Islamic banking less exposed to meltdown

Dhaka, Jul 17 (bdnews24.com)—Islamic banking is less exposed to risks like the global financial crisis as it is not based on predictions but on profit or loss sharing, a visiting top Sharjah Islamic Bank official says.

By definition, it cannot guarantee any interest or fixed rate of return on deposits like the conventional banking system, Ibrahim Iqbal Karmally, the head of trade finance for the Sharjah Islamic Bank, told bdnews24.com on Friday.

Karmally is visiting Dhaka to conduct a workshop on 'International Trade payment: Islamic Trade Finance' organised by the International Chamber of Commerce, Bangladesh.

The workshop was held on Friday at the city's China-Bangladesh Friendship Conference Centre.

"But basically, it is not away from the concept of return (interest ) to your clients," Karmally said, after the inaugural session.

Asked on the prospects of Islamic banking, he said that system is not based on predictions which gives it the advantage to less external shocks like the recent financial meltdown.

"The total GDP of the world is around $ 30 trillion where as the total credit market is $ 64 trillion. This gap is prediction."

Islamic banking is gaining popularity across the world as the global financial turmoil seems to have had limited impact on it, Mahbubur Rahman, ICCB president said at the launch of the workshop.

"Even the Vatican says banks should look at the rules of Islamic finance to restore confidence among their clients at the time of global economic crisis."

Islamic finance industry has been in an expansionary phase in recent years, banker Mamun Rashid told the audience.

"In fact, there is currently over $ 800 billion worth of deposits and investments lodged in Islamic banks, mutual funds, insurance schemes and Islamic wings of conventional banks.

Over 60 participants from 22 banks are attending the workshop designed to provide understandings of the Islamic international trade financing and the risks associated in the trade structure framework.

The Islamic banking industry started in the country back in 1983. Currently, of the 48 banks, six commercial banks run fully fledged Islamic banking.

In addition, 21 branches of 10 conventional banks are engaged in Islamic banking, according to central bank figures.

(bdnews24.com)

Islamic finance links:
Islamic finance consulting and training (GlobalPro Consulting- Kuala Lumpur,Malaysia)
Islamic finance consultant and trainer (Ahmad Sanusi Husain-Kuala Lumpur,Malaysia)

Islamic Finance to Reduce Fiscal Deficit in India

At a time when economic recovery needs more stimuli by the Government of India (GoI), there is also an urgent need to safeguard the economy from the debt trap because the GDP growth rate fell to 6.7% in 2008-09 from 9% in 2007-08; the debt servicing reached 58.83% of the total expenditure for the year 2008-09. It means maximum receipts are now spent for debt servicing which accounted for 15.87% of the Gross Domestic Product (GDP), while the debt receipts were 9.78% of the GDP in 2008-09. Even the interest payments were 21.39% of the total expenditures by GoI and 5.77% of the GDP in 2008-09. Notably the revenue deficit in 2008-09 is already 30% due to high debt serving ratio to total revenue expenditure.

In an attempt to find the actual reasons behind the high fiscal deficit, it is observed that the increased debt receipts by GoI to finance revenue expenditures (especially high debt servicing); increased subsidies on food, fuel and fertilizer; and rural development through schemes like NREGS, farmer’s loan waiving scheme and Sarva Shiksha Abhiyan are the three most important factors of high fiscal deficit. Since there is a need for more stimuli to counter recession in the economy, it is expected that the plan expenditures may further increase whereas due to recession, the revenue receipts may decline. This decrease in revenue receipts and increase in plan expenditure may increase the fiscal deficit to an unwanted high level. Working upon different options to reduce the fiscal deficit, it is found that Islamic finance can reduce the fiscal deficit even if revenue receipts decline and plan expenditures increase.

Islamic financial products have a great role to play in reducing the fiscal deficit in emerging economies by replacing the debt based investments for infrastructure with funds mobilized through equity based Government Securities for infrastructure projects. Let’s see how Islamic finance may help us reduce our present fiscal deficit.

Notably the total revenue expenditure is 142.92% of total revenue receipts reflecting 30.03% revenue deficits. The major cause of this high revenue deficit is high debt service ratio to total revenue expenditures. For a developing economy like India, in the proposed plan we project increasing capital expenditures, but in the revised estimates of 2008-09 budget, the revenue expenditure is 89% and the capital expenditure is just 11% of total expenditure; all due to high debt servicing ratio (66%) to total revenue expenditure. Notably the interest payment alone is 24% of total revenue expenditures. So, with capital expenditure being as low as just 11% of total expenditure and debt serving being as high as 59% of total expenditure, how can we go about planning to foster inclusive growth?

Debt Finances crossed the Planned Estimates:

The debt based finances for investments under 11th five year plan document was proposed to be 48.42% of total receipts for 2008-09, whereas the revised budget estimates reveal that the debt receipts were 96.38% of total capital receipts in 2008-09. This reflects our inability to mobilize targeted amount of non debt receipts, causing high fiscal deficit due to interest payments over borrowed debt receipts.

According to 11th plan documents, projected investments in 2008-09 should be of Rs. 321,579 crores while total plan capital expenditure in the revised budget observed just Rs. 41,301 crores. So the plan capital expenditure is just 12.84% of targeted investment in 2008-09. This shows our inefficiency to make budget development pro inclusive growth and to foster growth. So, it is better that GoI reduce debt borrowings which ultimately increases revenue deficits; and shift the focus on infrastructure investments to stimulate the economy at a time when GDP growth rates and employment growth rates are falling.

Actual Debt Receipts are 210% of the planned Estimates:

Since the revised estimates on debt receipts (Rs. 326,515 Crores) is already 210% of estimated requirements of debts (Rs. 1,55,704 Crores) by year 2008-09 as projected in 11th five year plan documents, the GoI should seriously think about this increased debt receipts. The funds utilized for debt servicing (Rs. 530,010 Crores) are already 162% of debt receipts to finance fiscal deficit (Rs. 3.26.515 Crores), the GoI should revisit its budgeting. How good is it to increase the debt receipts at a time when Indian industries are looking for more affordable credits from banks to meet the challenges after the global meltdown?

In year 2008-09 the deficit budget cost an amount of Rs. 192,694 crores to GoI which was paid as interest over the debt receipts borrowed to finance the deficit budget. This may be called as loss to GoI because had there been equity based receipts against debt receipts, GoI would have saved this amount.

Financing Fiscal Deficit through subsidized bank loans is not good


In the 11th five year plan document it was projected that by year 2008-09, to meet the proposed investment needs around 50% debt receipts worth Rs. 63,207 crores would be mobilized as domestic banks credit. However, the figures of revised budget estimates for 2008-09 states that market loans (amounting Rs. 261,972 Crores) are over 80% of total debt receipt by the GoI. The increased flow of subsidized bank loans to GoI for financing fiscal deficit is in fact creating problems for economic growth of the economy because it is creating hurdles for banks to increase the supply of cheaper credit to the private sector at a time when they need it to minimize their output cost and combat recession. It is observed that besides a fall in international demands, the availability of equity finance or cheaper credit sources have affected business confidence. The equity financial sources are drying up after reversal of capital flows from stock markets due to the global meltdown. External Commercial Borrowings (ECBs) and Export Credits have also declined. This has all affected the growth rate for industries.

Besides evaluating the fall in annual growth rate of Gross Domestic Product (GDP) from 9.0% in 2007-08 to 6.7% in 2008-09, it would also be important to analyze the growth trend for different industries during last year. The Manufacturing industry employing a majority of non agricultural-workers observed the deepest fall where annual growth rate fell to 2.4% in 2008-09 compared to 8.2% in 2007-08. Similarly the annual growth rate of agriculture, forestry and fishing fell to 1.6% in 2008-09 against 4.9% an year ago.

However, the increase in annual growth rate for Community, Social and personal services has remarkably increased to 13.1% in 2008-09 as compared to 6.8% in 2007-08 reflecting the impact of increased expenditures by the Government through financing schemes like NREGS. But it is important to note that such expenses have not only increased the fiscal deficit beyond the estimated budget for 2009-10, but only 9% of the Indian workforce engaged in Community, Social, and Personal services is expected to be benefited through it.

Thus the excess flow of subsidized bank credits to GoI for financing the budget deficit is ultimately restraining the economic growth.

Fearing an even higher fiscal deficit?

To reduce the fiscal deficit, it is simple to either cut the expenses or increase the revenues. But under present conditions, it is not possible either to increase the revenue receipts or to cut the expenditures because any increase in taxation will be disastrous at a time when recession has hit the business community and is already demanding for more stimuli to recover. When there is mounting pressure to increase the stimuli, the expenditure is suppose to increase further. Moreover the political promises (to provide subsidized foods and increase flagship programme expenses) by the new Parliamentarians before the election would also increase the plan expenditures. It all increases the possibility of any further increase in the current fiscal deficit.

What the Government should do now?

Considering the constraints to increase the revenue receipts and cut the plan expenditures to control fiscal deficit, the GoI needs to innovate new products for public finance. As almost 60% of total expenditures are made for debt servicing, GoI needs to substitute the debt receipts with equity funds. Since SEBI failed to protect the stock markets and NBFCs dealing in MFs and VCs are not in a position to mobilize huge long term investment funds, GoI needs to innovate Sovereign equities to mobilize adequate amount of non debt receipts for consolidation of public finance.

Considering the available options of capital sources in the international market, there are chances to get Islamic funds instead of mere equity funds from the Muslim countries. The equity funds are somehow different from Islamic Funds in the manner that when equity funds are mixed with debt funds, it doesn’t remain Islamic Funds.

Islamic Bond (Sukuk) for public finance in India:

Islamic economist Dr. Shariq Nisar in his paper ‘Islamic Bonds (Sukuk): Its Introduction and Application’ writes that the recent innovations in Islamic finance have changed the dynamics of the Islamic finance industry. Especially in the area of bonds and securities, the use of Sukuk or Islamic securities have become increasingly popular in the last few years, both as a means of raising government finance through sovereign issues, and as a way for companies to obtain funding through the offer of corporate Sukuk. Beginning modestly in 2000 with a total of 3 Sukuk worth $336 million the total number of Sukuk by the end of 2007 has reached 244 with over US$ 75 billion funds under management. Dr. Shariq summarizes the growth of Sukuk in following table.

Recent studies about Sukuk at http://online.wsj.com/ indicate that the Sukuk market has managed to come back modestly, but only for higher corporate issuers. IFIS data show that so far this year, more than $7.6 billion of Sukuk has been issued. Almost all this year's fund-raisers have been governments or government-related, the overwhelming majority from Southeast Asian countries such as Indonesia. The Middle Eastern market that drove the pre-2007 boom has also sprung into life this month with a $500 million issue for the government of Bahrain, which was boosted to $750 million because of strong demand. Thus there is no harm if GoI study the feasibility of innovating Islamic products to consolidate public finance in India.

Scope of Islamic Bond in India:

Since India houses the second largest Muslim population of the world, it is expected that at least 20% of Indian Muslims who are economically better off and desperately looking for real Islamic investments would grab it with enthusiasm. Unfortunately, so far India has yet to launch any real Islamic bond or Mutual fund because somehow all the so called ethical mutual funds have been mixing equity funds with debts.

Moreover unofficial sources indicate that considering the higher growth rate of India, some larger Islamic banks and financial institutions like Islamic Development Bank, Dubai Islamic Bank and others want to invest in Indian infrastructure but do not find suitable opportunities. So, we study the prospects of Islamic Bond (Sukuk) issues from GoI to finance infrastructures.

Fiscal deficits can be reduced by the Sukuk funds:

Since returns to Sukuk holders come from the actual returns from the project there is no chance of any interest burden on the economy. In case there is any loss in the specified project that will also be duly shared by the Sukuk holders. Thus Sukuk finance negates any possibility of interest burden on the economy and removes the chance of fiscal deficit due to interest payments on borrowed debts to finance infrastructural needs of the economy.

We have higher revenue expenditures due to higher debt servicing ratio to total expenditure. The problem is also that capital expenditure is much behind the target and growth rate can’t be fostered if we lack infrastructure. Thus while we need to stimulate the economy, it is better to introduce Sukuk by the Indian Government as it would not only help build infrastructure, increase capital expenses and stimulate the economy, but also reduce the revenue deficits, debt servicing ratio and revenue deficits.

Financing the deficit through more subsidized bank loans is creating problems for the banks to reduce lending rates for the private sector; as a result the private sector is getting lower amounts of credit at higher costs. Besides the recent global recession, this hardening credit supply is adversely affecting the growth rate of agriculture and the manufacturing industry, as reflected by negative growth rates during the last 6 months. Thus the finance deficit is not helping the majority of the Indian workforce as agriculture and manufacturing collectively provide livelihood for around 63% of the workers. So, to foster growth and ensure it is inclusive growth by way of providing sufficient and affordable credits to the private sector, the increased flow of subsidized bank loans to GoI should be reduced; otherwise the private sector will continue to suffer and we may not be able to attain a desirable growth rate even by increasing the fiscal deficits to stimulate the economy.

Since Sukuk is bounded with religious faith, the economic rationality is a secondary aspect in the decision making by the investors. The top priorities for Sukuk holders are to ensure that –

1. The returns are Halal (legal according to Islamic ethics) and investments will be used for building potential infrastructures for national development. Thus the investments and returns may draw tax incentives as well, which may stand as compensation against lower rate of returns.

2. The investments are meant for legal share (proportionate ownership) in the infrastructure.

3. There would not be any fraud or cheating by the fund managers and the investments would not be spent for promoting unethical and unlawful activities (as prohibited by Islamic ethics).

4. The investments will be in safe hands to carefully develop the assets and not manipulate them.

5. Even if the rate of returns are low as compared to market returns on other investments, the advantage of earning Halal income and the tax incentives on investments in infrastructure, would be some compensatory advantages to the Sukuk holders.

Since all sorts of returns on Sukuk are free from interest and does not exceed the actual asset value, whatever is paid as returns to Sukuk holders paid from the actual earnings from the asset created by that particular investment. There is no need to borrow any debt to pay Sukuk returns or repay the whole Shukuk funds because all the Shukuk holders collectively own the asset. They will thus proportionately gain or lose according to appreciation or decline in the value of that particular asset.

Indian Institute of Islamic Infrastructure Funds (IIIIF):

It is desirable that the GoI set an autonomous financial corporation as ‘Indian Institute of Islamic Infrastructure Funds’ (IIIIF) to grab the national and international market of Shariah Funds and mobilize adequate funds for the infrastructural investments in India. If IIIIF succeeds in soliciting cooperation with leading Islamic investment and development banks around the world, hopefully we may not need debt based receipts for deficit finance especially to meet the infrastructural requirements in India. The services of such banks may be solicited through GoI securities with assured lease rent after completion of particular infrastructure projects. Once India manages to mobilize project based Islamic Infrastructure funds, with such funds specific borrowed debts may be repaid to reduce the debt burdens.

Based on the projection by the Planning Commission of India, the estimated requirements of infrastructure investment is Rs. 20,56,150 crores. Considering the commercial aspects of different sectors, it is expected that IIIIF may help us arrange 93% of the total requirements amounting Rs. 19,12,420 crores for 11th five year plan’s infrastructural needs. Only the investment need of water supply and sanitation amounting Rs. 1,43,730 may not be sellable otherwise infrastructure projects of all other sectors seem sellable through equity based Government securities by IIIIF, upon which, any specific amount as % of investment could be assured as returns in terms of lease rents after completion of the projects. IIIIF along with RBI and the Ministry of Finance may design such equity based Government Securities (Sukuk). Further such securities may be traded in open market as RBI has recently framed policy for stripping and reconstitution of Government securities to enhance the trading scope of securities. However for Sukuk, there could be assured lease rent or dividend as rate of returns instead of interest.

