel warned of negative consequences if the government exaggerates issuance of Sukuks, stating that the volume of such bonds should be reasonable in terms of maturity and pricing.


“The most important feature for the government is to use the benchmark rate to encourage other borrowers to the market,” he remarked.


According to economist Yusuf Mansur, sukuk is another way of borrowing after the government exceeded its limit of loans from conventional banks.


“The government is going in the wrong direction as this step will only increase the internal debt,” he indicated.


Hani Khalili agreed, noting that internal debt, which is over JD5.5 billion, is increasing because government expenditure is also increasing on projects that do not generate revenues to pay back such debts.


The government should encourage banks to lend to the industrial sector instead of it (the government) borrowing from banks to finance unfeasible projects, he explained.


“It seems that the government has used all options with banks and now is going to resort to financial institutions that refuse to deal with traditional bonds,” he stated.


Aqel rejected Khalili’s point of view, saying the government has not used all lending outlets and that sukuks offer the diversification needed in the stock market.


Financial analyst Ali Tabbalat predicted the sukuk plan to be successful, saying Islamic bonds will stimulate the government fiscal plan by raising money to finance infrastructure projects.


Stating that the new financing instrument will increase the internal debt, Tabbalat said the government is going to borrow money and it is essential to open the Islamic bonds market at this time.


The analyst said Jordan can benefit from other countries’ experiences in this regard, particularly Dubai and Malaysia, saying that even some European countries are examining Islamic investment to tackle credit crunch.

By Omar Obeidat/Jordan Times

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Double digit growth for Islamic banking assets in 2009

Assets held by fully Shariah-compliant banks or Islamic banking windows of conventional banks rose by 28.6 percent to $822bn from $639bn in 2008, according to The Banker’s “Top 500 Islamic Financial Institutions” survey.

The London-based magazine found in a July survey that the world’s conventional banks posted annual asset growth of just 6.8 percent.

“A conservative approach to risk and a close link between the financial sector and real assets has helped shield the sector from the worst of the credit crisis,” said editor Brian Caplen.

“But finding improved ways to manage liquidity at Islamic banks, as well as harmonising Shariah and prudential compliance between institutions and markets, remain significant hurdles.”

GCC states accounted for $353.2bn or 42.9 percent of the global aggregate, while Iran remained the largest single market for Shariah-compliant assets, accounting for 35.6 percent of the total.

(Arabian Business)

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Ireland: Islamic banking system provides unique opportunity in tough times

IN the gloomy 1980s, Irish companies such as Avonmore and Dawn Meats created hundreds of jobs by operating a successful but unusual business in the Mayo town of Ballyhaunis: the slaughter of cattle according to the rules of Sharia law. Imams said their prayers as the cows were killed according to the rules laid down by the Koran.

Today, in the middle of another recession, the differences between Islamic and Christian beliefs offer another chance to a new generation of Irish people to create jobs, this time in Dublin's financial services sector.

The Department of Finance, the Revenue Commissioners and some of the country's leading accountants are already looking at ways to tap into the trillion dollar Islamic banking industry, which caters to a fifth of the world's population, according to a position paper drawn up by the department last month.

Islamic beliefs create two different opportunities for businesses in Ireland: the opportunity presented by the often well-off Muslim business people and doctors who live here and the opportunity presented to the Irish Financial Services Centre (IFSC) to become the European home to Islamic banks and investment funds.

The IFSC is already home to a few Sharia funds and the Financial Regulator set up an ad hoc team to specialise in the authorisation of Sharia funds and to foster familiarity between the regulatory system here and in Arab countries, Financial Regulator spokeswoman Jill Forde said this week. The Irish Stock Exchange also recently listed its first Islamic investment product -- a sort of Islamic bond -- but the market remains largely untapped despite Dublin's potential to become the European base for Islamic banks who want to offer funds, bonds, general banking and treasury services to Islamic companies.

"Starting from scratch is not a problem," says Jim McDonnell, a tax partner at PriceWaterhouseCoopers. For Ireland to succeed, we will need to make minor adjustments to the tax code and extend the network of double taxation agreements to countries in the Middle East, he adds. Ireland signed such an agreement with Bahrain recently and is in talks with Egypt, Saudi Arabia and Kuwait.

Expand

We must also be nimble. The biggest Islamic banks are in the Persian Gulf -- Dubai Islamic Bank, Kuwait Finance House and Saudi Arabia's al-Rajhi Bank -- but several other countries, notably Britain and Malaysia, are gearing up to be take a slice of the same cake. British Prime Minister Gordon Brown called two years ago for London to become the global centre for international Islamic banking and the country's Islamic banking sector is already bigger than Pakistan's and likely to expand further. Britain has six fully Sharia-compliant banks and 17 financial institutions such as the Qatar Islamic Bank have set up special branches or firms.

Some of these banks cater for Britain's large Muslim community, while others look after the sort of investment funds that the Government and Revenue Commissioners would like to see coming to Ireland.

While the Muslim community here is much smaller than Britain's (32,500 according to the 2006 census) it is expanding rapidly; jumping 70pc between 2002 and 2006 to become Ireland's third largest faith group after Catholics and Protestants. That community requires tailor-made banking that will either be provided by existing banks or by new institutions.

Non-Muslims in other countries have also been attracted by Islam's take on banking after the existing Western model was so discredited in the past two years. But despite the rising popularity of retail Islamic banks elsewhere, it remains difficult for Ireland's burgeoning Muslim population to access financial services here. Not one the 10 financial institutions listed on the Muslim Survival Guide for Northern Ireland and the Republic of Ireland website is based in the island of Ireland.

A seminar at the Islamic Cultural Centre of Ireland in the Dublin suburb of Clonskeagh last year urged local financial institutions to start offering mortgages and other financial services. Representatives from British-based Islamic banks gave presentations, but Dublin-based theologian Ali Selim emphasised the need for local institutions. It's an offer than has not yet been taken up, although Permanent TSB did consider such a move in the past.

To allow personal finance products for Muslims, we probably need changes in the rules governing lending here. The Sharia system for home buyers differs from the usual way of doing things here; rather than lend money to a home buyer and collect interest on it, an Islamic bank buys the property and then leases it to the buyer for the duration of the loan. The client pays a set amount each month to the bank, then at the end obtains full ownership. The payments are structured to include the cost of the house, plus a predetermined profit margin for the bank. Another popular financial services product is the credit card and here too the industry is coming up with solutions for Muslims living outside Ireland, but not inside the country. Muslim credit cards differ because the full balance must be paid off at month's end. The banks have devised a kind of commercial paper known as sukuk, which generates a predetermined return that is called a profit, not interest. It is tied to a specific asset such as a building and conveys ownership.

In Britain, Steven Amos, the Islamic Bank of Britain's head of marketing, recently told the London-based 'Times' newspaper that his bank is prospering as High Street banks alienate existing customers. "Our core business will always be Muslims, but the numbers of non-Muslims are really picking up. We've had massive interest -- and that's down to a number of reasons, all of which have kept us insulated from the credit crunch," he told the paper.

Those who have been working in Islamic banking for a long time feel vindicated. "The current financial collapse is an opportunity. The ugly side of Wall Street is exposed; it's always been there but covered by a layer of glamour that is now stripped away," according to Amr al-Faisal, a board member of Dar al-Mal al-Islami.

"We are more conservative and sober in our investments. That used to be considered a handicap. Now it's considered the height of wisdom."

Achampion of Islamic banking was the late Eddie George, who was governor of the Bank of England from 1993 and 2003. Nicknamed 'Steady Eddie' for the way he dealt with the aftermath of Black Wednesday in 1997, Lord Eddie George, as he became, is also remembered fondly by many in the Islamic finance industry in Britain for his determination over many years in pushing Sharia-compliant finance. In 2007, George recounted how he had been touched by the plight of one Muslim couple in Britain who had not been able to find a mortgage because of their religious beliefs, saying: "I couldn't think of any rational reason for this." It was under his promptings that the Bank of England began to consider how Islamic principles could fit with British law.

George was also instrumental in setting up a working committee, the Islamic Finance Advisory Group, to examine the challenges surrounding the introduction and expansion of Sharia-compliant finance in Britain in conjunction with a charity and the Union of Muslim Organisations in the UK and Ireland which helped to set the scene for Britain's rapidly expanding Islamic banking sector.

A pleasing example of how altruistic attempts to help ordinary Muslims get mortgages have repaid rich dividends for those who took the trouble to help their fellow citizens cope in a largely Christian society. It is also perhaps a lesson for George's newly appointed counterpart in Ireland, Professor Patrick Honohan, as he looks at ways of helping the struggling financial services industry.

(Thomas Molloy /Irish Independent)

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World halal standard plausible, Malaysia says

KUALA LUMPUR, Oct 29 (Reuters) - Malaysia hopes that Muslim countries can agree on which goods and products are halal, or acceptable to Muslims, a move that would boost the $2 trillion industry, although politics and interpretation of islamic law may complicate the task.

The Organisation of the Islamic Conference (OIC) is working on a single standard to be applied in its 57 member countries.

Agreement to regulate the halal industry, which ranges from financial institutions to cosmetics and meat, would help trade and speed up the certification for makers of halal products.

"Malaysia's halal certification is recognised worldwide so perhaps we can play an important role in creating a global standard," Malaysia's religious affairs minister Jamil Khir Baharom said in an interview on Thursday. "We need a halal certification that everyone can use easily."

The halal industry is based on a belief that Muslims should eat food and use goods such as cosmetics that are 'halalan toyibban', which means permissible and wholesome.

But Muslim jurists do not always agree on what is halal. Islam prohibits the consumption of pork and prescribes how animals must be slaughtered, but there has been debate on the acceptability of non-alcoholic beer, collagen and vinegar.

Rules are interpreted and enforced more strictly in some countries. Sudanese authorities have hauled up women for wearing trousers and a Malaysian woman has been sentenced to a beating for drinking beer, practices which are acceptable in some Muslim countries.

Jamil said Muslims generally agree on what is halal although some issues should be left to countries to decide. "In general, we don't have many differences in terms of products and food."

Some see politics as an obstacle as OIC members range from wealthy Saudi Arabia to poor countries like Somalia.

"Disagreement within the OIC is due to certain interests of certain countries," said Mohamad Akram Laldin, a religious scholar and legal expert. "Some people might have their own agenda and that might be the hindrance. They might want to push certain things from their view and not agree with others' views."

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Islamic finance and banking: Some basic principles and concepts

Islamic finance is a form of ethical investment and ethical lending. Under this system loans and investments are made Islamic finance is a form of ethical investment and ethical lending. Under this system loans and investments are made without interest. Ethical restrictions include prohibition on alcohol and gambling and the consumption of pork. Islamic funds never knowingly invest in companies involved in gambling, alcoholic beverages, or porcine food products. Elimination of "Riba" or interest is basic in all forms of Islamic financial system. Islamic banking follows the same principles. At the heart of Islam is a sense of cooperation -- to help one another according to principles of goodness and piety (but not to cooperate in evil or malice).

In essence, Islamic finance and banking aim to eliminate exploitation and to establish a just society by the application of the Shari'ah or Islamic law to the operations of banks and other financial institutions. To ensure compliance to the Shari'ah, Islamic banks use the services of religious boards comprised of Shari'ah scholars. Its practitioners and clients need not be Muslim, but they must accept the ethical restrictions underscored by Islamic values.

Islamic banking operates with the same purpose as conventional banking except that it operates in accordance with the rules of Shari'ah, known as Fiqh al-Muamalat (Islamic rules on transactions). Islamic banking activities must be consistent with the Shari'ah. Many of the principles on which Islamic banking is based are commonly accepted all over the world, for centuries rather than decades.

The principal source of the Shari'ah is The Qur'an followed by the recorded sayings and actions of Prophet Muhammad (pbuh) - the Hadith. Where solutions to problems cannot be found in these two sources, rulings are made based on the consensus of a community of learned scholars, independent reasoning of an Islamic scholar and customs. Such rulings must not deviate from the fundamental teachings in the Qur'an.

Islamic finance and banking were practised predominantly in the Muslim world throughout the Middle Ages, fostering trade and business activities. In Spain and the Mediterranean and Baltic countries, Muslim merchants became indispensable middlemen for trading activities. It is claimed that many concepts, techniques, and instruments of Islamic finance were later adopted by European financiers and businessmen.

Islamic banking operates on some basic principles which include:

l The Sharia'h prohibits the payment of charges for the renting of money (riba, which in the definition of Islamic scholars, covers any excess in financial dealings, usury or interest) for specific terms and also investment in businesses that provide goods or services which are forbidden in Islam (Haram, forbidden).

l The majority of the principles are based on simple morality and common sense, which form the bases of many religions, including Islam.

l The universal nature of these principles is immediately apparent even at a cursory glance of non-Muslim literature. Usury was prohibited in both the Old and New Testaments of the Bible, while Shakespeare and many other writers, particularly those writing in the 19th century, have attacked the barbarity of the practice. Much of the morality championed by Victorian writers such as Dickens -- ranging from the equitable distribution of wealth through to man's fundamental right to work -- is clearly present in modern Islamic society.

l Although the western media frequently suggest that Islamic banking in its present form is a recent phenomenon, in fact, the basic practices and principles date back to the early part of the seventh century.

l The main principle of Islamic Banking is "prohibition of riba" in all transactions and all types of investment and deposit.

Islam not only prohibits dealing in interest and investment in unlawful activities that Islam deems harmful to society, but also transactions involving excessive uncertainty (gharar) and all forms of gambling (maysir). Islamic banking is an instrument for the development of an Islamic economic order. Some of the salient features of this order may be summed up as:· Islam makes a clear distinction between what is halal (lawful) and what is haram (forbidden or unlawful) in pursuit of such economic activity. In broad terms, Islam forbids all forms of economic activities which are morally or socially injurious.· While acknowledging the individual's right to ownership of wealth legitimately acquired, Islam makes it obligatory on the individual to spend his wealth judiciously and not to hoard it, keep it idle or to squander it.

l While allowing an individual to retain any surplus wealth, Islam seeks to reduce the margin of the surplus for the well-being of the community as a whole, in particular the destitute and deprived sections of society by participation in the process of Zakat (a tax on wealth that is distributed to the needy).· Islam, through its laws of inheritance, seeks to prevent the accumulation of wealth in a few hands to the detriment of society as a whole.· Viewed as a whole, the economic system envisaged by Islam aims at social justice without inhibiting individual enterprise beyond the point where it becomes not only collectively injurious but also individually self-destructive.Islam has a unique theory on the theme of wealth, its ownership, distribution and social relationship. Islam enjoins that wealth must not be created for its own sake.

The theme of Islamic dispensation of wealth is treated as a deeply moral study of self and society. Islam gives precise moral injunctions as to what are, and are not acceptable kinds of wealth. These injunctions point out how individual preferences on wealth formation ought to be utilised within the social meaning. Profits are important as ends, but the means by which those profits are earned are even more important. Indeed, the reason for the emphasis in the Shari'ah on proper transaction is that Islam accords great importance to the economic welfare of society.Profit-and-loss sharing is the main concept of Islamic banking under Musharakah & Mudarabah mode of financing.

While Islam employs various practices that do not involve charging or paying interest, the Islamic financial system promotes the concept of participation in a transaction backed by real assets, utilising the funds at risk on a profit-and-loss-sharing basis. Such participatory modes used by Islamic banks are known as Musharakah and Mudarabah. This by no means implies that investments with financial institutions are necessarily speculative. This can be excluded by careful investment policy, diversification of risk and prudent management by Islamic financial institutions.The concept of profit-and-loss sharing in an enterprise, as a basis of financial transactions, is a progressive one as it distinguishes good performance from the bad and the mediocre.

This concept therefore encourages better resource management. The Islamic 'sukuk' system is similar to bonds in capitalist system, but in sukuk, money is invested in concrete projects and profit share is distributed to clients instead of interest earned.The investment must be ethical under Islamic banking financing method. The important principles for Islamic financial instruments for participation and investments that require strict adherence, while providing good returns, are:· Investments must be free of interest, speculation and gambling, all of which are considered as forms of exploitation;· Investments are made in permissible activities.Investments must be separately approved by an independent Shari'ah supervisory board to ensure Sharia'h principles are strictly adhered to and deviations and wayward business practices penalised, for example, Islamic finance requires penalties should be paid to charity. "The ethical principles on which Islamic finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service," the Vatican's official newspaper, Osservatore Romano, said in an article in its March 2009 issue. All products of Islamic banking must comply with Shari'ah, as determined by a competent Shari'ah supervisory board.

If a product's authenticity becomes doubtful, it will be the responsibility of the individual investor or consumer to determine on his or her own that the product complies with the principles and precepts of the Sharia'h.Islamic banking is growing at a rate of 10-15% per year all over the world. Islamic banks have more than 300 institutions spread over 51 countries, plus an additional 250 mutual funds that comply with Islamic principles. The relative stability of Islamic Banking institutions in current recession has received attention. Even the Vatican said banks should look at the rules of Islamic finance to restore confidence amongst their clients at a time of global economic crisis.

by Md. Touhidul Alam Khan (The Financial Express)

Md. Touhidul Alam Khan is the Executive Vice President, Corporate Banking Division of Prime Bank Limited and Associate Fellow Member of Institute of Islamic Banking and Insurance (IIBI),

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Significant Success For Malaysia In Islamic Finance, Says Prime Minister

KUALA LUMPUR, Nov 3 (Bernama) -- Prime Minister Datuk Seri Najib Tun Razak said Malaysia has achieved significant success in Islamic finance which at end June this year accounted for close to 19 per cent of the country's banking assets.

As at end-August, the Islamic capital market too had reached RM803 billion, representing 54 per cent of Bursa Malaysia's market capitalisation.

"Total financing now amounts to RM115 billion and constitutes 15.5 per cent of the total financing portfolio of the banking industry. Net non-performing financing remains low at 2.4 per cent," he said.

In his keynote address at the Sixth Annual Kuala Lumpur Islamic Finance Forum (KLIFF) here Tuesday, the Prime Minister said the country is also seeking to enhance its connectivity in Islamic Finance with other financial centres through Malaysia International Islamic Financial Centre (MIFC).

"For this purpose, Malaysia has entered into agreement via a memorandum of understanding with various jurisdictions for greater collaboration and engagement of mutual benefits in Islamic finance," he said.

He said Malaysia will continue to lead the way in expanding the outreach of Islamic finance, and therefore more MoUs signing with jurisdictions in other parts of the world are expected in the future.