Conclusion:

Islamic Finance in terms of Sukuk may help India raise required infrastructure investment funds for the Government and the corporate sector. It may solve the most threatening challenge of our economy by providing equity funds for infrastructure against Government Securities enabling GoI to reduce its fiscal deficit after repaying borrowed debts for capital expenditures through equity funds; and also by arranging equities for the corporate sector. It is hoped that the proposed IIIIF may reduce the fiscal deficit allowing India to foster inclusive growth as it carries following promising features –

1. Reduce the fiscal deficit of India even if the revenue receipts decline and we need to increase the plan capital expenditures to stimulate the economy.

2. Help India save up to 6% of our GDP in the amount we pay as interest over debt receipts.

3. Enable GoI to repay debt receipts borrowed for financing the infrastructure investments.

4. Provide desirable equity fund for the corporate sector at a time when external financial resources are dried up and the cost of domestic bank credits are not affordable.

5. Once GoI succeeds in arranging sufficient infrastructure funds through Sukuk and repays debts borrowed for capital expenditures, it would reduce the load of public finance on domestic banks thus enabling them to reduce the cost on credits specified under PSA for private sector enterprises.

There could be many more significanct outcomes of IIIIF if we resolve it without any prejudice for the sake of national interest.

(by Syed Zahid Ahmad / Asia EconoMonitor)

Islamic finance links:
Islamic finance consulting and training (GlobalPro Consulting- Kuala Lumpur,Malaysia)
Islamic finance consultant and trainer (Ahmad Sanusi Husain-Kuala Lumpur,Malaysia)

Islamic banking still almost unhurts by global economic meltdown: ICCB President

ICCB President Mahbubur Rahman on Thursday said, the relative stability of Islamic banking institution, in current recession has drawn attention of all concerned.

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. Available information says that about US$ 1 trillion of assets are managed according to Islamic investment principles.

ICCB President Mahbubur Rahman made the observation while inaugurating a day-long ICC workshop on "International Trade Payment: Islamic Trade Finance" at the Bangladesh China Friendship Conference Centre organized for the bankers here today, said a release of ICCB.

The topic of Islamic Finance has emerged in recent decades as one of the most important trends in the financial world. There has always been a demand in a number of countries for financial products and services that conform to the Shariah (Islamic law).

With the development of viable Islamic alternatives to conventional finance, Muslims are beginning to find Shariah compliant solutions to their financial needs, Mahbubur Rahman mentioned. The ICCB President said, it is evident that Islamic finance was practiced predominantly in the Muslim world throughout the Middle Ages, fostering trade and business activities. In Spain and the Mediterranean and Baltic States, Islamic merchants became indispensable middlemen for trading activities.

It is claimed that many concepts, techniques, and instruments of Islamic finance were later adopted by European finances and businessmen, he said.

It is estimated that Islamic Banking is growing at a rate of 10-15 percent per year and with signs of consistent future growth. It is understood that Islamic banks have more than 300 institutions spread over 51 countries, plus an additional 250 mutual funds that comply with the Islamic principles, the ICCB President added.

He stated that Islamic banking is now an issue of great interest for many including Western non- Muslims, because the system still remains almost unhurt by the onging global financial crisis. The Islamic banking industry in Bangladesh also continues to show strong growth since its inception in 1980's.

At present, out of 48 banks, 8 private commercial banks are operating as full- fledged Islamic banks. Besides, 21 branches of 10 conventional banks including 2 foreign banks are engaged in Islamic banking, he mentioned.

Chairman of ICCB Standing Committee on Banking Technique and Practices Mamun Rashid Said, besides its wide geographical scope, the expansion of Islamic finance has also been taking place across the whole spectrum of financial activities, ranging from retail banking to insurance and capital market investments. He observed that the global financial turbulence appears to have had a limited impact on the Islamic finance industry, which has been in an expansionary phase in recent years.

Iqbal Ibrahim Karmally, coordinator of ICC UAE Banking Commission and Head of Trade Finance at Sharjah Islamic Bank who conducted the workshop also spoke at the inaugural session. As many as 63 participants from different banks attended the workshop.

(The New Nation)

Islamic finance links:
Islamic finance consulting and training (GlobalPro Consulting- Kuala Lumpur,Malaysia)
Islamic finance consultant and trainer (Ahmad Sanusi Husain-Kuala Lumpur,Malaysia)

Maybank Singapore To Launch First Islamic Term Deposit For Retail Clients

SINGAPORE, July 16 (Bernama) -- Maybank Singapore will launch the first Islamic Term Deposit (Term Deposit-i) targeted at retail clients tomorrow, making it the first bank here to offer the Islamic banking product to that market segment.

As the first mover in the market, Term Deposit-i will pay profits upfront, the bank announced today, bucking the local trend of Islamic term deposits for high networth customers.

A similar product, Profit Now Account-i was launched by Maybank Islamic Bhd in Malaysia last May and it was well-received with more than RM1.3 billion total deposits to date.

In a statement here Thursday, the bank said Islamic banking products were sought after by local customers who were scouting for alternative investment avenues with the current change in investment landscape.

The bank is offering for a limited period, promotional rates of 0.6 percent, one percent and 1.4 percent for a tenure of three, six and 12 months respectively.

The minimum placement is S$10,000 (S$1=RM2.42) for a 12-month tenure or a minimum of S$25,000 for a three- and six-month tenure.

This deviates from the current available Islamic term deposit products in the market.

Some products require a minimum placement of US$500,000, catering only to the high networth segment.

The bank said Term Deposit-i was based on the commodity Murabaha principle, which was on a cost plus profit sale concept.

Under this concept, a specific syariah-compliant commodity will be identified and used as the underlying asset for the sale and purchase transaction between the customer and the bank.

Maybank Singapore currently offers other innovative Islamic banking products such as iSAVvy Savings account-i, a syariah-compliant online savings account.

The bank said since the introduction of the Islamic deposit products in 2005, it had seen an average year-on-year increase of over 40 percent in Islamic deposits.

This increase aligned with the global expected growth of over 40 percent to US$1 trillion by 2012, Maybank said.

Maybank Singapore Islamic banking head, Mohd Ismail Hussein, said the current market presented an opportune time to take on a back-to-basic approach.

"Consumers are on the lookout for an alternative to conventional products and this term deposit, being syariah-compliant may well match their needs," he said.

Mohd Ismail said Islamic banking was a fairly new concept in Singapore but was gaining momentum including from among the bank's non-Muslim Islamic banking customers.

"With Maybank being the market leader in Islamic banking in Malaysia, the operations in Singapore is in good stead to 'break the ice' between Islamic banking and the local retail market," he said.

Islamic finance links:
Islamic finance consulting and training (GlobalPro Consulting- Kuala Lumpur,Malaysia)
Islamic finance consultant and trainer (Ahmad Sanusi Husain-Kuala Lumpur,Malaysia)

Islamic Finance Market Requires Adaptability by Tech Vendors

The Islamic finance market, which has grown to $700 billion to $750 billion in assets, offers huge potential for technology vendors whose products can handle a diverse set of regulations, according to a report issued by research firm Celent.

“Because Islamic banking practices and regulations differ by region and country, key factors in a decision of which vendor to select are a solution’s flexibility and adaptability,” wrote Celent. “The core banking technology used by financial institutions is essential for meeting local customers’ needs; regulatory reporting, operational requirements and Shariah boards’ approvals.” Shariah refers to a code of law and conduct derived from principles set out in the central religious text of the Islamic faith, the Koran.

According to Celent, the largest growth potential for Islamic banking is in Turkey and Pakistan while Iran and Saudi Arabia are mature markets.

The Celent report evaluated nine Islamic banking software and service vendors: Infosys; International Turnkey Systems; Misys; Nucleus Software, Oracle, Path Solutions, SunGard; Tata Consultancy Services (TCS) and Tenemos. All of the technology solutions have multilingual and multicurrency functionality and accommodate the same Shariah-based products including Wadiah; Mudarabah; Murabahah; Musharakah; Ijara; Bai Salam; Istina’a and Sukuk. Of those Sukuk – debt contracts resembling Western-style securitizations – are the most popular.

Under Islam, interest is banned so Shariah-compliant products are often asset-based and share profits. Growth in the sector has been hampered by uncertainty over scholarly views on whether Islamic finance products truly comply with Shariah law and a lack of uniform interpretation which can make product development more expensive.

Shariah boards, which oversee adherence of financial practices to the Islamic code, are essential in the development of new products for banks and other institutions, according to the report. This can lengthen time to market for new products to be approved.

(Security Industry News)

Islamic finance links:
Islamic finance consulting and training (GlobalPro Consulting- Kuala Lumpur,Malaysia)
Islamic finance consultant and trainer (Ahmad Sanusi Husain-Kuala Lumpur,Malaysia)

Riba - Q & A Session with Muhammad Taqi Usmani

Islamic finance links:
Islamic finance consulting and training (GlobalPro Consulting- Kuala Lumpur,Malaysia)
Islamic finance consultant and trainer (Ahmad Sanusi Husain-Kuala Lumpur,Malaysia)

Brunei: Why Is There So Much Excess Of Zakat Funds?

Bandar Seri Begawan - His Majesty the Sultan and Yang Di-Pertuan of Brunei Darussalam yesterday questioned the existence of zakat or tithe collection funds, which amounted to over $100 million.

"What baffles me is that why there is an excess of so much in the funds?" His Majesty asked.

"If there is so much left in the funds, it must mean this is the balance left over after all the funds have been distributed to those who fit the categories of people considered poor and needy."

Delivering his titah at the National Disaster Management Council meeting yesterday, His Majesty asked whether the funds meant that there is no one left in the categories of poor and needy to request for financial assistance, resulting in the WO million worth of tithes.

"Is there really no one else in Brunei who deserves to receive a portion of these funds?" wondered His Majesty as he sought for answers from the relevant authorities in the meeting.

In this context, His Majesty said he would seriously focus on three significant categories of people who deserve to receive the zakat or tithe funds, namely the fakir (destitute and needy), miskin or poor and the algharimin for those who are under heavy debts.

"Is it true that Brunei has no more of these three categories of people that still need our assistance?" asked His Majesty.

His Majesty said that people who fit under the three categories still exist in our society, but asked why is there still so much balance in the funds.

"Why I raise this issue now is because I must simply remind you that poverty, if unchecked, can lead to disaster, aside from the compulsory law of zakat which must be given to those who deserve it and must not be held back," said His Majesty.

"Have we not heard of people committing various crimes due to desperation, people committing suicide because of poverty and even people converting their religion because of poverty."

"Is this not considered a disaster?' asked His Majesty, pointing out that this too can happen to those under heavy debts and the reason Allah (SWT) considered those in debt as one of the categories who deserve a portion of the funds.

"Praise be to Allah because so far, the Islamic Religious Council has approved the payment of debts for 190 people who fall under the A lgharimin category amounting to the sum of $ 2.377 million," said His Majesty.

This is only two million out of the $50 million which is still available. It is possible that there arc many still out there under the Algharimin category who deserve a portion of the zakat funds, said His Majesty.

"We should not underestimate the gravity of this situation as poverty can be considered a disaster in many aspects of the word.

"Disaster is not only floods, landslides or the existence of H1N1 flu. Disaster can exist in many forms," His Majesty added.

-- Courtesy of The Brunei Times

Islamic finance links:
Islamic finance consulting and training (GlobalPro Consulting- Kuala Lumpur,Malaysia)
Islamic finance consultant and trainer (Ahmad Sanusi Husain-Kuala Lumpur,Malaysia)

Islamic insurers work to build Saudi business

Islamic scholars in Saudi Arabia have long looked askance at the insurance industry. They fear it combines riba , or the collection of interest payments, with gharar , or gambling - both forbidden to the pious.

Saudi talk shows and websites abound with questions about insurance, particularly life assurance, which is still viewed with suspicion. But two recent changes have openednew possibilities in this conservative kingdom.

First, newly launched Islamic insurance products are beginning to catch on. Second, since joining the World Trade Organisation in 2006, Saudi Arabia has opened the industry to foreign investment in takaful , sharia -compliant cooperative insurance.

Now a board of Islamic scholars reviews each product and companies such as SABB Takaful, affiliated with HSBC, are coaxing consumers to buy insurance. Demand for Islamic insurance is brisk in the Arab Gulf, analysts say, particularly in Saudi Arabia, the largest economy.

Last year, the nascent insurance industry grew by 27 per cent to SR10.9bn in premiums last year from SR8.6bn in 2007, according to the Saudi Arabia Monetary Agency, the central bank that is also the insurance regulator. Health insurance premiums, which represent 44 per cent of the market, increased by 57 per cent to SR4.1bn. Automotive insurance, accounting for 46 per cent of the market, grew by 23 per cent.

"There is increasing awareness of insurance in the market," says David Hunt, managing director at SABB Takaful, which has 80,000 policyholders. "We see a long-term opportunity in bancassurance - selling insurance products along with bank products to provide customers with a one-stop shop."

Regulatory efforts are partially responsible for such growth. Last year, Sama expanded mandatory health insurance to cover all foreigners working in the kingdom and, now, Saudis working in the private sector. Vehicle insurance is mandatory for all drivers, Saudis included.

The government sees the insurance industry as part of a drive to create jobs for its young population while diversifying the highly energy-dependent economy.

Even so, the industry accounted for less than 1 per cent of Saudi Arabia's gross domestic product last year, partially due to unprecedented oil windfalls and partially to a reluctance to embrace insurance.

"Awareness and access to financial advisers remain one of the main obstacles," says Mr Hunt. "In the long term, people will become convinced of the importance of simple products like covering daily risks, travel insurance and home insurance."

Family ties and free education and healthcare provided by the state also hinder the development of the insurance markets, analysts say.

"There is serious debate to make health insurance compulsory for Saudi nationals," says David Anthony, a credit analyst at Standard & Poor's. "If this happens, Saudi Arabia will be one of the largest health markets in the world. But unless it is compulsory, people won't buy it."

Meanwhile, companies are working to comply with the new regime. Sama bars foreign companies from operating except through entities based in Saudi Arabia and majority-owned by a Saudi partner.

All insurers must adopt a co-operative insurance model, with separate shareholder and policyholder accounts, by which profits are shared with premium-payers. Basic insurers need a minimum capital of SR100m, while reinsurers need SR200m. Most of all, insurers must qualify for listing on the Tadawul, the Saudi stock exchange, which entails crossing substantial administrative hurdles, including complying with corporate governance regulations, market codes and employing a workforce that is 30 per cent Saudi.

Still, foreign companies are pouring into the kingdom, including Scottish Widows Investment Partnership, which is owned by Lloyd's Group and entered a partnership with Saudi Manar earlier this year. Their primary target is institutional investors, including banks, corporation and government funds and pension funds.

Many companies are eyeing energy sector insurance. However, Saudi Aramco and Sabic made arrangements with overseas companies long ago.

Some analysts suggest that bars on certain lucrative policies and the relative unpopularity of some lines, such as life assurance, constrict the market, creating risks that the increasing number of companies will saturate what is left over. Sama has pushed out several insurers, reducing the totalfrom 100 to 23 and analysts expect further consolidation.

John Sfakianakis, an economist in Riyadh, said: "Significant education will be needed, particularly since the home insurance market is barely tapped. But gradually the market will mature."

(By Abeer Allam/The Financial Times Limited 2009)

Islamic finance links:
Islamic finance consulting and training (GlobalPro Consulting- Kuala Lumpur,Malaysia)
Islamic finance consultant and trainer (Ahmad Sanusi Husain-Kuala Lumpur,Malaysia)

Dubai Islamic Bank Launches One-year Islamic Cert

DUBAI, July 14 (Bernama) -- Dubai Islamic Bank (DIB), the largest Islamic bank in the United Arab Emirates (UAE), on Monday launched its one-year Islamic certificate linked to the Crescent Commodity Twister Strategy developed by ABN Amro Bank, Emirates News Agency (AM) reported Tuesday.