In his address, Najib said Islamic finance was a strategic vital element in the world's recovery from a financial crisis that has shaken both finances and faith in banking institutions.

"Although Islamic finance has largely escaped the ravages caused by overzealous financial innovation and imprudent lending practices which were at the heart of the global financial crisis, we cannot afford to be complacent," he said.

He said it was imperative for the industry to draw upon the lessons learnt to ensure that it can avoid any such financial instability in the future.

Najib also highlighted several key drivers to ensure continuing resilience of Islamic finance in withstanding the impact of current and future crisis.

"Firstly, ensuring that innovation in Islamic finance remains grounded in Maqasid al Shariah (objectives of Syariah) which serves to anchor the business paradigm of Islamic finance in realisation of benefits to the people."

Then, innovation must also be supported by strong governance practices which hold true to the needs of Islamic financial institutions.

It must also be ensured that risk management systems have appropriate safeguards and keep pace with the sophistication of innovation in Islamic finance, the prime minister said.

There is a need to ensure a comprehensive and supportive infrastructure - a legal, regulatory and supervisory framework that addresses the unique elements of Islamic finance industry development.

"This needs to be additionally supported by institutional arrangements for expedient, effective and cost efficient resolution of troubled financial institutions and a financial safety net framework that encompasses the lender of last resort and a deposit insurance system," he added.

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Islamic Finance Players Urged To Lead In Attracting Fund Managers

KUALA LUMPUR, Nov 3 (Bernama) -- Islamic finance players must take the lead in further strengthening the architecture of the sector to attract global Islamic fund management companies to establish their operations in the country, said Minister in the Prime Minister's Department Tan Sri Nor Mohamed Yakcop.

He said players should continue embarking on extensive marketing as well as promotions as these efforts were particularly essential in creating attractive environment for the benefit of both parties.

"Vigorous efforts are required to drive innovation to meet the changing requirements and innovation is key to value adding the future of Islamic finance," he said at the KLIFF Islamic Finance Awards Dinner 2009 here Tuesday night.

"The greater challenge is to enhance our global position, particularly given the increasingly intense competition in this fast-growing segment of the international financial market," Nor Mohamed said.

Meanwhile, he disclosed that Malaysia's bond market like Sukuk has maintained its dominance, currently accounting for 58 per cent of total bond market, adding that sukuk issuance totalled RM6.4 billion with three large issues of between RM1 billion and RM2.5 billion so far.

"Up to October, Sukuk issuance totaled RM26.1 billion, accounting for 54 per cent of total bonds issued of RM48.6 billion," he said.

Nor Mohamed said the issuance of Islamic securities has also maintained its dominance with about 87 per cent of the listed securities on Bursa Malaysia being Syariah-compliant, which account for some 65 per cent of total market capitalisation.

On the unit trust industry, Islamic funds currently account for 12 per cent of the total net asset value of the industry and its growth has been encouraging, he added.

Later Nor Mohamed presented the KLIFF Award to the most outstanding individual for contribution to Islamic finance to Tan Sri Azman Hashim who is executive chairman of Amcorp Group Bhd and Sheikh Dr Mohamed Ali Elgari who is currently Professor of Islamic Economics at the King Abdul Aziz University, Saudi Arabia.

Meanwhile, the most outstanding institution for contribution to Islamic finance award went to Al Baraka Banking Group of Bahrain.

Other awards announced included the most outstanding Islamic Bank (Maybank Islamic Bhd), most outstanding Islamic retail banking (Bank Kerjasama Rakyat Malaysia), most outstanding Islamic investment banking (CIMB Islamic Bank Bhd), most outstanding Takaful company (Etiqa Takaful Mlaaysia Bhd), most outstanding Islamic fund manager (Public Mutual Bhd), most outstanding Islamic finance product (Bursa Suq Al Sila Commodity Murabahah House), most outstanding Islamic financing product (Air Asia's US$336 million French single investor leasing), most innovative Islamic project financing (Projek Lintasan Shah Alam's Sukuk al-Ijarah RM330 million and Sukuk al-Mudarabah RM415 million) while the most innovative sukuk issuance went to Petronas' US$1.5 billion Gold Global Sukuk.

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Countries Will Find Their Niche In Islamic Banking

KUALA LUMPUR, Nov 3 (Bernama) -- Malaysia's first mover advantage in the Islamic banking and finance industry will remain intact, said Standard Chartered Saadiq's Chief Executive Officer, Afaq Khan.

Malaysia is a long-term player in the industry and it is very established, he said.

"It has a deep Muslim population. It has the most developed local currency capital market and robust time-tested regulatory environment and as such carries tremendous reputation. The over 30 years of experience cannot be shaken in one day," he said.

On Malaysia's position with the entry of new players, Afaz Khan said Malaysia was not losing out to anybody in the world of Islamic banking and finance despite United Kingdom, Hong Kong and France having joined the bandwagon.

For instance, he said conventional banking is taking place in every part of the world but everyone has a unique proposition.

"Similarly, over a period, the Islamic banking and finance industry will also look at the advantages in each country, namely in terms of skills and infrastructure that already exist," said Afaz Khan.

On other developments, he said demand for Sukuk is back.

"Investors' interest in the Sukuk did not diminish," he said, adding that the Sukuk Index has rallied significantly.

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Maldives: Public considering bank interest as Riba

Minister of Islamic Affairs Dr Abdul Majeed Abdul Baaree has said that public has started to consider bank interest as Riba (usury, but literally means literally means increase, addition, expansion or growth.) and this was because Islamic scholars from abroad were brought to Maldives for religious sermons.

Minister Baaree said this speaking about different Islamic awareness programs initiated by the Ministry. He said since the last four years, a lot of work was done to advice people that bank interest was Riba but without any success until now. He added that sometimes when certain Bills are submitted to the People’s Majlis for debate, some Majlis members has advocated that if any bank issues interest than it would be considered as Riba and that this was the positive aspect of inviting foreign scholars for religious preaching.

Islamic Minister said that during the last year Pakistani scholars were invited to Maldives twice and they had spread awareness of Riba and they also spoke about the difference between modern and Islamic banking systems.

Minister Baaree said that they will continue to invite foreign religious scholars for special issues. Under their program of conducting religious awareness programs, he said that the ministry has so far published 3 books and more books will be published in the future.

(Miadhu)

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Shariah governance a challenge to Islamic banking

Oct 11, 2009 (Arab News)-- A number of statements, resolutions and judgments relating to Islamic banking that have been issued and passed during the last two years have rekindled the debate over the very nature of the Shariah governance process in the global Islamic finance industry.

These included Resolution 179 (19/5) on Tawarruq issued by the International Council of Fiqh Academy in April 2009; the statement issued by the Shariah Committee of the Accounting and Auditing Organization of Islamic Financial Institutions (AAOIFI) in Bahrain in February 2008 relating to musharaka and mudaraba sukuk; and the judgment of the Malaysian Appeal Court in April 2009 that the Al-Bai Bithaman Ajil (BBA) deferred payment contract as practiced in Malaysia is a valid Islamic sale contract.

It is true that no Islamic financial transaction can be closed without the sign-off of the Shariah Advisory Board as to whether the transaction or structure satisfies the tenets of Fiqh Al-Muamalat (Islamic law relating to financial transactions). In many markets, the reputation of the so-called top tier of international Shariah advisories do not mean much as retail customers in particular prefer to have the input of their local imam or Shariah scholar.

This is a potentially a major problem for the development of the sector because not every local imam or Shariah scholar is conversant with the rubrics of Fiqh Al-Muamalat, which is a highly complex yet under-developed area of Islamic jurisprudence.

The Islamic finance sector not only has a human capital development challenge but, perhaps equally importantly, also a Shariah advisory development challenge. While the universities and specialized academies are now starting to offer academic and training courses in this respect, they are still few and far between and their curricula are at best mixed and not quality controlled.

The failure to develop educational best practice and independent governance at universities in most Muslim countries has stunted the institutional development of these institutions, which has resulted in an unfortunate inertia that has failed to recognize the main and unique chance that Islamic finance brings to Muslim countries and societies. Malaysia is a notable exception, for which other country has set up three trusts with a combined volume of funds totaling 700 million ringgits dedicated to education in Islamic finance, the training of Shariah scholars for the sector and conducting research in Fiqh Al-Muamalat.

The International Centre for Education in Islamic Finance (INCEIF), armed with a trust fund of 500 million ringgits, has ambitions of becoming the INSEAD and Harvard Business School for Islamic Finance. Bank Negara Malaysia, the central bank's 100 million ringgits Shariah Development Fund aims to offer scholarships to aspiring qualified Shariah advisories both from Malaysia and abroad. The International Shariah Research Academy for Islamic Finance (ISRA), also with a trust fund of 100 million ringgits, specializes in conducting research in Fiqh Al-Muamalat and in compiling a database of fatwas (Islamic legal opinions).

Organizations such as the International Council of Fiqh Academy in Makkah, the Shariah Committee of Rabitah (World Muslim Congress) in Makkah, and the Shariah Committee of the AAOIFI in Bahrain are frontline organizations dealing with the issuing of fatwas and perhaps increasingly also debating the consequences of their opinions.

They are not training institutions nor do they have the capacity and independent governance structures to teach Fiqh Al-Muamalat.

Although there is a clamor for standardization or uniformity of Shariah interpretations, this is unrealistic given the various Madhabs (schools of Islamic law). In any case, even in conventional finance there is no uniformity of rules and laws, and can differ even within one country as in the US where the state laws on banking differ from each other.

The late Azharite Shariah scholar, Zaki Badawi, used to stress that it would be wise to remember that in Islam there is no Vatican. Diversity of Shariah opinions is a strength and not a weakness. Only that way the Islamic finance sector will thrive.

On the upside, there are signs that the Shariah governance process in Islamic finance is steadily evolving and gaining maturity with the latest call by prominent Saudi Shariah scholar and economist, Mohamed Elgari, for a scientific approach to Shariah compliance. This follows the recent call by another prominent Shariah scholar, Sheikh Esam Ishaq of Bahrain, that Shariah advisories serving the Islamic finance industry should be regulated.

Elgari has called on fellow Shariah advisories to adopt a scientific methodology in reaching their deliberations on Islamic finance. "To be respected," said Elgari, "Shariah scholars should follow scientific methods to reach their conclusions. We have seen many mistakes where declarations have been issued. Only the correct resolutions will prevail. Shariah is not a group of infallible people. It is a science. It requires methodology, and resolutions require peer review and market consultation."

Elgari is also a big supporter of the codification of Fiqh Al-Muamalat, which could contribute immensely to clarifying the rubrics and the contentious issues relating to products and services in the nascent Islamic finance industry. Similarly, he believes that greater transparency in the Shariah governance process, more professional articulation of the resolutions and statements, and prior debate and consultation between scholars and other stakeholders in the industry, could go a long way in mitigating the misconceptions and confusion that has arisen as a result of some of the recent Shariah rulings.

The market impact of these developments is real. Some bankers such as Mohammed Tariq, head of treasury at the Islamic Development Bank, agree that the AAOIFI Shariah Committee ruling is a marginal issue, but has contributed to the slowdown in the sukuk market.

Others such as Badlisyah Abdul Ghani, CEO of CIMB Islamic Bank, are less impressed: "The AAOIFI Resolution on musharaka sukuk," he wrote in the May/June 2009 issue of Islamic Banker, "is rightly based on the provisions of a particular School of Islamic Law. However, the resolution cannot invalidate musharaka sukuk transactions based on other schools of Islamic law. To generalize that musharaka sukuk as currently structured are not Shariah-compliant is unjustifiable from a Shariah perspective. In the Shariah governance process in Islamic finance it must be appreciated that all schools of Islamic law are valid and enforceable in their own right."

Another major development in August 2009 was the issuance by Bank Negara Malaysia of the first in a series of Shariah references. The first one, Shariah Parameter Reference 1 or murabaha Parameter (SPR1), will be followed by Shariah Parameters on ijarah (leasing), mudaraba (trust financing), musharaka (partnerships), istisna (construction financing) and wadiah (current accounts).

Bank Negara Malaysia stressed that "SPR1 outlines the main Shariah requirements in the contracts and provides examples, methods and models for practical application of the contract, and is issued as guidance and reference to all IFIs. It also marks a key advancement in the bank's efforts to promote greater harmonization in the development of the Islamic finance industry."

Some scholars stress that the Shariah governance process has also got to be pragmatic. The Islamic Fiqh Academy, for instance, recommends that "to ensure that Islamic banking and financial institutions adopt investment and financing techniques that are Shariah-compliant in all its activities, they should avoid all dubious and prohibited financial techniques. All transactions must conform to Shariah rules in order to ensure it meets the objectives of Shariah (Maqasid Shariah). In addition, such a move will ensure the progress and actualization of the socio-economic objectives of the Muslim world. If the current situation is not rectified, the Muslim world would continue to face serious challenges and economic imbalances that will never end. The council encourages the application of Qard Al-Hasan and establishment of Qard Al-Hasan funds by financial institutions to shift people who are in need of fund from products such as Tawarruq."

The concern raised by some of the Shariah scholars, who questioned this ruling, explains Mohammed Akram Laldin, executive director of ISRA (International Shariah Research Academy for Islamic Finance), the publisher of this e-newsletter, is based on the fact that most of the existing portfolios and products of IFIs globally are based on the mechanism of commodity murabahah based on the tawarruq mode. "If such transactions are deemed to be nonpermissible, then an alternative must be in place to facilitate such transactions which are worth billions of dollars," he added.

The suggested use of Qard Al-Hasan, adds Laldin, has yet to be tested in the market. "The very nature of the Qard Al-Hasan that specifically disallows the taking of any additional profit or increase over and above the principal given would impose a major restriction on the Islamic finance industry. In addition, the fee that can be charged on the implementation of the Qard Al-Hasan must be the actual fee incurred in administering the transaction," he explains.

Some Shariah scholars maintain that the imposition of such restrictions as the above might affect the rapid development of the industry going forward. Until Islamic finance achieves a reasonable level of total financial services market share, surely there has to be some room for "exceptional need" or necessity in the absence of viable alternatives. As long of course this need remains within the parameters allowed by the Shariah.

Scholars such as Sheikh Esam Ishaq of Bahrain would like greater inter-action with regulators. He stresses that scholars do engage with them in advising and counseling over matters relating to Fiqh Al-Muamalat. "If they are Muslim regulators, we do remind them that they cannot be ambivalent of the religious dimension of Islamic finance, which is faith-based," he says.

The Islamic finance market is growing in tandem with the increasing awareness of the general public of Islamic finance per se and of the Shariah supervision process over the last decade or so. People are now more demanding and want proper regulation of Shariah boards.

Sheikh Esam stresses that he is "definitely in favor of regulating Shariah advisories by some peer group or organization. But this process should be pragmatic. I agree that having the right education and skills sets to give Shariah advice relating to Fiqh Al-Muamalat are important aspects to this process. There should also be a limit to the number of Shariah boards any single advisory can sit on."

(Arab News)

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Using the Dinar & Dirham

Gold and silver are the most stable currency the world has ever seen.


From the beginning of Islam until today, the value of the Islamic bimetallic currency has remained surprisingly stable in relation to basic consumable goods:

A chicken at the time of the Prophet, salla'llahu alaihi wa sallam, cost one dirham; today, 1,400 years later, a chicken costs approximately one dirham.

In 1,400 years inflation is zero.

Could we say the same about the dollar or any other paper currency in the last 25 years?

In the long term the bimetallic currency has proved to be the most stable currency the world has ever seen. It has survived, despite all the attempts by governments to transform it into a symbolic currency by imposing a nominal value different from its weight.

Reliability

Gold cannot be inflated by printing more of it; it cannot be devalued by government decree, and unlike paper currency it is an asset which does not depend upon anybody's promise to pay.

Portability and anonymity of gold are both important, but the most significant fact is that gold is an asset that is no-one else´s liability.

All forms of paper assets: bonds, shares, and even bank deposits, are promises to repay money borrowed. Their value is dependent upon the investor's belief that the promise will be fulfilled. As junk bonds and the Mexican peso have illustrated, a questionable promise soon loses value.

Gold is not like this. A piece of gold is independent of the financial system, and its worth is underwritten by 5,000 years of human experience.

(Islamic Mint)

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What are the Dinar & Dirham

According to Islamic Law...

The Islamic Dinar is a specific weight of 22k gold (917.) equivalent to 4.25 grams.

The Islamic Dirham is a specific weight of pure silver equivalent to 3.0 grams.

Umar Ibn al-Khattab established the known standard relationship between them based on their weights: "7 dinars must be equivalent to 10 dirhams."

"The Revelation undertook to mention them and attached many judgements to them, for example zakat, marriage, and hudud, etc., therefore within the Revelation they have to have a reality and specific measure for assessment [of zakat, etc.] upon which its judgements may be based rather than on the non-shari'i [other coins].

Know that there is consensus [ijma] since the beginning of Islam and the age of the Companions and the Followers that the dirham of the shari'ah is that of which ten weigh seven mithqals [weight of the dinar] of gold. . . The weight of a mithqal of gold is seventy-two grains of barley, so that the dirham which is seven-tenths of it is fifty and two-fifths grains. All these measurements are firmly established by consensus." Ibn Khaldun, Al-Muqaddimah

How are the Islamic dinar used?

1.- The Islamic Dinar can be used to save because they are wealth in themselves.

2.- They are used to pay zakat and dowry as they are requisite within Islamic Law.

3.- They are used to buy and sell since they are a legitimate medium of exchange.

(Islamic Mint)

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The History of the Dinar & Dirham

In the beginning the Muslims used gold and silver by weight and the dinar and dirhams that they used were made by the Persians.

The first dated coins that can be assigned to the Muslims are copies of silver dirhams of the Sassanian Yezdigird III, struck during the Khalifate of Uthman, radiy'allahu anhu. These coins differ from the original ones in that an Arabic inscription is found in the obverse margins, normally reading "in the Name of Allah". Since then the writing in Arabic of the Name of Allah and parts of Qur'an on the coins became a custom in all mintings made by Muslims.

Under what was known as the coin standard of the Khalif Umar Ibn al-Khattab, the weight of 10 dirhams was equivalent to 7 dinars (mithqals)

In the year 75 (695 CE) the Khalifah Abdalmalik ordered Al-Hajjaj to mint the first dirhams, thus he established officially the standard of Umar Ibn al-Khattab. In the next year he ordered the dirhams to be minted in all the regions of the Dar al-Islam. He ordered that the coins be stamped with the sentence: "Allah is Unique, Allah is Eternal". He ordered the removal of human figures and animals from the coins and that they be replaced with letters.