This US dollar-denominated certificate, which offers investors ideal exposure to the global commodities market based on a strategy that has been designed to generate positive returns in both bull and bear-trending markets, seeks to generate 96 per cent capital protection upon maturity.

This certificate is issued by ABN Amro, which is 100 per cent owned by the Royal Bank of Scotland Group, and is available for subscription between July 11-August 15, 2009 with minimum investment of US$10,000 (Dh36,730).

Distributed by DIB's Wealth Management division, this fully Sharia-compliant product aims to benefit from the trends of the Rogers International Commodity Index (Rici) Enhanced ex-Lean Hog Index, which tracks agriculture, energy, industrial and precious metals commodities.

The underlying Crescent Commodity Twister Strategy aims to generate returns in any market condition by assuming long or short positions in the Rici at regular intervals.

Islamic finance links:
Islamic finance consulting and training (GlobalPro Consulting- Kuala Lumpur,Malaysia)
Islamic finance consultant and trainer (Ahmad Sanusi Husain-Kuala Lumpur,Malaysia)

Sukuk, the Way Forward in Emerging Markets

By Nathisha Maharaj
Senior Associate: Finance Projects and Banking
Cliffe Dekker Hofmeyr Inc

Recent innovations in Islamic finance have changed the dynamics of the Islamic finance industry, resulting in tremendous growth in Shari'ah (Islamic law) compliant, structured financial instruments such as Sukuk.

Shari'ah regards money as a measuring tool for value and not an asset. It prescribes that one should not be able to receive or generate income from money. This receipt or
generation of money from money (i.e. interest) is defined as Riba. Shari'ah strictly forbids Riba.

Sukuk is defined by the Accounting and Auditing Organisation of Islamic Finance Institutions (AAOIFI) as "certificates of equal value representing undivided shares in tangible assets,usufruct and services or the assets of particular projects or special investment activity".

Essentially, Sukuk is the Shari'ah-compliant equivalent of a bond.
A Sukuk structure operates on the principle that Sukuk holders each hold an undivided
ownership stake in an underlying asset. Sukuk holders are entitled to a share in the
revenues generated by such underlying assets, as well as being entitled to a share of the proceeds from the realisation of these assets. It is important that suitable assets are identified for purposes of investment (e.g. assets unrelated to industries involving alcohol,gambling or pork).

Types of Sukuk
Sukuk can take many forms depending on the type of Islamic modes of financing used in its structuring. The AAOIFI recognises 14 types of Sukuk, the most common of which are summarised below.

Al-ijarah Sukuk
Al-ijarah Sukuk (leasing notes) are issued where assets are sold by the issuer into a special purpose vehicle, then leased back for the duration of the leasing period. When the notes mature (i.e. when the lease period expires) the issuer has the right to buy back the assets.

Istisna'a Sukuk
Istisna'a Sukuk is used for the advance of funds in respect of real estate development, major industrial projects or heavy equipment such as turbines, power plants, ships or aircrafts. An Islamic financial institution (the investor) funds the manufacturer or contractor during the construction or manufacturing of the asset, acquires title to that asset and upon completion, either immediately passes title to the developer on agreed deferred payment terms, or leases the asset to the developer under an Al-ijarah Sukuk.

Murabaha Sukuk
Murabaha Sukuk is based on a 'cost-plus' financing model whereby a mark-up is added to the selling price of an item with a deferred payment structure. In practical terms, the financial institution concerned would take ownership of the goods or assets for onward sale to its client at a price. The price would include a profit margin on the goods or assets. The financial institution will therefore amortise its cost and return over the period of instalments.

Salam Sukuk
Salam Sukuk refers to a sale where the seller undertakes to supply a specific commodity to a purchaser at a future date, which is paid for in cash and in advance. As a form of financing,the purchaser is able to acquire the asset at a discounted price and subsequently sells the asset upon delivery.

Although this type of 'forward contract' would in principle be forbidden under Shari'ah, Salam Sukuk attaches certain strict conditions aimed at eliminating uncertainty, thereby establishing Shari'ah compliance.

The way forward
Sukuk has proved viable as an alternative to mobilise medium- to long-term savings and investments from a huge investor base. It is expected that the development of various Shari'ah-compliant financial structures, such as Sukuk, will encourage Muslims to participate in financial markets, and will be instrumental in expanding these markets, particularly in emerging countries.

Islamic finance links:
Islamic finance consulting and training (GlobalPro Consulting- Kuala Lumpur,Malaysia)
Islamic finance consultant and trainer (Ahmad Sanusi Husain-Kuala Lumpur,Malaysia)

Islamic finance: An introduction

By Ben Sandstad and Hagbarth Strom (Australia)

Key Points:
Islamic finance is premised upon the belief that commercial activity should be beneficial to society and reflect sound moral and ethical standards.


With the global financial crisis constricting the availability of capital, borrowers need to consider all options available for their financing needs. While these options typically take the form of conventional banking and capital markets options (whether domestic or international) alternative sources of financing are also being scrutinised. One such alternative source is Islamic-compliant financing (Islamic finance).

Islamic finance has in recent times been one of the most dynamic sectors of the global financial industry. As of June 2008, the Islamic financial industry, including Islamic banks, mutual funds, insurance schemes and Islamic branches of conventional banks, was estimated to be worth around US$800 billion.[1] There are more than 300 Islamic banks operating worldwide and more than a fifth of the world's population are Muslims.[2] While not immune to the global financial crisis, Islamic finance appears to have suffered less than the "conventional" international finance market. The Gulf region has to some degree been cushioned from the global economic crisis by funds accumulated during the oil boom, although the recent dive in oil prices has reduced this cushion.

Islamic finance is seen as a viable alternative for Australian borrowers, given Australia's proximity to several of the most populous Muslim countries in the world, notably Indonesia, Malaysia and Brunei, in addition to Australia's rich asset base and stable economy.

This is the first in a series of articles that will look at Islamic finance as an alternative for Australian borrowers and consider the principles underpinning Islamic finance, the most prevalent structures used in Islamic finance in both the structured finance and capital markets contexts, and structural issues for Australian borrowers when accessing the Islamic finance market.

Background to Islamic finance and Shariah law

While Islamic finance methods were widely practiced across the Middle East from the 7th century (when the Prophet Mohammed lived) onwards, modern Islamic finance only really started in the early 1970s with the establishment of the first Islamic banks.

Islamic finance is designed to allow Muslims to pursue their business and financial activities within the context of their religious values without violating fundamental Shariah principles. As such, Islamic finance is financing which complies with the principles of Islamic law, known as Shariah.

Shariah is considered the legal framework of Islam and governs all aspects of a Muslim's life, from moral and spiritual obligations to business and banking activities. Shariah law is derived from several sources, but the most important of these is the Quran, the holy book of Islam, as it was revealed to the Prophet Mohammed. The second and third sources of Shariah are the Sunnah and Hadith. The Sunnah can be described as the sayings and actions of the Prophet Mohammed, while the Hadith are the written records of the Prophet Mohammed's words and deeds. The extent of the contribution of Hadith to the Sunnah is disputed among Islamic scholars and, while the terms are sometimes used interchangeably, they are considered separate sources of Shariah. Other secondary, but nonetheless important, sources of Shariah include the Sahaba (the sayings and statements of the earliest converts to Islam) and Fiqh (Islamic jurisprudence).

Islam is divided into two main denominations, Sunni and Shia, and while we will not delve into the distinctions in this article, it is important to remember in the context of Islamic finance that there are certain differences between these denominations.

A great deal of religious jurisprudence, interpretation and scholarly work on Islamic finance stems from the four Sunni schools of thought, the Hanafi, Maliki, Shafi and Hanbali schools. The followers of these four schools have the same basic belief system but diverge in certain ways in their interpretation of Shariah, thus at times leading to varying conclusions on Islamic finance structures and transactions.

Participants in Islamic financing transactions can, however, obtain comfort as to the Shariah compliance of an Islamic finance transaction. A committee of Shariah scholars will consider the transaction and issue a fatwa (judgment) on the transaction's Shariah compliance.

Fundamental Shariah principles in Islamic finance

Islamic finance is premised upon the belief that commercial activity should be beneficial to society and reflect sound moral and ethical standards. Three broad principles must be borne in mind when discussing Islamic finance: the role of money, the importance of assets as a subject of investment and the principle of risk-sharing.

Money has no intrinsic value in Islamic finance. Rather, money is considered merely a medium of exchange and cannot by itself be a subject matter of trade. Profit can only be generated based on the production or sale of something having intrinsic value or utility (and not through the exchange of money alone). Therefore, Islamic banks cannot provide conventional finance products.

Islamic finance requires an asset basis. There must be an actual asset which is the subject of the finance contract. Unlike Western banking, where financial transactions are largely debt-based and interest-bearing, Islamic finance relies on structural arrangements of asset creation, transfer and ownership between borrowers and lenders.

The principle of profit- and loss-sharing is considered to create a proper balance between lenders and borrowers and is an important tenet of Islamic finance and necessarily present in all Shariah-compliant transactions. Shariah requires that parties to a transaction act in a just, fair and ethical manner with one another. Financial exploitation by one party of another is prohibited and the parties to a transaction must share risk in a reasonable manner. In order to receive a return, one must take part in the real risk involved in the production of such return. Such profit- and loss-sharing creates a real linkage between the purpose of the financing and the outcome. This can be contrasted with conventional practices of separating risk from ownership and outcome.

In addition to these broad principles, there are certain well publicised prohibitions in Islamic finance that must be adhered to:

Interest (Riba)

The prohibition of riba (the generation of money from money or, simplistically, interest) is arguably the most important principle of Islamic finance and flows directly from the above principles. Any return on funds provided by a financier needs to be earned by way of profit derived from a commercial risk taken by the financier. By contrast, conventional interest is charged irrespective of the outcome of a venture and is considered a return on money simply for use of money. Should the borrower's business venture fail, the borrower would still be liable to the lender for interest payments. This disconnect between financing and the underlying business is not considered appropriate by Shariah.

Uncertainty (Gharar)

Another important prohibition in Islamic finance is gharar, generally translated as uncertainty. Specifically, gharar is uncertainty as to a fundamental term of the contract, such as subject matter, existence of object, price or time for delivery. Transactions that have excessive risk due to uncertainty around key terms are forbidden by Shariah. For example, gharar is often observed within derivative transactions, such as forwards, futures and options, with the result that in Islamic finance most derivative contracts are prohibited due to the uncertainty involved in the future delivery of the underlying asset. Insurance is another area affected by gharar and specific Islamic insurance structures (Takaful) have been developed as a result.

Gambling/excessive speculation (Maisir)

The prohibition of maisir covers gambling and other games of chance, such as lotteries and betting on races. While general commercial risk is permissible, forms of speculation which are regarded as akin to gambling are prohibited. Speculative trades where there is little or no certainty as to the outcome, such as currency market speculation or investment in derivatives, would not be permitted. Where the distinction between general commercial risk and speculation is not clear the commercial substance of a transaction will be analysed. Whilst distinct concepts, there is some degree of overlap between gharar and maisir.

Unethical investments (Haram)

Dealings in certain areas such as alcohol, drugs, pork products and adult entertainment are considered unethical and are prohibited, or haram. The application of this principle may be proportional to the level of prohibited activity, although different Islamic scholars vary in their interpretation of this principle. For example, while financing an alcohol distillery would be prohibited, financing a hotel that incidentally generates income from alcohol sales may, depending on the proportion of revenue from the alcohol sales, be permissible.

Islamic financing techniques

A number of techniques have been developed which comply with Shariah principles and allow Muslims to participate in financings. We will cover five of the most common structures in our series of articles on Islamic finance.

These principal structures are:

(i) Ijara: this is a lease arrangement whereby a financier purchases and leases to the customer a specific asset in return for a rental fee. Similar to conventional leases, the Ijara and can be structured as a finance lease or an operating lease;

(ii) Murabaha: this is a purchase and resale arrangement, whereby a financier purchases goods as requested by the customer and sells them to the customer on a deferred payment basis incorporating a mark-up;

(iii) Musharaka: this is a partnership arrangement under which two or more parties establish a joint commercial venture, contribute capital and labour, and share the profits and losses;

(iv) Mudaraba: this is an investment or partnership whereby one party provides capital (rab al-maal) and the other party provides labour (mudarib). Unlike in the musharaka structure, where both parties are liable for any losses, in a mudaraba structure any loss is borne by the investor only; and

(v) Istisna: this is a contract of sale for specified items which are yet to be manufactured or constructed.

Often, Sukuk (Islamic bonds) are referred to as another Islamic financing structure. Sukuk are capital market securities, taking the form of trust certificates or notes representing a proportional or undivided ownership interest in an asset or pool of assets. Sukuk are used in combination with the Shariah compliant financing techniques described above to produce a Shariah compliant capital markets instrument to allow investment in underlying assets.

By the end of 2007, outstanding sukuk globally exceeded US$90 billion.[3] Gross sukuk issuance increased dramatically up to 2007, from US$7.2 billion in 2004 to almost US$39 billion in 2007.[4] While issuance declined significantly in 2008 to US$14.9 billion, the sukuk market attracted the same number of issuers as in 2007 and current estimates of the pipeline of sukuk range around the US$45 billion mark.[5]

Unlike conventional bonds sukuk do not pay interest but generate returns through actual transactions based on the shariah-compliant financing structures described above. While a conventional bond is a loan of money creating a creditor-debtor relationship, an Islamic bond represents an ownership stake in an existing asset. Thus, while trading in conventional bonds is a sale of debt, trading in sukuk generally equates to a transfer of ownership interests.

In subsequent articles we will discuss each of the above financing structures and how they are implemented in the banking market as well as in the capital market (using sukuk).

[1] Jobst, Andreas ; Kunzel, Peter ; Mills, Paul S. ; Sy, Amadou N. R. "Islamic Bond Issuance - What Sovereign Debt Managers Need to Know" Policy Discussion Paper No. 08/3, July 2008, International Monetary Fund, p 3.

[2] The CIA World Factbook (accessed on 22 April 2009 - https://www.cia.gov/library/publications/the-world-factbook/geos/xx.html)

[3] Jobst, p 4.

[4] Ibid.

[5] "Sukuk Issuance Fell Dramatically in 2008 but Long-term Market Prospects are Good, Says S&P" (accessed on 27 April 2009 - http://www.islamicfinance.de/?q=node/176)

Islamic finance links:
Islamic finance consulting and training (GlobalPro Consulting- Kuala Lumpur,Malaysia)
Islamic finance consultant and trainer (Ahmad Sanusi Husain-Kuala Lumpur,Malaysia)

UAE's Islamic financial firms to bring changes in Canberra's financial services sector

The first Islamic financial Services Mission of the UAE to Australia ended successfully and the Dubai Export Development Corporation is expecting new business opportunities for the Islamic Finance sector as a result of the trade mission.

UAE's Islamic financial firms, part of the delegation to Australia, have met with the Treasury officials in Canberra to discuss the current rules governing its financial services and incorporate Islamic financial products.

Jointly organised by EDC and the Australian Trade Commission (Austrade), the Trade Mission delegates are seeking to encourage changes in Australia's federal taxation which will allow Islamic financial products to be treated at par with conventional financial products. The Australian financial system, like most in other parts of the world, is based on the principle of payment and receipt of interest that disadvantages Shariah compliant financial products.


'One of the important aims of this mission is to initiate a dialogue between UAE's Islamic Financial firms and the Australian authorities so as to discuss changes that will allow Islamic Firms to be established in the country and to be treated on an equal footing with conventional financial firms,'



said Engineer Saed Al Awadi, Chief Executive Officer, EDC.