This command was then carried on throughout all the history of Islam. The dinar and the dirham were both round, and the writing was stamped in concentric circles. Typically on one side it was written the "tahlil" and the "tahmid", that is, "la ilaha ill'Allah" and "alhamdulillah"; and on the other side was written the name of the Amir and the date. Later on it became common to introduce the blessings on the Prophet, salla'llahu alayhi wa sallam, and sometimes, ayats of the Qur'an.

Gold and silver coins remained official currency until the fall of the Khalifate. Since then, dozens of different paper currencies were made in each of the new postcolonial national states created from the dismemberment of Dar al-Islam.

Allah says in the Qur'an:

And amongst the People of the Book there are those who, if you were to entrust them with a treasure (qintar), he would return it to you. And amongst them is he who, if you were to entrust him with a dinar would not return it to you, unless you kept standing over him. Qur'an (3,75)

Qadi Abu Bakr Ibn al-Arabi, the greatest authority on Qur'anic Law wrote in his famous "Ahkam al-Qur'an" about this ayat:

"The benefit that can be taken from this is the prohibition of entrusting the People of the Book with goods".

Qadi Abu Bakr said: "The question concerning entrusting property is legislated by the text of Qur'an." This means that the ayat is a legal judgement of absolute validity and of the greatest importance to the deen.

Entrusting wealth to non-Muslims is not allowed, but furthermore, taking a non-Muslim as a partner outside Dar al-Islam (where we stand over them) is extremely restricted, because they might cheat or might use our wealth in forbidden transactions.

Since paper-money is a promise of payment, can it be permitted to trust the issuers while they hold the payment (our property) outside our jurisdiction? History has also demonstrated repeatedly that paper money has been a permanent instrument of default and cheating the Muslims. In addition, Islamic Law does not permit the use of a promise of payment as a medium of exchange.

(Islamic Mint)

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Need For Deeper Look Into Islamic Financial Products

KUALA LUMPUR, Oct 31 (Bernama) -- While Malaysia is doing a great job in promoting Islamic finance, the adaptation process to some of its products will need a deeper look or "a second visit", according to a renowned Muslim scholar.

Dr Hatem El-Karanshawy, founding dean of the Qatar Faculty of Islamic Studies, has voiced caution over the need to quickly Islamise products just to be at par with other conventional instruments.

"We should not rush to adopt products and Islamise them in a way because we would like the products to be on the same footing as other western institutions or non-Islamic banking that are not based on Islamic principles," he said.

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

He said that he had discussed the matter with those involved in the industry in Malaysia.

However, El-Karanshawy said Malaysia had done a great job in promoting the industry by hosting important international associations working for Islamic finance with the government giving a push in the social development of the system.

He dispelled the notion that Islamic finance is not progressive, saying that it is one of the fastest growing industries in the world.

However, he pointed out that some Islamic financial institutions are not adhering as they should be to the proper Islamic finance and this is where the real challenge is.

"If they can develop innovative products that would really correspond to the needs of society and adhere to the basic principles, then the growth would be faster and attract more financial institutions," he said.

On the notion that Islamic bank should not be profitable, El-Karanshawy said no one said that financial institutions in Islam should be charitable organisations.

"Yes they have to make profits but what type of profits? They have to make profits, they have to be successful. They are talking about corporate social responsibility after the aggressive movement of the market," he said.

This, he added, has been the misconception of Islamic finance.

Asked whether Islamic finance should be incorporated into the new global financial architecture, El-Karanshawy said the market then should be involved in social responsibility.

"If the financial sector job is financing investments, in the sense, it will study what's the money, where the money is going to and then have its returns based on fundamentals of investment and develop ways to share the risks, I think that is the direction that Islamic finance principles would help," he said.

He added that some elements for venture capital companies in the world could be easily adapted to accept or adhere to the idea of Islamic principles.

At the recent CNBC Global live debate in Doha, El-Karanshawy said current banking and finance had strayed from its function of being the "servant of the real economy" in facilitating productivity and development.

"People are talking about the secondary market, derivatives. Thinking about making profits rather than the real reason for making investments," he said.

With the problems posed by derivatives, El-Karanshawy questioned the action taken by the free market to address this.

Such innovations, according to him, have to be balanced and not risking investors' money.

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ISDA Writes Global Standards for Islamic Derivatives

Oct. 27 (Bloomberg) -- Global standards for Islamic derivatives contracts may be published as soon as December, helping companies and investors manage risk more effectively, according to the International Swaps and Derivatives Association.

“This is a real innovation in what could potentially be a huge growth area,” ISDA Chairman Eraj Shirvani said in an interview in Singapore yesterday. “Establishing market standards with the input of the scholars’ opinions, combined with the expertise and benefits of the ISDA framework, potentially opens up a significant array of new hedging possibilities for issuers and investors.”

The New York-based ISDA, which represents more than 830 organizations active in the $592 trillion derivatives market, started working on its Shariah-compliant master agreement with the Bahrain-based International Islamic Financial Market in 2006. The first version of their framework will focus on swaps for profit-rate and currency transactions, Shirvani said.

Islamic finance is the fastest-growing segment of the global financial system with $919 billion of assets under management, including $114 billion of Shariah-compliant bonds, known as sukuk, Prudential Financial Inc. said on Oct. 7. Assets will grow to as much as $1.1 trillion this year, Kuwait Finance House KSC forecast in July, as the world emerges from recession and a recovery in oil prices boosts Arab wealth.

Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates.

Bond Trading

“Investors will have the ability to trade in sukuk they perhaps wouldn’t have been able to before without a hedging tool available to them,” Angus Amran, treasury and capital markets head for Cagamas Bhd., Malaysia’s biggest buyer of home loans, said in a phone interview from Kuala Lumpur. The standards will “promote homogeneity and acceptance of Islamic financial products,” he said.

Because Muslim Shariah law prohibits payment or receipt of interest, speculation and uncertainty, many Islamic investors avoid derivatives. To ensure compliance with Shariah, new Islamic financial products must be vetted and approved by recognized scholars who are versed in its principles.

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

Oil Prices

Created in the 1970s after an almost 20-fold jump in oil prices over 10 years, the Shariah finance industry caters to the world’s 1.57 billion Muslims. From being almost non-existent a decade ago, the Islamic bond market has grown to $130 billion, according to Moody’s Investors Service.

Sukuk have returned 27 percent this year, an HSBC Holdings Plc index shows, after the market fell four times as much as conventional investment-grade corporate debt last year. The Dubai government set up a $2.5 billion Islamic bond program on Oct. 25 as the emirate seeks to sell international bonds for the first time in more than a year.

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

Government Efforts

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

Islamic financial institutions have been more resilient to the global financial crisis than their conventional counterparts because direct investment in subprime assets and derivatives is prohibited to them, Moody’s said in February.

“We have had many enquiries regarding derivatives and some people say this is important for the industry and some people have done without them,” Mohamad Alchaar, secretary-general of the Accounting & Auditing Organization for Islamic Financial Institutions, said in a phone interview today.

The Bahrain-based AAOIFI, which promotes industry standards, is not part of the ISDA’s project with the IIFM, Alchaar said.

Market Contagion

U.S. and European regulators have called for the adoption of central clearinghouses to reduce risk in derivatives after President Barack Obama’s administration described the contracts as a “major source of contagion” in the credit crunch.

The derivatives market relies on counterparties negotiating their own buy and sell orders, with no guarantees either will complete the trade.

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

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Ireland outlines tax laws for Shariah-compliant products

Ireland, like other European countries, is warming to Islamic finance and Dublin has emerged as an Islamic investment fund rival to the Channel Islands and Luxembourg. Indeed several Shariah-compliant funds are registered there, including the Oasis Crescent Global Equity Fund which is based in Dublin and so is the planned CIMB Global Islamic Equity Fund which is due to be launched over the next month or so.


Last week the Irish Revenue Service, the tax authorities, outlined in detail the tax treatment of Shariah-compliant products and structures for the funds, leasing and Takaful (Islamic insurance) industries.


Part 27 of the Taxes Consolidation Act (TCA) 1997 governs the taxation of funds. Chapter 1A of that Part applies the gross-roll-up taxation regime to all funds set up after March 31, 2000. According to the Revenue Service, the regime does not impose an annual tax on the profits of the fund but requires the fund/fund manager to deduct and account for tax out of payments made to unit holders - except for certain classes of unit holder who can, by use of a declaration procedure, be paid gross. Provided the fund is constituted in accordance with Chapter 1A, these arrangements apply irrespective of whether the fund is a Shariah-compliant fund or a conventional fund.


Any income received by a service provider, which is linked to the profits or performance of a fund should be treated as fee income where it relates to duties performed by the service provider. There is no specific VAT exemption for funds but would depend on the activities of the fund.


There is no stamp duty on the issuance or redemption of units/shares in a fund. In addition, the transfer of units/shares in a fund is not chargeable to stamp duty to the extent that the fund is an investment undertaking within the meaning of section 739B of the TCA 1997 or a common contractual fund within the meaning of section 739I of the TCA 1997.


As for Ijarah (leasing) transactions, the Irish Revenue Service says the provisions of the Taxes Consolidation Act 1997 will apply as if the Ijarah arrangement in relation to operating leases were a conventional operating lease arrangement, or if the Ijarah Muntahia Bittamleek in relation to finance leases were a conventional finance lease. Accordingly, a company that accounts for the transaction as a finance lease under generally accepted accounting practice may be taxed in accordance with the provisions of section 80A TCA 1997, in respect of relevant short term leases on making a claim and the Ijarah arrangement in relation to hire purchase, were a conventional hire purchase arrangement.


However, this confirmation is limited to Ijarah that refers to the leasing of plant and machinery and other chattels. It does not apply to the lease of immovable property.


Where the lease contract requires the lessee to make an additional payment toward a charitable cause in the event of a lease rental becoming overdue, the transaction will be treated as if the lessee had made the payment directly to the lessor and the lessor made the payment toward the charitable cause (which is in fact the normal sequence of payments). The lessee will be entitled to a deduction and the lessor will be treated as having received the income but will be entitled to a deduction under section 848A TCA 1997, subject to the provisions of that section.


There is no stamp duty for Ijarah (Leasing and Hire Purchase) arrangements where the asset involved does not comprise immovable property or an interest in immovable property. The VAT treatment of an Ijarah (Finance Lease and Hire Purchase) arrangement in relation to immovable property transactions will depend on the specifics of the agreements. Generally, such agreements are likely to be regarded as the supply of a freehold equivalent interest by the lessor to the lessee at the time the agreement is entered into. As regards arrangements which cover goods other than immovable property, the normal VAT rules concerning leasing (a supply of services), transfer of title (supply of goods) or hire purchase (a supply of goods), as appropriate, would apply.


Previous guidance given by the Revenue Service in relation to the taxation of conventional operating and finance leases and to hire purchase arrangements will, in substantially similar circumstances, also apply to the equivalent Ijarah transactions.


In relation to General Takaful and ReTakaful arrangements, contributions received by a Takaful provider from policyholders (Takaful members) and by a ReTakaful company from Takaful companies, as members of the ReTakaful arrangement, are to be treated as taxable income. Whether the income is on the trading account will depend on the facts and circumstances of the case.


The Revenue Service confirmed the deductibility of expenses incurred by a Takaful company or a ReTakaful company for management, marketing, and claims and commissions should be treated in the same way as such expenses were incurred by a conventional insurance or a reinsurance company with the same level of activity. Similarly, the deductibility of a contribution payment paid to a Takaful or a ReTakaful company is to be treated in the same way as an insurance or reinsurance premium for a conventional insurance policy or a reinsurance arrangement.


The provisions of sections 76 to 83 of the Taxes Consolidation Act 1997 apply in respect of the taxation of a Takaful or a ReTakaful arrangement as if such arrangements were conventional insurance or reinsurance arrangements respectively. In addition, the taxation of a Family (Life) Takaful company, which is an assurance company within the meaning of section 730A TCA 1997, and its members (policyholders) is to be determined under Chapters 4 and 5 of Part 26 of the Taxes Consolidation Act 1997. In this regard, an amount paid by an insured person is to be treated in the same way a payment under a conventional life assurance policy is. Similarly, a maturity or claim amount paid by a Family (Life) Takaful company is to be treated in the same way a claim or maturity payment under a conventional life assurance policy is.


As there are no existing Family (Life) Takaful arrangements in Ireland, the provisions relating to the taxation of old basis business should not apply to the Family (Life) Takaful arrangements.


Under the VAT Act 1972, Takaful (General and Family (Life)) and ReTakaful arrangements are exempt from VAT under paragraph (xi) of the First Schedule to the Act. But a liability to stamp duty under the Stamp Duties Consolidation Act (SDCA) 1999 will arise in relation to policies of insurance or policies of life insurance issued under Takaful (General and Family (Life)) and ReTakaful arrangements where the risk is located in Ireland.

(By Mushtak Parker/Arab News 2009)

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Islamic asset management needs products, distribution to thrive

MANAMA, Oct 25 — The infant Islamic management industry lacks a large enough range of products and distribution channels to increase to challenge its conventional peers in catering to Muslim wealth, experts said.

The nascent US$1 trillion (RM3.5 trillion) Islamic finance industry is walking a fine line between replicating conventional products and establishing its own genuine products that adhere to Islam’s prohibition of interest.

Asset management is seen as a sector where the industry could easily create products according to its own set of values, but it has not yet established the range of products to compete with conventional asset management.

There were some 750 Islamic mutual funds with less than US$50 billion under management as of the first quarter of 2009, a fraction of global asset management, and there are only 14 funds larger than US$500 million, according to a report published by Ernst & Young this year.

“The demand is there, but we need products, products, products,” said John Sandwick, an Islamic asset management consultant.

“Pension funds are coming up in the Middle East,” he said, adding that the nascent but strongly growing Islamic insurance industry, or takaful, particularly in Saudi Arabia, will also give a boost.

Experts said that it has been a weakness of Islamic fund products to focus on equities and real estate, not offering the comprehensive asset diversification of conventional funds that typically allocate a large portion to fixed-income investments.

“There is still a gap in terms of plain vanilla products,” said Mark Smyth, managing director at consultancy Failaka.

Saudi Arabia and Malaysia are the only two Muslim markets with strong retail banking.

Smyth said Islamic fund managers were caught between catering to the contested Malaysian retail market with very low margins and creating off-shore funds to target Gulf Arab institutional investors.

But these, including the multi-billion sovereign wealth funds managing the region’s oil wealth, are almost exclusively investing in conventional products, he said.

“To attract liquidity without existing clients is very difficult,” he said. “It’s very difficult for Islamic funds to get it off the ground, and they’re all saying it’s distribution.”

Islamic asset managers are prohibited from investing in companies that are highly leveraged and in certain sectors, such as financials, alcohol and gambling.

A bigger Islamic asset management industry would give a much needed money injection to the market for sukuk, or Islamic bonds, a key product of the industry.

Issuance fell by more than half to US$14.9 billion last year, Standard & Poor’s has said, and issuance in the Gulf Arab region this year has entirely hinged on issuance from governments and state-affiliated institutions.

This in turn would provide asset managers the much needed fixed-income component, for which they have in so far used short-term money market instruments such as murabaha.

Only a handful of sukuk funds exist today, Failaka’s Smyth said.

“There is this wall between the products and the money that needs to be torn down,” said Silke Bernard, a Luxembourg-based lawyer specialising in funds at law firm Linklaters said.

She said Islamic funds lacked access to the large distribution platforms used by asset managers and that Islamic funds often lacked the required minimum size of typically US$100 million and a track record of several years required by large asset managers. — Reuters

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Budget 2010: Malaysia To Drive Towards High-Income Economy

KUALA LUMPUR, Oct 23 (Bernama) -- Prime Minister Datuk Seri Najib Tun Razak has laid down a firm foundation to drive the nation towards embracing a high-income economy in the 2010 budget through bold proposals to raise private equity, invigorating the stock market, further developing Islamic finance while emphasising on micro-credit programmes.

Najib, who is also Finance Minister, said green technology would be promoted via a RM1.5 billion fund while small-and medium-scale industries development programmes and the construction sector -- both vital backbones to the economy -- would be given additional injection of funds.

As for the stock market, he said the government would liberalise the commission-sharing arrangements between stockbrokers and remisiers in two stages to enhance retail participation in the bourse.

Tabling the 2010 Budget in the Dewan Rakyat today, the prime minister said 100 per cent foreign equity participation would also be allowed in corporate finance and financial planning companies.

All public-listed firms too would be required to offer e-Dividend to shareholders to increase efficiency of the payment system.

Existing tax incentives for financial services, particularly Islamic finance, will be extended until 2015, with new measures put in place comprising a 20 per cent stamp duty exemption on Islamic financing instruments and deductions on expenditure incurred in the establishment of islamic stockbroking firms.

On the Ar-Rahnu micro-credit programme, the government will encourage all Syariah-compliant financial and banking institutions such as Bank Muamalat and Bank Islam to offer this scheme to assist those unable to secure financing from financial institutions and to obtain business capital fast.

To support implementation of private sector projects in regional corridors, the government will allocate RM3.5 billion next year as part of efforts to ensure they are developed according to schedule.

Planned investments totalling RM221 billion have exceeded the Ninth Malaysia Plan target of RM145 billion.

The government will issue 1Malaysia Sukuk (Islamic Bond) totalling RM3 billion to all Malaysians aged 21 and above, with a minimum investment of RM1,000 and a maximum of RM50,000 plus a maturity period of three years, with a five per cent annual return paid quarterly.

To further promote the construction industry, Najib said RM9 billion has been allocated to finance infrastructure projects including RM4.7 billion for road and bridge projects and RM2.6 billion for water supply and sewerage services.

He said RM899 million will be allotted for rail facilities, RM820 million for ports and sea services and RM276 million for airport projects.

Najib also said the maximum individual income tax will be reduced to 26 per cent from 2010 from 27 per cent as a result of which, the tax rate for cooperatives will be reduced to 26 per cent while the fixed tax rate for non-resident individuals will dwindle to 26 per cent.

This is to ensure the individual income tax remains competitive and continues the economic agenda based on creativity, innovation and high-value added, he said.