'Australia, with a Muslim population of about 400,000 people and growing at 20% per year, is an attractive market for UAE's Islamic Financial Firms. It is estimated that the annual household purchasing power of Australian Muslims is in excess of $3.3bn. Of course, Islamic Finance is not only limited to Muslims but is also popular to non-Muslims such as in the case of Dubai,' he added.

With a federation of six states and two territories, Australia levies state and federal taxes hence, Islamic financial firms have to overcome both of them. This means that for Shariah compliant products such as Murabaha mortgages tend to pay stamp duty, the most important tax at the state level, twice ie at the time of purchase and then when the loan is paid off. This adds to the borrower's burden and makes Shariah financial products uncompetitive.

However, some states in Australia such as Victoria have approved the State Taxation Act (Amendment) Act 2004, through the State Legislative Assembly and Legislative Council, which abolished double stamp duty on Islamic home finance. Other states are also considering making similar changes to their state taxation in order to accommodate Shariah compliant home finance.

Another example of double taxation is the Islamic trading of commodities requires a physical holding of the asset, which is very different from conventional commodity trading whereby the asset need not exist. Similarly, Shariah compliant deposits pay a profit rather than interest and this should not disadvantage the investor.

Al Awadi explained that, 'These challenges are being faced in most countries abroad. In 2005 and 2006, the UK government headed by the then Chancellor Gordon Brown introduced a legislation to incorporate Shariah compliant products into the UK financial services framework. Although, the UK does not mention Islamic finance it nevertheless used such contracts to base the changes in taxation. For example, the Finance Act 2005 under section 47 defines a purchase and resale contract which happens to correspond to a traditional murabaha contract. In a similar manner, a shariah compliant deposit is treated as a profit share return or in an Islamic context a Mudarabah contract.

'As a direct result of these changes, the UK now boasts two Islamic banks and a number of banks with Islamic windows. We hope to achieve similar modifications within the Australian financial system through our recent trade mission, eventually introducing Islamic financial products down under,' he concluded.

Kym Hewett, Austrade Senior Trade Commissioner in Dubai, commented, 'I am keen to see the positive experience the delegates on the initial mission translate into a great level of understanding on Islamic Financial products and deeper level of engagement between financial institutions in Australia and the UAE. Austrade's relationship with EDC continues to evolve since our Tradelink Partnership signing in 2008.'

(AMEInfo)

Islamic finance links:
Islamic finance consulting and training (GlobalPro Consulting- Kuala Lumpur,Malaysia)
Islamic finance consultant and trainer (Ahmad Sanusi Husain-Kuala Lumpur,Malaysia)

Islamic economic system only way out, says expert

Dammam – The recent global economic crisis was not caused just by sub-prime loans and credit derivative swaps but the more fundamental drawback of the system was behind the meltdown.
C.H. Abdul Raheem, a senior chartered accountant, prominent scholar in Islamic Economics and general manger Finance and Business Planning with Tasnee Company- Jubail, expressed these views at a lecture on “Global Economic Crisis- an Alternate View”.
The event was recently organized by Thanima- a socio-cultural organization of Indian expatriates in the Kingdom here at a local restaurant.
Raheem, is also the founder of Alternative Investment Credit Limited (AICL) a non – banking financial institution, which is run by Islamic banking concepts, implemented in Kerala state in year 2001 with the approval of the Reserve Bank of India.
“Any economic system has to take care of different behavioral aspects of human beings, and moral part is very important, and systems based on material gains alone will not work in the long run,” Raheem said.
The economist said that Islamic economic system, which advocated a balanced combination of individual freedom and social responsibility backed by a strong moral base, was the only viable alternative.
“Islam has structural and compulsory wealth re-distribution mechanism such as Sadaqa, Zakat, Will, Waqf, law of inheritance etc. There were period in human history when these principles were successfully practiced and prominent economist lived in those time and wrote valuable books on Islamic economics and practice”, he said.
Raheem said that the two important symbol and icons of capitalist system – the interest-based banking and the speculative stock exchange system - had miserably failed.
“Capitalism, especially interest-based economy, has brought in huge disparities between the rich and the poor. The capitalist system is practically dead as the western governments has nationalized most of the banks and other industrial corporations, which is a big anti-thesis of capitalism,” he said, adding that implementing a non-interest banking and investment system, which is divine and an ethical procedure is the only practical solution to solve to cover up the present situation.
During the function he answered various questions asked by the audience. Earlier, the chief organizer of Thanima’s Dammam chapter, C.P. Musthafa welcomed the audience and K.M. Rasheed presented the vote of thanks. - SG

(by Faisal Aboobacker Ponnani/Saudi Gazette)

Islamic finance links:
Islamic finance consulting and training (GlobalPro Consulting- Kuala Lumpur,Malaysia)
Islamic finance consultant and trainer (Ahmad Sanusi Husain-Kuala Lumpur,Malaysia)

Investors look for safe asset classes

LONDON (Arabnews.com) -- In the aftermath of the global credit crunch and financial crisis, investors have been increasingly on the lookout for value-added and safe asset classes. In the emerging asset classes of exchange traded funds (ETFs) and commodities (ETCs), for instance, investors have tended to favor physically-backed precious metals especially gold, whose price has been appreciating over the last few months.


Indeed, commodities in general including oil, gas, coal agricultural products and of course precious metals have been outperforming traditional asset classes such as real estate and equities.

“Precious metals,” stresses Tim Harvey, head of EMEA sales at ETF Securities Ltd., “have historically provided a safe haven, a hedge against inflation and a hedge against currency risk. They have often acted as an event hedge, outperforming during period of financial or geopolitical instability. As precious metals have tended to have a low correlation with most major asset classes they have provided unique diversification benefits that have often improved a portfolio’s risk-reward profile.”

Indeed, ETF Securities, which has pioneered exchange-traded commodities (ETCs) since 2003, last year launched “the world’s first Shariah-compliant precious metal ETC platform” based on physical platinum, palladium, silver, gold and a basket of precious metals, and which track the spot price of the underlying precious metal.

According to ETF Securities, the platform was developed in response to growing demand for Shariah-compliant ETCs from investors in the GCC (Gulf Cooperation Council) countries, North Africa and Asia. The Shariah-compliant ETC market has grown to $2.6 billion in the last 14 months, and ETF Securities’ ETC is traded on five stock exchanges in Europe.

While ETFs are open-ended UCITS III funds that track the underlying equity index, ETCs are asset-backed (usually by physical bullion or commodity (futures) contracts) open-ended securities that track the underlying commodity index or commodity.

“This development,” says ETF Securities, “recognizes the rising importance of Islamic investors and their appetite for ETCs, which were designed to be simple and accessible tools for all types of investors. Shariah-compliance further extends the global reach of ETCs.”

According to Tim Harvey, ETF securities physically backed precious metal exchange traded commodities are Shariah-compliant. “HSBC Amanah’s Shariah Board issued a fatwa on Gold Bullion Securities, GBS in June 2004, and Metal Securities Ltd. (MSL) was approved by HSBC Amanah Shariah board in June 2009,” he explained.

The bars and ingots are held in trust in London by custodian HSBC Bank NA (USA), the leading custodian for ETCs in the world. The metals held with HSBC Bank conform to the rules of Good Delivery of the London Bullion Market Association (LBMA) and the London Platinum Palladium Market (LPPM). Securities are only issued once the metal is confirmed as being deposited into the company’s bullion account with the custodian.

Consistent with allocated gold, no precious metal is borrowed, loaned out and nor does it earn any income.

Shariah-compliant ETCs track the spot price of the underlying precious metal. The Shariah status of ETF Securities Shariah products has already been accepted by Shariah investment boards in Saudi Arabia, Bahrain and UAE, claims Harvey.

ETF Securities physically backed products trade on the London Stock Exchange, Deutsche Boerse, NYSE- Euronext Paris/Amsterdam, Borsa Italiana and the Australian Stock Exchange, and are traded by some 20 market making firms, offering multiple points of liquidity. ETF Securities physically backed products are also at least as liquid as the relevant underlying physical precious metal market.

To ETF Securities’ Tim Harvey, “Gold remains the ultimate form of payment and therefore the ultimate safe haven. Similarly, platinum remains in supply/demand deficit.

Islamic finance links:
Islamic finance consulting and training (GlobalPro Consulting- Kuala Lumpur,Malaysia)
Islamic finance consultant and trainer (Ahmad Sanusi Husain-Kuala Lumpur,Malaysia)

Islamic investment banks must diversify from realty

Dubai: Islamic investment banks are too dependent upon real estate for their investment activity and they need to diversify into other asset classes, according to a report published on Monday.

Islamic Investment Banking 2009 is published by Yasaar Media and co-published by Unicorn Investment Bank and Doha Islamic.

According to the report, the Islamic finance industry has seen significant shrinkage since the onset of the global financial crisis. Areas that are particularly ripe for Islamic investment activity include both Islamic private equity and venture capital.

(Gulfnews)

Islamic finance links:
Islamic finance consulting and training (GlobalPro Consulting- Kuala Lumpur,Malaysia)
Islamic finance consultant and trainer (Ahmad Sanusi Husain-Kuala Lumpur,Malaysia)

Global Islamic finance industry worth over $1tr in asset terms

Dubai: The global Islamic finance industry is now worth more than $1 trillion (Dh3.67 trillion) in terms of assets, having quadrupled in the last three years, as it concentrates more on diversification.

Unsurprisingly perhaps, nine of the top ten Sharia-compliant financial assets by country, are based in the Middle East and Asia. The tenth is in the UK.

Despite the current economic challenges faced by countries in the region, the excess liquidity still in Gulf economies has fuelled sustained demand for Islamic finance products, according to Ahmad Al Khan, head of investment banking at Global Banking Corporation (GBCORP), based in Bahrain.

In the not-too-distant future, Islamic finance will be tapping into new sectors in order to have a much greater global presence and attract a wider audience.

"The Islamic financial institutions have become far more aware of the necessity to better diversify their asset portfolios and the growing sukuk market should help widen the range of asset classes eligible for investment. Islamic banks have also started to explore new business lines - mortgages could pave the way for more active Sharia-compliant securitisation," Al Khan said.

In line with this, GBCORP has invested in the $2.4 billion Marsa Al Seef waterfront project in Bahrain.

The development is located on 25.8 million square feet of land on the northern coast.

GBCORP appointed the Global Real Estate Development Company (GREDCO) as development managers to oversee the project.

The effect of the financial downturn on Bahraini business has been contained somewhat as institutions in the country had limited exposure to the US-driven subprime market.

(Gulfnews)

Islamic finance links:
Islamic finance consulting and training (GlobalPro Consulting- Kuala Lumpur,Malaysia)
Islamic finance consultant and trainer (Ahmad Sanusi Husain-Kuala Lumpur,Malaysia)

Muslims No Longer Locked Out of ETFs (Exchange Traded Funds)

You must say this for the Muslims. They’ve known for hundreds of years not to trust the bankers. By not holding financial stocks, mutual funds based on Muslim principles have done quite well the past two years as the financial-services sector dragged down the rest of the economy.

So, it shouldn’t be surprising to see the first U.S.-listed ETF focused on Muslim principles. The real question is what took so long? The provider, Javelin Exchange Traded Funds, a brand-new independent ETF firm, started building the firm from scratch about 18 months ago. It’s nice to see amid the ETF industry’s consolidation new firms entering the market.

Just two days before July 4 — was there any symbolism in that date? — Javelin entered the market with the launch of its first ETF, the Dow Jones Islamic Market International Index Fund (JVS). The fund trades on the NYSE Arca and tracks the Dow Jones Islamic Market Titans 100 Index a float-adjusted, market capitalization-weighted index consisting of 100 large foreign companies. The companies represent 23 countries and 18 currencies. Among country allocations, at the end of May, the United Kingdom posted the largest at 21.04% of the index, followed by Canada (10.71%), Japan (9.83%) and France (9.82%). The ETF charges a management fee of 0.68%.

In terms of portfolio creation, religious-based funds draw a significant amount of money from people who realize the need to invest in stocks, but don’t want their investment assets to fund activities outside their religious beliefs. Investors can find funds for Presbyterians and Catholics as well as Muslims. The beauty of these funds is that the fund providers vet their portfolio holdings for strict adherence to religious law so you don’t have to. Hence, if you’re a believer, you can still go to Heaven holding these portfolios. Not surprising then, most seem to follow a socially responsible investing strategy.

So, what kind of industries fall off the Muslim buy list? Anything forbidden by the Koran is screened out of the fund, such as alcohol, gambling, pornography and pork products. In addition, Shariah law objects to the borrowing or lending of money with interest. This knocks most, if not all, financial stocks, off the portfolio screen. According to Javelin, the index’s largest sector weighting as of May 29 was oil & gas, followed by basic materials, health care, technology and telecommunications.

“With over seven million Muslims in the U.S, we were surprised to discover that the investment needs of this vital population were not being met,” said Javelin President and Founder Brent Firth in a written statement.

Well, that’s not entirely true.

Amana Mutual Funds and Azzed Asset Management currently run funds according to Sharia law. Because of the Koran’s prohibition on moneylenders, Islamic-based mutual funds have significantly outperformed the broader market. The Amana Trust Income (AMANX), at $691 million the largest mutual fund that follows the Koran, has consistently beaten the S&P 500 for six out of the last seven years, with the other year falling below the index by just 0.1%. In 2007, when the bubble popped, Amana posted a gain of 14.1% compared with the 5.5% return from the S&P 500. And while Amana couldn’t avoid a loss last year — it’s a stock fund after all — it’s 2008 loss of 23.5% outperformed the S&P 500 by 13.5 percentage points, according to Morningstar.

There’s even a Halal index fund, the Iman K (IMANX), which follows the Dow Jones Islamic Index. That, however, posted a 40% plunge last year, compared to the 37% loss on the S&P 500.

But there hasn’t been an ETF muslims could feel confident investing in. With an expense ratio nearly 50% lower than the Halal mutual funds, muslims can now take advantage of the ETF’s benefits.

This, however, may be the year Islamic-based funds fall behind the broader market. During a recession, people do what makes them feel good and that means drinking, smoking, porn, gambling and overeating many pork-based products. In addition, with the financial stocks beaten down so badly they have a lot of upside. I must add, that so far this year, the Muslim mutual funds are still beating the S&P 500.

In addition, the new Islamic ETF doesn’t hold any U.S. stocks, so it won’t be able to directly benefit from any recovery in the U.S. economy.

“We went for an international fund because the mutual funds held domestic stocks and this was a unique market which didn’t have a fund tracking it,” says Javelin spokesman Charles Tennes. He adds Javelin may do an Islamic fund with domestic stocks in the future, but that’s not in the firm’s immediate plans.

Side Note: Ever since the Standard & Poor’s Depositary Receipts (SPY) received the nickname Spyder for its initials, SPDR, ETF firms have loved to give themselves clever, cutesy names. The first ETFs to track international markets were called the World Equity Benchmark shares, or WEBS. Get it? SPDRs and WEBs? So, Javelin Exchange Traded Funds wants its funds to be called the JETS. Here’s to hoping Javelin President Brint Frith likes the nickname “Benny”; that his firm is not confused with the NETS, the failed ETF series out of Northern Trust, that no one makes the joke NETS JETS, or that anyone associates them with the New York Jets football team.

(by Lawrence Carrel/Lawrence Carrel's Instablog)

ETF: exchange traded fund: a mutual fund that is traded on a stock exchange

Islamic finance links:
Islamic finance consulting and training (GlobalPro Consulting- Kuala Lumpur,Malaysia)
Islamic finance consultant and trainer (Ahmad Sanusi Husain-Kuala Lumpur,Malaysia)

Turkey should think about Islamic banking

While the global financial system still has not found a departure point for itself, alternative financial structures seem here to stay, says a renowned expert on Islamic banking.

Lord Mohamed Iltaf Sheikh, the founder of the Conservative Muslim Forum who visited Sunday's Zaman, said that the Islamic banking system, which is based on religious ethics, continues to generate business in many countries, particularly in the Middle East.
Lord Sheikh has set up an advisory and consultancy company to advise interested parties on Islamic banking and Islamic insurance. Sheikh observes that Muslim communities in Europe already constitute a significant economic realm not only by dint of their population but also because of their cultural assets. For this reason, he gives great importance to establishing Islamic banks in Europe based on principles such as transparency and neutrality. He states that in the United Kingdom the Islamic way of doing business has been bolstered as a government policy. The UK is the eighth largest country in the number of Islamic finance and insurance companies it hosts. The British government has already adopted several concessions meant to encourage Islamic banking not only for Muslims but also for the general public. Lord Sheikh pointed out that anybody who acquires a property using Islamic banking principles is exempted from the stamp tax while signing over the property. Lord Sheikh's vision of Islamic banking is not only about elimination of “riba,” or usury, but also about cooperating and investing in socially and environmentally responsible projects.

Though Islamic banking is the fastest growing financial market in the world, with 30 percent annual growth in banking and 20 percent in the insurance sector, Sheikh believes that Islamic banking will not become a substitute for the conventional banking system. “It is due to the lack of capacity,” he says. “Islamic banks cannot afford to handle huge transactions, for the time being.” But this could change in the near future, given the massive growth in the sector. Sheikh noted the fact that the Vatican has praised the Islamic banking system as an alternative to the conventional understanding of the financial markets. Sheikh thinks that with its population of 70 million Turkey should encourage and invest in Islamic banking, more so than any other country in the region.

Lord Sheikh is not only lobbying for Islamic banking within the capitalist West, but also among Muslim communities themselves. In the realm of insurance, Muslim communities are fairly reluctant to purchase a life or health insurance policy because of a religious belief in destiny. Sheikh has been trying to educate Muslim communities about the kind of input human will should provide for divine destiny to take care of human beings' needs. He says that their professional advice and expertise in Muslim countries is important for spreading the idea of insurance in those countries.

Thanks to the development of Islamic economies throughout the world, the term “Islamic banking” has gained significant meaning in today's financial system. Islamic banking activity connotes a typical financial system that operates in harmony with Islamic principles and modes of life. For example, the payment of fees for the renting of money, or “riba,” is strictly prohibited according to Islamic principles. Despite many commonalities shared with conventional banking system, Islamic finance is based on equal sharing of profits and alternatives to riba.

Islamic banks have grown recently in the Muslim world but remain a very small share of the global banking system. Micro-lending institutions founded by Muslims, notably the Grameen Bank, use conventional lending practices and are popular in some Muslim nations, especially Bangladesh, but some do not consider them true Islamic banking. However, Muhammad Yunus, the founder of Grameen Bank and microfinance banking, and other supporters of microfinance, argue that the lack of collateral and lack of excessive interest in micro-lending is consistent with the Islamic prohibition of riba.

Lord Sheikh, chairman of the Conservative Ethnic Diversity Council, started his career by joining Sun Alliance Insurance Company in London. Sheikh has been the president of the Insurance Institute of Croydon and a member of the National Council of the Chartered Insurance Institute. He was regional chairman of the British Insurance Brokers Association.

(Sunday's Zaman)

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Islamic finance consultant and trainer (Ahmad Sanusi Husain-Kuala Lumpur,Malaysia)

Indonesia: Advantages of Shariah Economy

Bandung. Vice presidential candidate Boediono stepped up to a food stall in a bazaar organized by students from the Bandung Institute of Technology last month and asked the price of something on display. “Thirty-three dirhams, sir,” replied the student vendor.

Of course, the former central bank governor had no such Middle Eastern currency, the only currency used for all transactions at the bazaar. No problem. A money changer was available there to convert his rupiah into dirhams.

Boediono, Susilo Bambang Yudhoyono’s running mate, did not end up buying the food, but he got the message: the bazaar’s organizers, comprised of students from the university, also known as the ITB, and activists from the nearby Salman Mosque, wanted him to experience a Shariah-based economy.

ITB student Arif Budianto, one of the organizers, said the group wanted to promote a Shariah economy in Indonesia because, as he put it, “Shariah economy is the best solution to the present economic problem, packed with an excessive poor-rich gap, market volatility and speculation.”

In a truly Islamic economy, the value of the currency is determined by the currency itself. The dirhams and dinars used are coins made of pure silver and gold, the value of which determines their exchange value. In a liberal economy, by contrast, the value is determined by monetary policy and markets.

Arif and his activist friends presented Boediono with the message, because, while the candidate does have a personal commitment to Islam, “he has been very involved in the capitalist economic system.”

Early in the election campaign season, there had been fear-mongering directed against Yudhoyono and particularly Boediono that they were capitalist neo-liberals, more interested in market forces and so-called foreign interests than grass-roots issues such as people’s welfare.

However, as the People’s Consultative Assembly (MPR) Speaker Hidayat Nurwahid pointed out, it was during Yudhoyono’s presidency and Boediono’s recent term as Bank Indonesia governor that regulations on Shariah banking and Shariah obligations were born.

Also during his term, Boediono issued hundreds of Shariah bank licenses.

“Accusations that Yudhoyono and Boediono are proponents of neo-liberalism are baseless,” Nurwahid said.

The chairman of the West Java chapter of the Prosperous Justice Party (PKS), Ahmad Syaikhu, said that during Boediono’s time at the central bank, Shariah banking boomed and Islamic bonds were introduced in the Indonesian stock market.

One of the other ITB bazaar organizers from Salman Mosque, Zaim Saidi, said he and his friends would continue to develop the Shariah-inspired system throughout the country.

“The time has come for Indonesian Muslims to abandon the usury economy and get back to the use of the dinar and dirham,” he said.

“We receive many requests from other regions to set up this kind of market.”

But to Budi Rustandi, a student from Bandung’s State Islamic University, the label “Islamic” was not a priority.

“What is more important is the substance,” he said.

“If an economic system can bring justice, equality and a healthy life to society, I would regard it as ‘Islamist’ though other people might call it ‘neo-liberal’ or ‘capitalist.’

“But if an economy brings injustice, inequality and manipulation, I would deny it even though it is named ‘Shariah’ or ‘Islamic.’ ”

(Jakarta Globe)

Islamic finance links:
Islamic finance consulting and training (GlobalPro Consulting- Kuala Lumpur,Malaysia)
Islamic finance consultant and trainer (Ahmad Sanusi Husain-Kuala Lumpur,Malaysia)

Glossary of Islamic Finance Terms - List #3

adadiyyah (pl. `adadiyyat) Countables i.e. things which are measured in individual units rather than by volume, weight, or length. An example of `adadiyyat are eggs which are customarily purchased in unit, (half dozen, dozen, etc.) rather than by weight.


`adl `Adl is a general term which conveys the meanings of justice, equity and fairness.


`amil One who performs a task, an agent. One who deserves compensation for some task which he does, such as the mudarib (manager) in a mudarabah contract or a zakat collector.


`aqar Real estate; Immovable property such as land, buildings, trees and so forth.


`aqd `Aqd is a central term in Islamic financial law, which essentially means, "contract."


`ard Land.


`arif An expert who is consulted in situations which require an impartial, informed decision, such as the appraisal of property.


`ariyah A contract in which one party loans another the use of some item for an indefinite period of time. Ariyah is generally used to refer to the neighborly lending of small articles.


`ayn `Ayn is term used by the classical jurists to refer to currency or ready money. The term `ayn refers to gold, silver, coins, notes and any other form of ready cash. `Ayn is often contrasted with dayn.


`inah A sale in which a purchaser buys merchandise from a seller for a stipulated price on a deferred payment basis and then sells the same merchandise back to the original seller for a price lower than the original purchase price.


Ajr Generally ajr means compensation or wage. In an ijarah (lease) contract, the ajr is the price paid by the hirer to the hired party in exchange for the services which the latter renders.


akl al-suht Unlawful acquisition of wealth.


al-ajir al-khas A hired-worker who is contracted to perform a specific task in a specific amount of


time by one party, such as a cook or a servant.


al-ajir al-mushtarak A worker, such as a tailor, who offers his services to many and thus may be contracted by several clients at once.


al-ajr al-mithl The prevailing rate; the price which is normally paid for a given service.


al-akl bi l-batil Unlawful acquisition of wealth.


al-amin al-`amm One who has been entrusted with the property of another for a reason other than safe-keeping (wadi`ah), such as a tenant who rents an apartment or the mudarib in the mudarabah contract.


al-amin al-khas One who has been entrusted with the property of another and is responsible for it, as is the case in the wadi`ah (safe-keeping) transaction.


al-amwal al-ribawiyah The six kinds of substances (gold, silver, dates, wheat, salt and barley) which, when exchanged in kind, must be exchanged in equal measure and with immediate transfer of possession. If these conditions are not met, then the exchange is considered to be riba (interest).


al- kharaj bildaman The Islamic legal principle that means entitlement to revenue follows assumption of responsibility. Profits, therefore, are based on the ownership of, and responsibility for, capital.


al-hajjah al-asliyyah Lit: Basic needs. Tech: In relation to the law of zakat, the shariah has exempted those assets which are required to fulfill one's basic needs. Also spoken with regard to economic role of the Islamic state. The Islamic state is responsible to provide for the basic needs of all citizens, should some of them fall short of the means.


amanah Trust, with associated meanings of trustworthiness, faithfulness and honesty. As an important secondary meaning, the term also identifies a transaction where one party keeps another’s funds or property in trust. This is in fact the most widely understood and used application of the term, and has a long history of use in Islamic commercial law. By extension, the term can also be used to describe different financial or commercial activities such as deposit taking, custody or goods on consignment.


arbun Earnest money/Down payment; a non-refundable deposit paid by the client (buyer) to the seller upon concluding a contract of sale, with the provision that the contract will be completed during the prescribed period.


ayah The term refers to a passage from the Holy Qur'an.


bai al-dayn Sale of debt or receivables.


bai al-'inah A loan in the form of a sale, called 'inah (facade) because it is a sale in appearance only. This is accomplished by one's buying back what one has sold for a lower price than that for which one originally sold it. The difference, ostensibly profit, is actually a loan.


bai al-wafa' A sale with the right of redemption, literally, a sale of honour. Typically, such a sale takes place when a commodity is sold on the condition that the seller be allowed to redeem the commodity upon paying its price; and the buyer agrees to honour the condition.


bai al-bithaman ajil Deferred-payment sale, credit sale.


batil Void, invalid. Said of a transaction, a contract which governs a transaction or an element in a such a contract when they are null and void. opp. sahih.


bay` Sale; an agreement between two parties (the seller and the buyer) to the effect that the ownership of the sale item is transferred from the seller to the buyer in exchange for a price.


bay` `ajil bi-ajil Lit.Delayed-for-immediate sale. A type of sale in which the sale price is paid immediately and delivery of the sale item is delayed. Syn. bay` al-salam.


bay` al-kali bi-kali (Lit. Sale of a debt for a debt) Bay`al- kali' bi-kali' is a type of sale which is prohibited. Islamic jurists use this term to describe several different types of debt-for-debt exchanges. The most well-known of these is the exchange in which a lender extends his debtor's debt repayment period in return for an increase on the principal i. e. interest. The term kali' is a synonym for debt.


bay` al-mu'ajjal Deferred payment sale, credit sale; a sale in which payment is delayed and delivery of the contracted goods is immediate


bay` al-salam Deferred delivery sale; A type of sale in which the sale price is paid immediately and delivery of a specified sale item is deferred for a stipulated period. Syn. salaf.


bay` bi-thaman ajil Deferred payment sale. Some Islamic banks carry out a transaction of this name in which goods are requested by a client, purchased by the bank and then sold to the client at an agreed upon price which includes the bank's mark-up profit. Often the client is offered the option of paying in installments. This is essentially identical to the murabahah financing used throughout the Islamic banking sector. Syn. bay` `ajil bi-ajil and bay` al-mu'ajjal.


bay`atan fi bay` Lit. Two sales in one. A type of transaction, which was explicitly prohibited by the Prophet. The meaning of the expression "two sales in one" is explained by the fuqaha' in various ways. Also called "safaqatan fi safaqah."


bayt al-mal The treasury of the Muslim Community; historically, the bayt al-mal as an institution was developed by the early Caliphs but which soon fell into disrepair. The funds contained in the bayt al-mal were meant to be spent on the needs o the Ummah e. g. supporting the needy.


daman Responsibility for financial coverage in the case of destruction or damage.


daman/kafala Guaranty or surety


darura Overriding necessity


dayn Debt; some form of wealth which one is required to pay back to another.


dhimmah Dhimmah is a basic term in fiqh al-mu`amalat which roughly corresponds to the concept of liability. A debt is said to be "established in someone's dhimmah" if he is in debt to someone else. The fuqaha' also speak about a person's dhimmah "being occupied " and "being cleared." The concept of dhimmah may be likened to a virtual liability container which it may be said that every responsible person has. These containers, it may be imagined, are constantly being filled with rights and obligations--such as the obligation to repay someone.


dinar A gold coin used by Muslims throughout Islamic history. The standard mass of the dinar which is referred to in Fiqh is 1 mithqal (app. 4.25 grams.)


faqih Muslim jurist; A Muslim who is an expert in Fiqh; a Muslim who is knowledgeable of the rules of the Shari`ah and knows how these rules are related to the source texts upon which they are based.


faqir (pl. fuqara') A poor person.


faskh Undoing, dissolving, cancellation. Faskh is a term used by the classical fuqaha to refer to the dissolution of a contract or agreement. It has been described as the cancellation of a contract, such that affairs return to the state in which they were before the closing of the contract, without any addtition or subtraction. Many of the classical fuqaha' apply the term faskh to instances in which a previously valid (sahih) contract is cancelled voluntarily by the contractual parties--such as in iqalah, khiyar al-`ayb (option to return in case of a defect) and khiyar al-shart (stipulated option of return)--and use the term infisakh for cancellations which occur outside of the will of each of the contractual parties--such as the cancellation of a sale contract when the sale item is destroyed, before the seller can hand it over to the purchaser or the dissolution of certain partnerships (see shirkah) upon the death of one of the participating parties.


fatwa (pl. fatawa A formal response issued by an expert faqih, called a mufti in response to a question.


fatwa An authoritative legal opinion based on the Shari'a (Islamic law)


fiqh Practical jurisprudence, or human articulations of divine rules encompassing both law and ethics. As such, fiah may be understood as the jurists' understanding of the Shari'a, or jurists' law.


fiqh al-mu'amalat Islamic commercial jurisprudence, or the rules of transacting in a Shari'a compliant manner


fuduli A party is described as "fuduli" whenever it transacts (e. g. sells, rents, etc.) with someone else's property without the permission of the Shari`ah (e. g. wakalah). Such is the case when a party does not own the property with which it transacts and is not the wakil (authorized representative) or wali (guardian) of the true owner. For example, if a person were to negotiate and "close" a deal with a buyer in which he sold some machinery without the owner of the machinery having made him his wakeel (authorized representative) the "seller" would be described as fuduli.


fuqaha pl. of faqih, qualified specialists in fiah, or jurists.


gharar Uncertainty in a contract of exchange as to the existence of the subject-matter of the contract and deliverability, quantity or quality of the subject-matter. It also involves contractual ambiguity as to the consideration and the terms of the contract. Such ambiguity will render most contracts void.