The government will also privatise companies under the Ministry of Finance Inc and other viable government agencies to enable them to operate more efficiently and ease financial dependence as part of efforts to gradually phase out involvement in economic activities especially in areas where it competes with the private sector.

In intensifying foreign direct investment, the Prime Minister said Khazanah Nasional Bhd and Permodalan Nasional Bhd (PNB) would join hands with foreign investors in education, tourism and infrastructure and allow them to have equity ownership in firms and joint ventures in local projects.

In focusing on niche areas, Najib said the tourism industry has been allocated RM899 million next year to initiate programmes including upgrading the quality of related infrastructures nationwide.

To promote the medical tourism industry, the government will raise the income tax exemption to 100 per cent from 50 per cent now to enable healthcare service providers to offer high-quality health services and attract more health tourists.

To raise computer literacy, the government proposed to give tax relief to broadband subscription fees by up to RM500 a year from 2010 to 2012 to individual taxpayers while civil servants can now apply for computer loans once in three years from five years before up to a maximum of RM5,000.

Najib said the government will also implement a more open automotive policy and will charge RM10,000 for each Approved Permit (AP) to distribute APs effective Jan 1 next year.

A portion of the fee will be channelled to the Bumiputera Development Fund in the automotive sector.

In ensuring fuel subsidies benefit the intended target groups, a fuel subsidy management system will be implemented in early 2010 by utilising the MyKad and existing infrastructures.

Najib said this approach of providing subsidies only for the targeted groups will also be used for other commodities.

Najib also announced that contributions to the Employees Provident Fund (EPF) can be increased voluntarily to 11 per cent again from eight per cent with immediate effect but it will be made compulsory in 2011 due to the expected recovery in the economy.

He said a basic insurance and takaful scheme will be offered to ensure the people continue to have access to motor insuranc protection as the current motor insurance scheme structure was rigid as it failed to take into account rising business costs and claims.

It will be introduced by mid-2010, he said.

The government also proposed that a five per cent tax be imposed on gains from the disposal of real property from Jan 1, 2010.

Meanwhile, the Government will allocate RM2.3 billion to build and upgrade infrastructures in rural areas.

Najib also brought cheer to civil servants when he announced a special contribution of RM500 to support staff recently will also be extended to all government employees from Grade S41 to Grade S54 to be paid in December.

This works out to RM400 million, he said.

In winding up his maiden budget speech themed "1Malaysia, Together We Prosper" which lasted for more than 90 minutes, the Prime Minister said the 2010 Budget was 11.2 per cent lower than this year's budget, amounting to RM191.5 billion.

Of the total, RM138.3 billion or 72.2 per cent was for operating expenditure and RM53.2 billion or 27.8 per cent for development expenditure.

Under the development expenditure, RM25.4 million has been provided for the economic sector to support the needs of infrastructure, industry and agriculture and rural development, he said.

In advancing towards a high-income economy, the Government will take a new approach based on innovation, creativity and high value-added initiatives.

These measures are expected to more than double the per capita income of the people in the next 10 years.

Najib also emphasised the private sector contribution in driving the economy will be intensified, with priority given to enhance domestic investment and encourage local firms abroad to remit their profits and re-invest in the country.

To provide a business-friendly environment and ensure an effective delivery system, individuals and companies are only required to use a single reference number in their dealings with government agencies.

"For individuals, the initiative known as MyID, uses MyKad number, while for companies MyCoID utilises the Companies Commission of Malaysia (CCM) business registration number," he said.

The Prime Minister also said a National Innovation Centre will be established, supported by a network of innovation excellence centres under the Science, Technology and Innovation Ministry and in collaboration with the Higher Education Ministry.

"This is part of efforts to intensify research and development initiatives and commercialisation. A strong foundation is needed for the economy to shift towards a high-income economy, he added.

(Bernama)

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Five Indonesian banks set to launch Islamic units

JAKARTA, Oct 23 (Reuters) - Five Indonesian banks including Bank Central Asia (BBCA.JK), the No. 3 lender, expect to launch standalone sharia units next year, boosting the sharia market in the world's most populous Muslim nation, officials said.

Industry officials said the revised law on value added tax, which removed double taxation in the Islamic market, would encourage more banks to set up Islamic banking subsidiaries. The double taxation had made Islamic transactions more expensive than comparable conventional deals.

"We hope that it would be easier for us to expand business and seek strategic partners. We also hope to grow faster and attract investors from Middle East," said Barno Sudarwanto, head of planning and development at the sharia unit of Bank Negara Indonesia (BBNI.JK), the No. 4 bank, which will be spun off.

Others due to set up separate sharia banking units include mid-sized lenders Bank Panin (PNBN.JK), Bank Victoria (BVIC.JK) and unlisted Bank Jabar Banten.

Investor Daily newspaper on Friday reported that a U.S. insurance firm had met with central bank officials this week to discuss the possibility of buying an Islamic-compliant lender in Indonesia, without giving details.

Conventional banks typically set up their Islamic subsidiaries by first setting up Islamic banking departments and later on converting them into separate Islamic banks. Others, including BCA, may acquire smaller conventional banks and turn them into Islamic subsidiaries.

"I expect to see more banks spinning off their sharia units as the new VAT law which scraps double taxation from sharia transactions will take effect next year," said Adiwarman Karim, chief of Karim Business Consulting.

The firm offers consultancy services on the Islamic market, including the establishment of Islamic banks.

Indonesia currently has five sharia banks and 24 commercial banks with sharia units as of August 2009, out of around 130 commercial banks operating in Southeast Asia's biggest economy.

ACQUISITIONS BCA vice president director Jahja Setiaatmadja told Reuters the bank was in the final stage of setting up such a unit, adding that operations may start in January. He declined to give further details.

BCA, with a stock market value of $12 billion, acquired Bank UIB in October 2008 and planned to convert the small lender into a sharia bank.

Ramzi A. Zuhdi, director in charge of Islamic banking at the Indonesian central bank, said it took about a month for banks to obtain approvals to convert their Islamic banking units into Islamic banks if all the administrative requirements were met.

In neighbouring Malaysia, seen as the Islamic financial hub in Asia, domestic banks can immediately convert their Islamic units operating under the parent companies into separate entities, said Vaseehar Hassan Abdul Razack, chairman of Unicorn International Islamic Bank Malaysia.
Riawan Amin, the chairman of Indonesia's association of Islamic banks (Asbisindo), said it often took longer than initially expected to launch Islamic banks in the country due partly to administrative reasons such as in recruiting employees.

(Reuters)

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Jordan to cover deficit by sukuk

Jordan is considering issuing Islamic debt, or sukuk, by the year end to help it cover part of its spiralling budget deficit that has worsened due to the global downturn, finance ministry officials said yesterday.

They said a finance ministry committee was set up to study how to introduce the Islam-compliant paper for the first time in the kingdom, which relies on conventional six-month, one-year and three-year maturity T-bills and bonds.

Jordan's monetary authorities have resorted this year to issuing more public debt instruments that are auctioned to local banks and financial institutions to fund government spending.

Economic decision makers are seeking more innovative ways to finance a deficit worsened by the inability to cut down a bloated public sector that drains finances by high spending on salaries, pensions and debt interest, a government official said.

"Sukuk instruments could help finance government projects and finance the deficit, especially since the government now is resorting only to lending from local banks," said a ministry official.

(Reuters)

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Syria - Devout Muslims Turn to Islamic Insurers

Ghayath al-Mahayni, 34, a Syrian employee in a private company, refuses to take part in any business that contradicts his religious beliefs.

So when he decided recently to take out a medical insurance plan, he chose an Islamic insurance company, which avoids practices forbidden by Islamic laws such as riba, meaning usury or lending money and receiving interest in return.

“I felt relieved when I got this insurance,” said Mahayni, who pays 300 US dollars a year for his cover with the Aqliah insurance firm.

“When I got sick, I didn’t have to pay exorbitant amounts of money for the treatment,” he added.

The private insurance business in Syria has developed strongly since the government decided in 2005 to end the state monopoly in the sector.

There are currently 13 private insurance firms. Two of them follow Islamic rules: Aqliah, launched in April, and the Syrian Islamic Company, which started operating in September. A third one is in the process of being established.

The companies offer a variety of products like insurance against car accidents, fire, and work-related injuries.

Syria also has three Islamic banks that were established in 2006 after the sector was opened to private enterprise. The banks, which are mostly owned by Syrian and Arab Gulf companies and businessmen, are financially linked to the Islamic insurance companies.

“Islamic insurance companies have been successful in attracting a section of the population keen on respecting Islamic teachings,” said Eyad Zahra, the Damascus-based general director of the insurance regulator.

He said he expected that in the medium term 30 per cent of people with insurance would choose Islamic insurance companies.

According to Ahmad Salouta, a professor of psychology at Damascus University, the interest in Islamic firms springs from the conservative nature of Syrian society, with many people making judgements not only on financial and commercial criteria but also on “a system of values, customs and religious beliefs”.

The idea behind Islamic insurance is to bring together a group of people with limited means to cooperate and help each other, said Abdelkarim al-Saqa, an official at the ministry of religious endowments.

The companies differ from other private firms by giving their clients the possibility to have their funds repaid if they do not make any claims.

Some strictly observant Muslims consider that paying fees to an insurance company, leaving it to fate whether they would receive benefits or not, could be regarded as a form of gambling, which they believe to be against Islamic principles.