gharim (pl. gharimun) Orig. A debtor who does not possess the funds with which to repay his debt. According to the Hanifi jurists, a gharim is one who whose funds, after repayment of his debt, would not equal the nisab. The Shafi`i and Maliki jurists divide the gharimun into two types: 1) those whose debts were incurred in their own benefit and 2) those whose debts were incurred benefiting others. The gharimun are one of the eight groups mentioned in the Qur'an as legitimate recipients of zakah funds.


ghasb The wrongful appropriation of property by force.


habal al-habalah A type of sale practiced by the Arabs during the Jahiliyyah, in which the essence of the agreement between the two transacting parties, depended on a pregnant she-camel giving birth to a female calf which would subsequently become pregnant itself. The habal al-habalah transaction was prohibited by the Prophet, according to several well-known reports, ostensibly because of the extreme uncertainty (see gharar) in the essence of the contract, given that neither of the contractual parties can be even remotely certain that a pregnant she-camel would successfully give birth to a another she-camel, which would subsequently mature and become pregnant itself.


hadith (pl. ahadith) A successively transmitted report of an utterance, deed, affirmation or characteristic of the Prophet Muhammad. The ahadith are the source texts by which the Sunnah is preserved.


halal Permissible, lawful; said of a deed which is not prohibited by Allah, opp. haram.


halal lawful; one of the five major Shari'a a categorizations of human acts


hamish gedyyah security deposit. An amount of money paid by the purchase orderer upon request of the seller to make sure that the orderer is serious in his order of the asset. However, if the promise is binding and the purchase orderer declines to purchase the asset, the actual loss incurred to the seller shall be made good form this amount.


haqq lit. truth, right. Al-Haqq, the Truth, is one of the names of Allah. In the Fiqh of financial transactions, the term haqq signifies a right which a party possesses, for example the creditors right to payment.


haram Impermissible, unlawful, opp. halal.


hawalah Bill of exchange, promissory note, cheque, draft. Tech: A debtor passes on the responsibility of payment of his debt to a third party who owes the former a debt. Thus the responsibility of payment is ultimately shifted to a third party. hawalah is a mechanism which can be usefully employed for settling international accounts by book transfer. This obviates, to a large extent, the necessity of physical transfer of cash. The term was also used, historically, in the public finance during the Abbaside period to refer to cases where the state treasury could not meet the claims presented to it and it directed its claimants to occupy a certain region for a certain period and procure their claims themselves by taxing the people. This method was also known as tasabbub. The taxes collected and transmitted to the central treasury were known as mahmul (i.e. carried to the treasury) while those assigned to the claimants or provinces were known as musabbab.


hawl The term hawl is used by the jurists to describe the amount of time which must pass before a Muslim in possession of funds equaling or exceeding the exemption limit (nisab) must pay Zakah on his wealth. In the case of cash, gold and silver it is one Islamic year i.e. a lunar year of app. 354 days.


hibah Gift, donation. Tech: Transfer of a determinate property (mal) without any material consideration. Muslims have been exhorted by the Prophet to donate gifts to others. This is one of the important values of a Muslim society. It is intended to cultivate love and co-operation among citizens rather than rivalry and competition.


hisbah Hisbah is a term used by the classical jurists, among them Ibn Taymiyyah, to describe the function of regulating the market place which is to be carried out by the Islamic authority (often called the muhtasib in this sense). Hisbah includes taking whatever steps may be needed in order to maintain a fair and orderly market place. Historically, various Islamic rulers have undertaken the duty of hisbah by supervising activities ranging from the inspection of eateries for sanitary conditions to the investigation of fraud. The basis of hisbah is the Prophet's customary inspection of the marketplace of Madinah.


hukm (pl. ahkam) In Fiqh, the Shari'ah ruling (e. g. obligatory, recommendable, neutral, reprehensible, or forbidden) associated with any action.


husah (lit. pebbles) A type of sale practiced by the Arabs in the Jahiliyyah and prohibited by the Prophet Mohammed in which the sale was determined by the casting of pebbles. Classical commentators mention three forms of the husah sale: 1) the seller would say to the would-be purchaser, "when I throw the pebbles in my hand, then the deal is closed and binding on you," 2) the seller would say to the would-purchaser, "I shall sell you the commodity which your pebbles hit" or 3) in a land sale, the seller would say, "I shall sell you the plot of land whose dimensions are defined by the extent to which you throw this pebble." The husah sale--like the habal al-habalah sale was ostensibly prohibited because of the gharar (uncertainty) which characterized the contract which governed it.


ihtikar Hoarding; the prohibited practice of purchasing essential commodities, such as food and storing them in anticipation of an increase in price.


ijara Ijara is a form of leasing in which there is a transfer of ownership of a service for a specified period for an agreed upon lawful consideration. Instead of lending money and earning interest, Ijarah allows the financial institution to earn profits by charging rentals on the asset leased to the customer.


ijarah wa-iqtina Lease-and-purchase transaction; a financing instrument used by practitioners of contemporary Islamic finance in which a financier purchases reusable merchandise (e.g. airplane, buildings, cars) and then leases them to clients in return for an agreed upon rental fee (to be paid for the length of the lease period) and an agreement that the client will purchase the merchandise at the end of the lease period.. There are similar transactions of various names, among them al-ijarah al-muntaha bi-tamlik.


ijma` (lit. consensus) The unanimous consensus of the Muslim Ummah on a given issue, usually as represented by the agreement of the jurists. Ijma' has traditionally been recognized as an independent source of law, along with the Qur'an, Sunnah and Qiyas (analogical deduction), by most of the jurists.


ijtihad (Lit. effort, exertion, diligence) The process by which a qualified Islamic jurist (called a mujtahid) endeavors to arrive at the correct ruling on a given issue by reflecting on source texts from the fundamental sources of the Shari`ah: the Qur'an and Sunnah.


ikhtikar Monopoly


ikhtilaf Divergence of opinions among jurists


iktinaz Hoarding wealth by not paying zakah on it.


iman Conviction, faith or belief; the acceptance and affirmation of Allah, His Books, His Messengers, His Angels, the Hereafter and Divine Decree.


Infaq Spending, normally in the path of Allah. Among the various praiseworthy types of infaq are spending on one's family, spending in preparation for jihad and feeding and clothing orphans and other underprivileged individuals.


iqtisad Lit. moderation. The term is used in modern standard Arabic to denote the field of economics.


Islam (Lit. submission to Allah) The religion of Allah (God) i. e. the worship of Allah alone. Islam is (1) shahadah i. e. testifying that there is no god but Allah and that Muhammad is the Messenger of Allah, (2) establishing Salah i. e. prescribed prayer, (3) paying Zakah i. e. giving a portion of one's wealth to the needy, (4) the Sawm of Ramadan i. e. fasting during the 9th month of the Islamic calendar and (5) Hajj i. e. making pilgrimage to the sacred precincts of Makkah (Mecca) in Arabia once in a lifetime if one is able. A person whose religion is Islam is a Muslim. A person becomes Muslim by declaring the shahadah i.e. " Ashhadu an la ilaha illallah wa ashhadu anna Muhammadan rasulullah" ("I tesify that there is nothing rightfully worshipped except Allah and I testify that Muhammad is the Messenger of Allah").


Islah Reform


Islamic banking Financial services that meet the requirements of the Shariah, or Islamic law. While designed to meet the specific religious requirements of Muslim customers, Islamic banking is not restricted to Muslims: both the financial services provider and the customer can be non-Muslim as well as Muslim. Also called Islamic finance or Islamic financial services.'


Istihsan Judicial preference for one legal analogy over another, usually in view of the public welfare


istisna'a A contract of sale of specified goods to be manufactured, with an obligation on the manufacturer to deliver them upon completion. It is a condition in istisna'a that the seller provides either the raw material or cost of manufacturing the goods


jahala Lack of knowledge or ambiguity in the terms of contract.


jahiliyyah (exp. ayyam al-jahiliyyah lit. the days of ignorance) The so-called "pre-Islamic period." The period between the Prophethood of `Isa bin Maryam (Jesus) and the Prophethood of Muhammad. Jahiliyyah is the term Muslims use to refer to the era just before the coming of the Prophet Muhammad and more generally to the state of affairs which characterized this era, which was plagued by shirk (the crime of associating partners with Allah), infanticide, tribal strife, etc.


ji'alah Service fee; a fee paid for any service rendered, also known as ju'l.


kafalah Assumption of the responsibility for debt repayment; a standard Islamic financial transaction in which X (the kafil) agrees to assume responsibility for the debts of Y (the makful `anhu). Similar but not identical to hawalah.


khiyar (lit. Option, choice) the option extended to one or more of the parties in a sales contract to rescind the sale, upon the appearance of a defect, for example. The jurists have traditionally recognized several different types of khiyar, including khiyar al-ru`yah, khiyar al-`ayb, khiyar al-shart, khiyar al-majlis.


khiyar al-shart An option in a sale contract concluded at the time of signing the agreement, giving one of the two parties to the contract a right to cancel the sale within a stipulated time.


madhhab (lit. way of going, pl. madhahib) A fiqh school or orientation characterized by differences in the methods by which certain source-texts are understood and therefore differences in the Shari`ah rulings which are deduced from them. There are four well-known madhahib among Sunni Muslims whose names are associated with the classical jurists who are said to have founded them (Hanafi, Maliki, Shafi`i and Hanbali).


makruh Lit.detested; technical term used by the fuqaha' to classify actions with regard to their desirability. Makruh is said of an action which one is rewarded for avoiding, but not punished for committing.


mal Wealth, money, property; any valuable thing which can be possessed.


manfa`ah (lit. benefit) The yield which a utilizable property produces. The term is often used by the fuqaha' to describe the usufruct associated with a given property, especially in leasing transactions. In an automobile lease for example, the term manfa`ah might be used to describe the benefit which the lessee derives from the use of the car for the duration of the lease (as opposed to the actual ownership of the vehicle).


maqasid the general objectives of Islamic law


maqasid al-Shari`ah (lit. The objectives of the Shari`ah). The term maqasid al-shari`ah refers to a juristic-philosophical concept developed by the later generations of the classical jurists, who attempted to formulate the goals and purposes of the Shari`ah in a comprehensive manner to aid in the process of investigating new cases and organizing previous existing rulings.


maysir Gambling, a game of chance. Originally a game of chance played by the Arabs before Islam, maysir came to refer to any game of chance One of three fundamental prohibitions in Islamic finance (the other two being riba and gharar). The prohibition on maysir is often used as the grounds for criticism of conventional financial practices such as speculation, conventional insurance and derivatives.


miskin A poor, indigent person. The miskin is mentioned in the Qur'an as one of the recipients of zakah.


mu`amalah A financial transaction. Fiqh al-mu`amalat is the traditional Islamic discipline concerned with the jurisprudence of financial transactions.


mudaraba A Mudarabah is an Investment partnership, whereby the investor (the Rab ul Mal) provides capital to another party/entrepreneur (the Mudarib) in order to undertake a business/investment activity. While profits are shared on a pre-agreed ratio, loss of investment is born by the investor only. The mudarib loses its share of the expected income.


mudarib: The mudarib is the entrepreneur or investment manager in a mudarabah who invests the investor's funds in a project or portfolio in exchange for a share of the profits. For example, a mudarabah is essentially similar to a diversified pool of assets held in a Discretionary Asset Management Portfolio.


mufti A highly qualified jurisconsult who issues fatawa (sing. fatwa, informed legal pronouncements), usually in response to questions posed to him.


mugharasah A type of agricultural contract in which a land owner and a worker agree that, in return for the worker's planting and tending of fruit-bearing trees on the land owner's field, the landowner will assign to him a share of the orchard's harvest. Both Hanafi and Hanbali jurists (the latter also call the transaction munasabah) discuss mugharasah in their fiqh works. Two valid forms of the contract have been mentioned: 1) The landowner supplies the necessary materials (e. g. twigs) and bears related expenses (e. g. fixture transportation) while the worker tends the trees for a fixed period. After the expiration of this period, the worker receives a fixed wage or a fixed portion of the orchard. 2) The worker supplies the materials and bears related expenses and receives a share of the harvest. The second more closely resembles muzara`ah.


mujtahid Legal expert, or a jurist who expends great effort in deriving a legal opinion or interpreting the sources of the law.


murabahah (phr. bay` al-murabahah) Originally a term describing any sale in which the seller sells his merchandise for more than the price at which he acquired it, the term murabahah is now used in contemporary Islamic finance to describe a financing scheme in which a financial institution agrees to purchase merchandise for a client provided that the client promises to purchase it from the financial institution at an agreed upon mark-up. This transaction, called simply murabahah or murabahah financing, is widely used in contemporary Islamic finance.


murabaha Purchase and resale. Instead of lending out money, the capital provider purchases the desired commodity (for which the loan would have been taken out) from a third party and resells it at a predetermined higher price to the capital user. By paying this higher price over instalments, the capital user has effectively obtained credit without paying interest.


musaqah A type of partnership in which the owner of an orchard agrees to share a stipulated portion of the produce of the orchard's trees with a worker, in exchange for the latter's irrigation of the garden.


musharakah Partnership. A standard Islamic transaction in which two or more parties enter into any one of several related types of partnerships (see shirkah, mudarabah, musaqah, muzara`ah). In a typical musharakah agreement, two or more parties agree to provide capital (ra's mal) towards the financing of a commercial venture, share profits according to a stipulated ratio and share losses on the basis of equity participation.


muzabanah Essentially, muzabanah is a transaction in which the owner of fruit trees agrees to sell his fruit for an estimated equivalent amount of the dried fruit, such as palm fruit for dates or grapes for raisins. Muzabanah was an agricultural practice known to the people of Madinah and prohibited by the Prophet (see hadith of Jabir b. `Abd Allah), ostensibly because of the strong element of gharar present in such a transaction. The special case of araya (see entry) was exempted from this prohibition. Some fuqaha', particularly Maliki jurists, use the term muzabanah to describe any sale in which the weight or volume of the exchange items is unspecified.


muzara`ah Share-cropping; an agreement between two parties in which one agrees to allow a portion of his land to be used by the other in return for a part of the produce of the land.


najash The prohibited practice of deceiving and inciting a potential buyer during the course of pre-sale negotiations or bidding by egging him on, either through insincere bidding on the part of a spectator (such as bidding with no intention of buying and merely in order to have the would-be buyer raise his bid), or false statements on the part of the seller himself (such as the seller claiming that the commodity is of greater value than its true worth).


nisab The exemption limit for the payment of zakah. A Muslim who possesses wealth below the nisab is exempted from paying zakah, while a Muslim who possesses wealth at or above this exemption limit is obliged to pay zakah. The nisab differs depending on the type of wealth in question.


PLS Profit and Loss Sharing. The term is used to describe any one of several financial schemes (but particularly the banking system of Pakistan) based on the principle of interest-free lending and featuring the use of mudarabah and musharakah (see entries) as financing instruments.


qabd (lit. seizing) taking possession of the exchange commodity in an exchange transaction, such as the exchanger taking possession of the silver which he traded for his own gold. Its being immediate is a necessary condition for the validity of currency exchange.


qard hassan a loan per amore in which there is no interest. In Islamic law, all loans are gratuitous contracts


qimar A type of prohibited arrangement in which the acquisition of property is contingent upon the occurrence of an uncertain event, as is the case in gambling.


qirad Qirad is a synonym for mudarabah.


Qur'an the Book of Divine Revelation that was delivered to humankind by the Prophet Mohammed, peace be upon him.


ra's al-mal Capital. The money or property which an investor (rabb al-mal) invests in a profit-seeking venture, often in a partnership (musharakah) such as a mudarabah or shirkah arrangement.


rabb al-mal In the mudarabah, the investor.


rahn Collateral; a pledge or the transaction which governs such a pledge.


riba (lit. increase) any increase in a loan or sale transaction which accrues to the lender, seller or buyer, without the provision of an equivalent counter-value to the other party. In Islam, riba is one of the most abhorrent of all sins and is absolutely prohibited. Riba encompasses various types of illict gain, of which banking interest is one example.


riba al-fadl The riba of exchange surplus. Any commodity-for-commodity exchange transaction (i. e. barter) in which the exchanged commodities are of the same type but of unequal measure, or the delivery of one commodity is postponed.


riba al-nasi'ah Postponement riba. Riba al-nasi`ah is one of the two categories into which riba (see entry) is often divided by the fuqaha', the other being riba al-fadl (see entry). Riba al-nasi'ah takes place when two ribawi substances (see al-amwal al-ribawiyyah) are exchanged, one immediately and the other with a delay. An example of riba al-nasi'ah: two parties agree to exchange 10 kilos of gold for 2 kilos of silver such that the former is handed over immediately and the latter is to be delivered 2 weeks from the date the contract is signed. Another example: two traders exchange 1 metric ton of wheat for 2 metric tons of barley such that the latter is delivered after one year.


rishwah Bribery.


rukn (lit. pillar, pl. arkan) In fiqh, an integral part of an act, such as a transaction, without which the act can not be said to have been performed.


sadaqah (pl. sadaqat) Charitable giving.


sahih (lit. sound, healthy, correct) said of a valid contract, opp. of bƒtil. A hadith of the highest level of authentication.


salah Ritual prayer; the second pillar of Islam after the shahadah.


salam A type of sale in which the full price of the goods is paid in advance and the goods are delivered at a specified date in the future.


salam A contract for the purchase of a commodity for deferred delivery in exchange for immediate payment according to specified conditions


sarf Currency exchange.


shahadah Testimony to the fact that Allah has the unique right to be worshipped to the exclusion of anything or anyone else and that the Prophet Muhammad is the Messenger of Allah by declaring, "Ashhadu an la ilaha illallah wa ashhadu anna Muhammadan rasulullah" (i.e. "I testify that there is no one or thing rightfully worshipped except Allah and that Muhammad is the Messenger of Allah).


Shariah: Islamic law as revealed in the Quran and through the example of Prophet Muhammad (PBUH). A Shariah compliant product meets the requirements of Islamic law. A Shariah board is the committee of Islamic scholars available to an Islamic financial institution for guidance and supervision in the development of Shariah compliant products.


Shariah advisor An independent professional, usually a classically trained Islamic legal scholar, that advises an Islamic bank on the compliance of its products and services with the Shariah, or Islamic law. While some Islamic banks consult individual Shariah advisors, most establish a committee of Shariah advisors (often know as a Shariah board or Shariah committee).





Shariah compliant An act or activity that complies with the requirements of the Shariah, or Islamic law. The term is often used in the Islamic banking industry as a synonym for "Islamic"—for example, Shariah compliant financing or Shariah compliant investment.


shart (pl. shurut) A necessary condition, something which needs to exist or be present in order for something (like a transaction) to be valid. Also a condition or stipulation in a contract.


shirkah Any contract between two or more persons in which they agree to jointly enter into a financial enterprise whose profits will be divided between them. syn. musharakah.


shuf`ah The right of pre-emption in sale transactions, for example, a real estate sale in which some party possesses the right to force the seller to sell him all or part of the real estate in the event of a sale.


sighah (sighat al-`aqd) Sighah is a term used by the fuqaha' to refer to the formal exchange which takes place between the contractual parties indicating their willingness to enter into the contractual agreement and therefore constitutes the contract itself. The sighah is a rukn (integral element) of the Islamic contract and essentially consists of a proposal (ijab) on the part of one contractual party and an acceptance (qabul) on the part of the other, either of which may be verbal, written or even gestural, depending on the circumstances under which the contract is closed. An accepatable sighah in a sale contract, for example, may consist of a purchaser saying to a seller, "do you agree to sell me this merchandise for this price?" followed by the seller replying "Yes." The ijab and qabul may be reversed so that the seller proposes and the purchaser accepts. Signing a written contract which details the conditions of the transaction which it governs, constitutes acceptance on the part of the signer.


suftajah (Orig. Persian) A debt transfer transaction, practiced in Islamic societies since the `Abbasi period in which A, a debtor authorizes his agent (wakil) or someone who owes him a debt, to pay a given amount to C to whom A owes a debt. Suftajah is related to and may be considered a special case of the standard Islamic debt transfer transaction known as hawalah (see entry).


sukuk Similar characteristics to that of a conventional bond with the difference being that they are asset backed, a sukuk represents proportionate beneficial ownership in the underlying asset. The asset will be leased to the client to yield the return on the sukuk.


Sunnah The actions, deeds, affirmations and characteristics of the Prophet Muhammad. The customary practice of the Prophet which informs the life of a Muslim.


takaful Islamic insurance. Structured as charitable collective pool of funds based on the idea of mutual assistance, takaful schemes are designed to avoid the elements of conventional insurance (i.e., interest and gambling) that are prohibited by Islamic law.


tawarruq Reverse murabahah. As used in personal financing, a customer with a genuine need buys something on credit from the bank on a deferred payment basis and then immediately resells it for cash to a third party. In this way, the customer can obtain cash without taking an interest-based loan


Ulema pl. of 'alim, Shariah a scholars or jurists.


Ummah The Muslim Community.


urboun Earnest money. It is the amount paid by the client (orderer) to the seller after concluding a contract of sale, with the provision that the contract is completed during the prescribed period. The urboun amount will be counted as part of the price; otherwise the urboun will be kept by the seller if the buyer fails to execute the contract.


usul al-fiqh Islamic legal theory.


wadia Safe-keeping/resale of goods with a discount on the original stated cost


wadi`ah (lit.) Safe-keeping deposit. The standard Islamic financial transaction in which X entrusts property to Y for safe-keeping. Wadi`ah refers to the deposited property.


wakalah Agency; a standard Islamic practice wherein X (the wakil) acts as the agent of Y. In this capacity X may execute the affairs of Y. Wakalah is a widely applicable phenomena in Islamic practice which is often used in financial transactions: whenever a party cannot personally supervise a given affair, it deputizes another party to execute it on its behalf.


waqf pl. (awqaf) lit. cessation; A standard Islamic transaction in which one 'freezes' his property such that it is considered to have been arrested in perpetuity and can neither be sold, inherited or donated. The term waqf frequently refers to the property itself. The use of a waqf (e.g. a park) is often dedicated to the relief of the poor, the public at large or other charitable ends.


wasiyyah Will, testament, bequest. The statement of a Muslim in which he details the manner in which his wealth is disposed of after his death.


zakah literally, it means blessing, purification, increase, or cultivation of good deeds. In Shariah, it is an obligation in respect of funds paid for a specified type of purpose and for specified categories. It is a specified amount prescribed by Allah the Almighty for those who are entitled to Zakah as specified in the Qur'an. The word Zakah is also used to indicate the amount paid from the funds that are subject to Zakah.

(by Mohammad Imad Ali/Finance in Islam)

Islamic finance links:
Islamic finance consulting and training (GlobalPro Consulting- Kuala Lumpur,Malaysia)
Islamic finance consultant and trainer (Ahmad Sanusi Husain-Kuala Lumpur,Malaysia)

Halal business: Closer partnerships between importers and producers will benefit Thai entrepreneurs, while China's Muslim market offers rich potential

Thai entrepreneurs are encouraged to move beyond being merely suppliers and to form partnerships with investors from the Gulf Co-operation Council (GCC) states and other Muslim nations to cash in on the growth of the global halal market.

Importers from these countries have shifted from a basic import model in which they simply order products and are now looking at finding the right business partners.

"The point here is that this marks an important development for Thai businesses because it would make halal importing companies partner up with global suppliers, thus helping them establish a presence there and giving the local businesses knowhow about the exact procedures for processing, packaging and labelling. They will emerge as more than importers and become producers working together with global facilities," said Dr Yusuf Reilly, a consultant to the Thai Halal Manufacturers & Exporters Association for the Europe and USA zones.

Al Islami, for example, is setting up a meat-processing plant in the UK. Mekkafood in Germany is setting up its own production facilities, Dr Reilly told participants at the Expanding the Global Halal Markets Conference 2009 held in Bangkok recently.

This trend is also being witnessed in countries in Asia where foreign investors, including those from GCC states are seeking local partners, especially food and farm product processors to tap abundant supply sources.

The GCC, which has a population of 36 million and includes Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, has put large investments into agriculture in Indonesia this year.

In Thailand, Bahrain-based Islamic bank Al Salam Bank recently signed a memorandum of understanding with Thailand's largest agro-industry group, CP Group, for the possibility of jointly investing in food and farm businesses.

According to Dr Reilly, the global halal market is huge and it is expected to be worth US$650 billion by end of 2010, thanks to the developments and the growth of some virgin markets including Turkey and China.

With about 30 million Muslims, China is a major potential market as both a producer and consumer of halal products. "The market is underserved and very eager to find halal products that meet their needs," he said.

Adisak Asmimana, president of the Thai Halal Manufacturers & Exporters Association, said at the conference that Muslims in China were a huge consumer market that Thai halal companies should tap into.

Ningxia, the autonomous region near the border with Mongolia, is home to a large Muslim population, as is Xinjiang, the Uyghur autonomous region tucked between Mongolia and Kazakhstan in the northwest .

Dr Adisak, the first president of the new association, said he had worked hard over the past year on more aggressive strategies under D2D or "Direct to the Keyman's Door" to strengthen and build relationships with halal business partners around the globe including China.

He has played a key role in the establishment of the World Halal Business Association with businessmen from China. With a representative office in Hong Kong, the association will help support the expansion of halal market to China and acts as a springboard for Thai products to expand worldwide.

Chan Hing Tze, president of China Halal Manufacturers and Exporters Association, believes a strong halal business is essential to help the world economy get through the current crisis.

"The fact that I'm not a Muslim does not prevent me from linking trade and business with Muslims in China, Asia and the Arab world," he said.

"The difference is not a problem for there are no boundaries in the global economy and you can be sure that we could help boost the global halal business substantially in the near future."

There are plenty of halal-food restaurants in China, particularly Beijing, which is home to 200,000 Muslims.

The Thai Commerce Ministry has encouraged small and medium-sized entrepreneurs to explore the halal market by joining its trade trips abroad. The ministry also advises manufacturers to make products and run businesses in strict conformity to Islamic rules.

In Thailand, halal products are processed in accordance with regulations of the Central Islamic Committee of Thailand for Halal Food Standard B.E. 2544, which covers production plants, food products, raw materials, employees, transport and storage, distribution and services.

The Halal Science Centre at Chulalongkorn University says the world's Muslim population in 148 countries is now 1.9 billion or 29% of the total world's population.

The world's Muslim consumers include 8 million in North America with a market value of $1.75 billion per year, 18 million in Europe ($2.63 billion), and 200 million in Indonesia ($2.19 billion). Thailand's share in halal products market is estimated at $330 million or 0.057%.

Dr Reilly suggests Thai companies catch up the market trends of halal products to enlarge its market share.

His study shows that the market of the younger generation is getting bigger and products that fit into their new lifestyle with appealing packaging and labelling are in high demand.

These consumers work longer hours and do not go to markets or cook very often. Therefore, frozen meals, packaged food and microwave dinners are in high demand.

"Open your mind to this possibility, look for partnerships and think about halal-based beverages that appeal to the massive untapped youth market of teens and young Muslim professionals," he said, offering tips on a market where great potential still exists.

(Bangkok Post)

Islamic finance links:
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Islamic Bank of Thailand expands lending in South

The state-owned Islamic Bank (IBank) has set target to expand its lending portfolio by another 20 billion baht in deep South this year, bank president Theerasak Suwannayos said.

The loan expansion is inline with the government’s policy to rehabilitate the economy and to curb the unrest in the five southern border provinces of Satun, Songkhla, Yala, Pattani and Narathiwat, Mr Theerasak said.

However, the bank president admitted that his bank currently has only four billion baht liquidity in hands and he had discussed with Finance Minister Korn Chatikavanij to ask for an approval for the bank’s plan to raise capital by six billion baht.

After the capital raising, the bank will have capacity to grant as many as 60 billion baht in new loans

(Bangkok Post)

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Islamic finance consultant and trainer (Ahmad Sanusi Husain-Kuala Lumpur,Malaysia)

Malaysia Well Positioned To Provide Islamic Banking Services In Europe

KUALA LUMPUR, July 11 (Bernama) -- Malaysia, recognised internationally for its vast experience in Islamic finance, is well positioned to provide services and facilities related to Islamic banking in Europe.

"This is a potential area that we have yet to develop with Europe. We need to move away from the thinking that Islamic banking must only be in the Middle East or among Arab, muslim countries," said Malaysia's ambassador to Brussels, Datuk Hussein Hanif.

"It goes beyond that.Following the recent financial crisis, developed countries are acknowledging Islamic banking," Hussein told Bernama in an interview recently.

Hussein said Bank Negara can play a role by having an exchange of visits and discussions with its counterparts in Europe on Islamic banking.

Malaysian banks, like Maybank and CIMB, already have representatives in London, he said, adding that these banks can collaborate with those in Europe to expand services in Islamic banking.

"The clientele for Islamic banking is not confined to just Muslim countries but spread all over Europe, the United States and the Far East," he highlighted.

He said Islamic banking continues to grow at a rapid pace because it is value-oriented and this enables it to draw funds from both Muslims and non-Muslims.

Today, more than 250 Islamic financial institutions are operating worldwide.

There are more than 14.74 million Muslims in Europe, of which 1.8 million are resident in the United Kingdom (UK), plus an additional 72 million in Turkey.

The UK is the first country in Europe to promote and encourage retail Islamic banking.

It is also in the process of embracing Islamic financial techniques by introducing new laws to facilitate further market entry.

Apart from Islamic finance, Hussein said the demand for halal food is increasing in Europe and it can be an important area for Malaysia to tap into.

He explained that Malaysia is well positioned to be the centre for the promotion, distribution and production of halal food, non-food products and other services.

"Europeans prefers our products because of the better quality," he said.

"If you look at halal food, it is in compliance with the health and safety requirements of any other western country," he said.

He said there is potential, alongside a misconception that halal food is only for muslims.

Halal food is also marketable to non-muslims, he added.

According to Hussein, the halal standard does not cover just food but has also rules regarding the transporting, packaging, labelling and logistics.

The total trade between Malaysia and the European Union (EU) amounted to US$41 billion last year.Exports to the EU totalled US$22.5 billion while imports from the grouping was US$18.5 billion.

Islamic finance links:
Islamic finance consulting and training (GlobalPro Consulting- Kuala Lumpur,Malaysia)
Islamic finance consultant and trainer (Ahmad Sanusi Husain-Kuala Lumpur,Malaysia)

US interest in the sukuk market raises new hopes for its future

Dubai: The sukuk, or Islamic bond market, has been severely tested over the past 18 months. After five years of growth in issuance, size and investor appetite, last year saw a contraction of 50 per cent in the value of sukuk issued. The second half of 2008 and the first quarter of this year saw the market effectively closed.

While governments and investment-grade corporates in North America, Europe and Asia were issuing record amounts of bonds in the first and second quarters of this year, their Middle Eastern counterparts were also issuing - but in the conventional markets, not the sukuk market.

A well-publicised criticism of the mudaraba sukuk structure made by Shaikh Taqi Usmani, a prominent Sharia scholar, in February 2008, is often blamed for the drying up of the market. Of more impact, though, was the global credit crunch that struck shortly afterwards.

But recent months have seen developments that indicate a significant shift in the market, and which have profound implications. New buyers and sellers have emerged, at the same time as traditional participants have rediscovered their appetite for Islamic debt.