Islamic insurance companies also generate income and profit by investing in projects that are deemed to conform to religious beliefs, Saqa said.

He added that these companies do not invest in areas that contradict Islamic teaching such as firms that sell liquor.

In addition to covering individuals against injury, they also distribute excess gains fairly between all the insured.

A council of four religious experts supervises the activities of the companies to make sure they comply with Islamic laws, Saqa said.

Despite their emerging popularity, the development of Islamic insurance companies like their private counterparts has been hindered by a general lack of awareness about their worth among Syrian people, experts say.

Some officials at the endowment ministry suggested that clerics should encourage people to join Islamic insurance companies during Friday sermons.

Another cause of the slow growth of the sector is the relatively high premiums they charge in comparison to average salaries, some observers say.

In addition, they add, the government has imposed restrictions on investments in these companies – foreign investments are limited to ten per cent of their capital – which could be deterring Arab investors from venturing into this field.

According to Firas al-Ashkar, an official at the state-run Syrian Insurance Company, this has benefited the new sector. By having limited investments outside Syria, insurance companies – especially Islamic ones - have shielded themselves from the effects of the international financial crunch, he argued. (Syria Briefing)

(Global Arab Network)

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Shari’a Standard No. 17 – Investment Sukuk

1. Definition of investment sukuk

Investment sukuk are certificates of equal value representing undivided shares in ownership of tangible assets, usufruct and services or (in the ownership of) the assets of particular projects or special investment activity.

2. Types of investment sukuk

Among the different types of investment sukuk are:

2/1 Certificates of ownership in leased assets

These are certificatesof equal value issued either by the owner of a leased asset or a tangible asset to be leased by promise, or they are issued by a financial intermediary acting on behalf of the owner with the aim of selling the asset and recovering its value through subscription so that the holders of the certificates become owners of the assets.

2/2 Certificates of ownership of usufructs

2/2/1 Certificates of ownership of usufructs of existing assets

There are two types:

2/2/1/1 Certificates of equal value issued by the owner of an existing asset either on his own or through a financial intermediary, with the aim of leasing the asset and receiving the rental from the revenue of subscription so that the usufruct of the assets passes into the ownership of the holders of the certificates.

2/2/1/2 Certificates of equal value issued by the owner of the usufruct of an existing asset (lessee), either on his own or through a financial intermediary, with the aim of subleasing the usufruct and receiving the rental from the revenue of the subscription so that the holders of the certificates become owners of the usufruct of the asset.

2/2/2 Certificates of ownership of usufructs of described future assets

These are certificates of equal value issued for the purpose of leasing out tangible future assets and for collecting the rental from the subscription revenue so that the usufruct of the described future asset passes into the ownership of the holders of the certificates.

2/2/3 Certificates of ownership of services of a specified party

These are certificates of equal value issued for the purpose of providing services through a specified provider (such as educational benefits in a nominated university) and obtaining the service charges in the form of subscription income so that the holders of the certificates become owners of these services.
2/2/4 Certificates of ownership of described future services

These are certificates of equal value issued for the purpose of providing future services through described provider (such as educational benefits from a university without naming the educational institution) and obtaining the fee in the form of subscription income so that the holders of the certificates become owners of the services.

2/3 Salam certificates
These are certificates of equal value issued for the purpose of mobilising salam capital so that the goods to be delivered on the basis of salam come to be owned by the certificate holders.
2/4 Istisna` certificates

These are certificates of equal value issued with the aim of mobilising funds to be employed for the production of goods so that the goods produced come to be owned by the certificate holders.

2/5 Murabaha certificates

These are certificates of equal value issued for the purpose of financing the purchase of goods through Murabaha so that the certificate holders become the owners of the Murabaha commodity.

2/6 Musharaka certificates

These are certificates of equal value issued with the aim of using the mobilised funds for establishing a new project, developing an existing project or financing a business activity on the basis of any of partnership contracts so that the certificate holders become the owners of the project or the assets of the activity as per their respective shares, with the Musharaka certificates being managed on the basis of participation or Mudaraba or an investment agency.

2/6/1 Participation certificates

These are certificates representing projects or activities managed on the basis of Musharaka by appointing one of the partners or another person to manage the operation.



2/6/2 Mudaraba Sukuk

These are certificates that represent projects or activities managed on the basis of Mudaraba by appointing one of the partners or another person as the mudarib for the management of the operation.

2/6/3 Investment agency Sukuk

These are certificates that represent projects or activities managed on the basis of an investment agency by appointing an agent to manage the operation on behalf of the certificate holders.

2/7 Muzara’a (sharecropping) certificates

These are certificates of equal value issued for the purpose of using the funds mobilised through subscription for financing a project on the basis of Muzara’a so that the certificate holders become entitled to a share in the crop according to the terms of the agreement.

2/8 Musaqa (irrigation) certificates

These are certificates of equal value issued for the purpose of employing the funds mobilised through subscription for the irrigation of fruit bearing trees, spending on them and caring for them on the basis of a Musaqa contract so that the certificate holders become entitled to a share in the crop as per agreement.

2/9 Mugharasa (agricultural) certificates

These are certificates of equal value issued on the basis of a Mugharasa contract for the purpose of employing the funds for planting trees and undertaking the work and expenses required by such plantation so that the certificate holders become entitled to a share in the land and the plantation.

(Accounting and Auditing Organisation for Islamic Financial Institutions-AAOIFI)

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Investors Urged To Use Malaysia As Base For Islamic Finance

Manama (Bahrain), Oct 16 (Bernama) -- In line with efforts to promote Malaysia as an Islamic financial centre, investors are being encouraged to use the country as a gateway for investment and base for financial activities.

"Let's jointly promote Islamic finance in the international market and the mutual acceptance of each others' financial products while marketing them together," the Raja Muda of Perak, Raja Dr Nazrin Shah ibni Sultan Azlan Shah, urged in an interview here.

He pointed out that Malaysia is generally a business friendly place and there are lots of attractive policies in place for foreign investors, wanting to invest in the country.

Raja Dr Nazrin Shah, who is also the financial ambassador of the Malaysia International Islamic Financial Centre (MIFC), led a roadshow delegation comprising regulators and industry players to Qatar and Bahrain from Oct 10-15.

Tracing the development of Islamic finance in Malaysia, he said in 1983, the first Islamic bank was established in the country and in the 90s, banks were invited to open windows within their system to start trading in Islamic products.

He said the MIFC intiative was established in 2006 to establish Malaysia as the centre for Islamic finance and to integrate the country within the Islamic financial community.

"We (Malaysia) now have an Islamic capital market and are the largest producer of Sukuk (Islamic bonds).

"I think 60 percent of Sukuk originates from Malaysia. We have Islamic insurance, re-insurance and asset management, developed over the last few years," he explained.

According to Raja Dr Nazrin Shah, the underlying principle of Islamic finance is basically to prohibit accessive risk taking and speculative activities while it is also sound finance.

He said non-Muslims are also beginning to use Islamic products, especially in Malaysia.

"I think we have progressed much and Malaysia is the centre for Islamic finance," he said, when asked how far had Malaysia come as an international Islamic financial base.

He also said there was a need for greater collaboration and dialogue to promote Islamic finance in international markets.

"These are the basic pillars that have to be considered on a continuous basis in order to promote Islamic finance, he added.

"In 1997, Malaysia went through a financial crisis and that was a wake up for us. Since 1997, we have strengthened our financial system while putting in place stronger regulatory and supervisory considerations, for greater corporate governance and best practices.

"Because of these reforms, it has put us in good stead in withstanding the present economic crisis," he said.

He said Malaysia like many other countries had been affected by the economic crisis.

"Basically,there has been a contraction in demand for our exports.But the financial system remains strong as our banks are very well capitalised," he highlighted.

Raja Dr Nazrin Shah said Malaysia is a very open economy and its growth has been export driven.

In the present situation, he said, demand in the developed economies and Europe is low and it might take some time for them recover from the crisis.

He stated that countries like Malaysia, which traditionally depend on exports, now have to look to alternative markets as in South East Asia and boost domestic demand.

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Sound Bites - The U.S Dollar by Dr Mahathir Mohammad

1. When I wrote on the need to change trading currency from the US Dollar to some other currency I was accused of being anti-West.

2. Since then there have been many articles on the need to use other currencies for trading and even for other purposes e.g. reserve currency.

3. Today the headline in the Star's foreign news reads, "US Dollar reaches breaking point - central banks flushed with record reserves are increasingly favouring the Euro and Yen" (read article here).

4. If I had been critical of the West, it was always for good reasons. They invented a lot of ways of making money for their rich investors without producing any goods or services or creating any jobs. Because of their subprime loans, hedge funds and derivatives, currency trading, etc. etc. they had undermined the real economy. Their bubble has now burst, spilling over the rest of the world. And Malaysia has been affected by their crisis for no good reason.

5. When in 1997 we asked the International Monetary Fund and the World Bank to stop currency trading, they laughed at us. Now they know that people whose knowledge of finance can be written on the back of a postage stamp are not so ignorant after all.

6. And when so many people urge that other currencies than the US Dollar be used for trade and reserves, they cannot all be anti-West. In fact these views are coming from the West.

7. Labelling ideas as anti-this and anti-that will get us nowhere. Call a spade a spade. Only then can you find solutions to problems.

(Dr Mahathir Mohammad)

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