Indonesia's $650 million (Dh2 billion) sukuk issued in April effectively re-opened the market. Since then, Bahrain has raised $750 million, and last week Saudi Electricity Company tapped its home market for $1.9 billion, issued in Saudi riyals.

But study the detail of these issues, and new trends appear. Perhaps the most important is the emergence of the US as a source of sukuk investors.

Historically, the US has not featured on issuers' wish-lists of investors. The education needed to convince US investors to buy this asset class was too time-consuming, too costly and had little guarantee of success. And in the good times there was plenty of demand from the Middle East and Asia, so who needed the US investor? So went the perceived wisdom.

And yet, when HSBC was marketing the Indonesian sovereign sukuk this year, it received strong demand from US institutions, without any prior sukuk education.

Perhaps this demand should not have been surprising after all, the sukuk was issued to comply with the US 144A rule that allows marketing to onshore clients in the US. This was only the third sukuk offered in 144A format, and indicates a growing willingness by issuers to be offered in the US.

By complying with 144A, the sukuk becomes on a par with conventional bonds in terms of the documentation, legal framework and disclosure levels. We are now seeing sukuk issuers lean towards 144A offerings as a matter of course, which bodes well for the market.

The US is not the only new investor sector to have emerged: Islamic private bank investors have also become significant, with 10 per cent of the Bahrain issue being subscribed by this segment. Perhaps it is not surprising that such investors see the attractions of sukuk, given the volatility of other asset classes, but like the US investor base, demand has suddenly appeared.

The most visible result of these new investors entering the market has been the level of subscriptions. Bahrain's $750 millions offer was five times subscribed; Indonesia's was seven times subscribed, receiving commitments of $4.6 billion.

In both cases, this strong interest allowed the borrower to issue at pricing tighter than guidance, and, in the case of Bahrain, to increase the issue from $500 million to $750 million. The SEC issue was even more popular, receiving commitments of more than $5.3 billion.

So what can we conclude from these developments, and how do we see the market developing? First, more sukuk will be issued under 144A regulations, the documentation and transparency levels of which will boost demand across geographies and investor types.

Second, the US will become a leading target for sukuk issuers, and as familiarity with the asset class increases, the investor base will broaden.

Finally, the emergence of private banking investors will open another investor segment that will require its own marketing and approach.

Overall, these developments mean the sukuk market has made a strong comeback.

(By Mohammed Dawood, Financial Times)

- The writer is director, debt capital markets, HSBC Amanah

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Central Bank of Kenya (CBK) urged to set policies for Islamic banks

The Central Bank of Kenya should set up a Central Sharia Supervisory Authority to oversee Islamic banking in Kenya.

According to Mr Ali Mohamed a Sharia auditor from Qatar, the authority should have the duty of setting up policies on Islamic banking in Kenya.

Speaking to journalists in Nairobi on Friday, the auditor warned that the current situation of allowing individual banks to set up their Sharia policies puts customers at risk and cause confusion in the Islamic banking sector.

“In this case, the roles of individual Sharia’a boards will be to monitor the financial institutions Sharia compliance. This will avoid issues of conflicting fatwa and Sharia arbitrage,” he said.

Mr Mohamed recommended that CBK makes it mandatory for Islamic Financial Institutions to adhere to standards set by Accounting and Auditing Organization of Islamic Financial Institutions (AAOIFI) rather than the International Financial Reporting Standards (IFRS).

“At the moment, we cannot differentiate balance sheets of an Islamic bank and a conventional bank whereas their concepts of running business are totally different,” he said.

He further called for serious vetting of Sharia advisors and top management of Islamic banks arguing that presence of “Sharia literate directors would discourage precedence of profit making motive over compliance to Sharia’a principles.”

Islamic banking is a moderately new concept in Kenya with two banks, Gulf African and First Community offering the services.

Islamic finance links:
Islamic finance consulting and training (GlobalPro Consulting- Kuala Lumpur,Malaysia)
Islamic finance consultant and trainer (Ahmad Sanusi Husain-Kuala Lumpur,Malaysia)

Glossary of Islamic Finance Terms - List #2

The principles and precepts of Islamic Shari'ah governing commercial and financial transactions are both extraordinary complex and also elegantly simple. The existence and doctrinal enunciations of different schools of Islamic jurisprudence render it challenging to summarize those principles and precepts in a succinct fashion. To familiarize the reader of these materials with the terminology used in Islamic Finance transactions, however, we are providing brief and generalized summaries of the key concepts (primarily embodied in certain Arabic words) that describe the structures and philosophy underlying modern Islamic Finance. We also set forth a few abbreviations for organizations that are currently prominent in the field of Islamic Finance.

AAOIFI means the Accounting and Auditing Organization for Islamic Financial Institutions.

Adl (pl. is adlan) means a trusted person selected by the parties to the transaction to serve as a type of trustee-arbitrator.

Arboon (also Arbun or Arboun or Bai al Arboon) means a sale involving a down payment in respect of the purchase price and complete performance of the contract at a future date. The down payment will be applied in respect of the purchase price, if the purchaser shall subsequently consummate the sale, or forfeited, if the purchaser shall not subsequently consummate the sale (including as a result of an election by the purchaser).

Bai Dayn means debt financing.

Dayn means debt. Certain schools of Islamic thought prohibit the sale of debt (bai' al-dayn) except where the purchase price does not reflect a discount from the face value of the debt.

Fatwa (pl. is fatawa) is an opinion or pronouncement on Islamic law issued by an Islamic scholar or Shari'ah Supervisory Board.

Fiqh means understanding or human comprehension of the divine law (Shari'ah). Different schools of Fiqh developed over time within Islam, and these schools often have varying views on whether a particular action is permitted under Shari'ah.

Gharar means uncertainty and ambiguity and, separately, can also include elements of deceit. Under Shari'ah, parties may not enter into an agreement that is subject to excessive uncertainty and ambiguity.

Halal means lawful under Shari'ah.

Hawala is a transfer agreement whereby an obligation is transferred from one person to another; bill of exchange, remittance.

Haram means unlawful under Shari'ah.

Hissas means equity shares or ownership interests.

IDB means the Islamic Development Bank.

IFSB means the Islamic Financial Services Board.

Ijara (also Ijarah) means lease or leasing of assets or services. In Islamic finance transactions, a financial institution or a special purpose entity receiving financing may purchase an asset and lease it to the customer at an agreed rental and for an agreed term.

Ijara wa iqtina means a lease of an asset couple with a right in the lessee to purchase the asset at the end of the lease term. This arrangement is often quite similar, structurally, to a conventional "hire/purchase" scheme, in which the lessee/customer has the right to buy an asset at the end of the asset's lease term.

Ijtihad means, literally, "effort" or legal reasoning or the making of a legal decision by independent interpretation of the usul al-fiqh, particularly the revealed sources.

Islamic finance refers to investment and financing that are structured to comply with the requirements of the Shari'ah.

Istisna'a (also Istisna) is variously referred to as a commissioned manufacture and sale, a commissioned future sale and purchase/sale transaction in which a buyer/customer places an order for the construction or manufacture of an object to be delivered at a future date (which can range from something as simple as an item of jewelry to something as large as a liquefied natural gasification project) at a pre-agreed price.

Masnou means that which is manufactured or constructed pursuant to an istisna'a arrangement or contract.

Maysir (also maisir) means gambling.

Mudaraba is a type of joint venture in which one venturer (the investor, or rabb ul-maal) provides capital to another (the working or service venturer, or mudarib) in order to undertake a business activity. Profits are shared at a pre-determined ratio, but losses of capital are borne by the investor.

Mudarib (also Mudareb) means the joint venturer providing services in a mudaraba and who manages the mudaraba.

Murabaha means "a profitable sale", a cost-plus sale. In modern financial practice involving bank mediation, it has come to mean a mode of financing whereby the financier purchases a specific asset/commodity chosen by the financier's customer and re-sells it to that customer at a predetermined price. The selling price is higher than the purchase price, and the difference between the financier's acquisition price and resale price is the financier's profit (i.e., the reward for the financier's risk). The customer's payment obligation can become due and payable at the time of the financier's transfer of the asset/commodity or can be deferred and paid over time.

Musharaka (also Musharakah or Musharaqah) is a joint venture (frequently a partnership) in which each of the joint venturers contribute capital to a particular business undertaking. The joint venturers share profits as they may agree, but the losses must always be shared in accordance with the contributed capital of the respective joint venturers.

Musharaka Mutanaqisa means a musharaka in which sharing of one joint venturer diminishes over time with performance by the other joint venturer and is frequently referred to as a "diminishing partnership".

Mussallam means the purchaser of the commodity or item to be delivered on a deferred basis pursuant to a salam contract.

Mussallam fiihi means the commodity or item that is the subject of a salam contract.

Musallam ilayhi means the seller of the commodity or item to be delivered on a deferred basis pursuant to a salam contract.

Mustasne' means the purchaser under an istisna'a arrangement.

Qur'an (also Quran or Koran) is the holy book of Islam as revealed to the Prophet Mohammad (sawf).

Qard hassan means a benevolent loan in which the lender is afforded no monetary return, and in current parlance frequently refers to an interest-free loan.

Rabb ul-maal means the venturer providing funds in and to the mudaraba and will not have the right to manage the mudaraba.

Rahn means a mortgage (with respect to real property) and pledge (with respect to personal property).

Riba means, literally, "increase" and is used to connote an unjustified increase in capital; the term is often used to refer to interest, usury or unjust enrichment). A key tenet of Shari'ah requires that participants in a commercial transaction undertake a risk in the endeavor. A borrower's obligation to pay interest in a conventional loan transaction is viewed as assuring a "riskless" return on the financier's investment, and thus is not permitted under the Shari'ah.

Salam is a sale agreement in which the seller undertakes to supply the buyer with specific goods at a future date in exchange for, and as a liability against, full payment in advance at the current time.

Sane' means the seller who agrees to supply the item to be manufactured or constructed pursuant to the istisna'a arrangement or contract. The sane' may or may not be the entity or person that actually manufactures or constructs that item.

Shari'ah (also Shari'a or Sharia) means the perfect, immutable, divine Islamic "law" as revealed in the Qur'an and the Sunna.

Shari'ah Supervisory Board (also Shari'ah Board or Shari'ah Committee) is a body of Islamic scholars that reviews Islamic financing transaction documents and approve them as being compliant with the Shari'ah.

Sharika means a partnership (or similar joint venture) or a contract between two or more parties pertaining to capital and work (management) for the purpose of making a profit.

Sharika al-masrafiyya means, in current usage, musharaka.

Sharikat ul-amwaal means a property partnership or property joint venture.

Sukuk (pl. of sakk or saak) are capital market instruments which may be "Islamic bonds", "Islamic asset securitizations" or "Islamic whole business securitizations". The sukuk holder is granted a fractional undivided ownership in the assets or business being financed. AAOIFI recognizes 14 categories of sukuk.

Sunna means the practices and traditions of the Prophet Mohammad; the binding authority of his dicta and decisions.

Takaful means "guaranteeing each other" and the sharing of risk on a cooperative basis and mutual assistance (ta'awun). It is an Islamic insurance system that is based on mutual co-operation and assistance among groups. Such Islamic insurance has been devised to avoid fundamental prohibitions under Islamic Shari'ah such as riba, gharar and maysir.

Tandeed means conversion of musharaka assets into money.

Taqlid means "imitation" in the following of precedent and is particularly relevant to the period of Islamic history (approximately 950 ? 1900 (possibly 1970) C.E.) during which it is said that there was a "closing of the gate of ijtihad".

Usul al-fiqh means the "roots of the law", which are (a) the Qur'an, (b) the Sunna, (c) the ijma, or "consensus" of the community of Islamic scholars, and (d) the qiyas, or analogical deductions and reasoning of the Islamic scholars with respect to the foregoing. The Qur'an and the Sunna are often referred to as the "revealed" sources.

Wakala is an agency agreement or arrangement.

Wakil (also Wakeel) is the agent in a Wakala relationship.

(Dechert LLP)

Islamic finance links:
Islamic finance consulting and training (GlobalPro Consulting- Kuala Lumpur,Malaysia)
Islamic finance consultant and trainer (Ahmad Sanusi Husain-Kuala Lumpur,Malaysia)

Glossary of Islamic Finance Terms - List #1

Bai Bithaman Ajil
A contract of sale and purchase for the financing of an asset on a deferred payment and installment basis with a pre agreed payment period. The sales price includes a profit margin.

Bai Inah
A financing facility involving two separate contracts. In the first contract a financier sells an asset to a customer on deferred payment terms. Immediately after, the financier repurchases the same asset from the customer on cash terms at a price lower than that of the deferred payment sale.

It can also be applied vise versa where a financier buys an asset from a customer on cash terms. Immediately after, the financier sells back the same asset to the customer on deferred payment terms at a price higher than that of the cash sale.

Bai Dayn
Refers to the buying and selling in the secondary market of debt certificates, securities, trade documents and papers that conform with the Syariah. The trade documents are issued by debtors to creditors as evidence of indebtedness. Only documents evidencing real debts arising from bona fide merchant transactions can be traded.

Bai Istijrar
A contract between a supplier and a client whereby the supplier supplies a particular item on an ongoing basis on an agreed mode of payment until they terminate the contract. It is also applied between a wholesaler and a retailer for the supply of a number of agreed items.

Bai Muzayadah
A sale of an asset in public through the process of bidding among potential buyers and the asset is sold to highest bidder.

Bai Wafa’
A contract with the condition that when the seller pays back the price of the property sold, the buyer returns the property to the seller. It is a Bai in form but a pledge in substance.

Bai Salam
A purchase contract for the delivery of an item on a certain future date with the full payment of the purchase price in cash at the point of contract.

Bai Istisna’
A purchase order contract where a buyer orders a seller or contractor to manufacture an item according to specification in the purchase contract to be delivered on a certain future date. The settlement of the purchase price is according to the agreement between the two parties.

Dhaman or Kafalah
A contract of guarantee where a person underwrites any claims or obligations that should be fulfilled by a debtor, supplier or contractor in the event that the debtor, supplier or contractor fails to fulfill his obligation.

Gharar
An unknown fact or condition. In a commercial transaction, the fact or condition of either of the contracting parties or the item in the contract or the price of the item is not known giving rise to an uncertain status or result of the contract, i.e. whether it is valid or void. An excessive gharar makes a contract null and void.

Ghish, ghurur
Cheating, fraud, deception. Both are prohibited by the Shariah.

Haq Maliy
A right on a financial asset. Examples of rights are haq dayn (right to the claim of a debt) and haq tamalluk (right of ownership).

Hibah
Gift, something given to a person without exchange.

Hiwalah
A contract of transferring a debt obligation from the debtor to a third person.

Ibra’
Giving up of a right. In a commercial transaction a creditor gives up part or all of his right to a debtor usually for early settlement of the debt.

Ijarah
A sale or purchase of usufruct. A sale or purchase of the use of another person’s property. The ownership of the property remains with the lessor while the lessee only owns the right of the use of the property.

Ijarah Thumma Bai
Refers to an Ijarah (leasing/renting) contract to be followed by a Bai (purchase) contract. Under the first contract, the hirer leases the property from the owner at an agreed rental over a specified period. Upon expiry of the leasing period, the hirer enters into a second contract to purchase the property from the owner at an agreed price.

Ittifaq Dhimni
An agreement between parties concerned on the sale price and repurchase price of an asset prior to the execution of the sale and repurchase contracts for the purpose of bidding process in Bai’ Muzayadah (bidding or auction).

Ju’alah
A unilateral contract promising a reward for the accomplishment of a specified task.

Khilabah
A form of fraud, either in words or deed by a party to a trading contract with the intention of inducing the other party to make a contract. This is prohibited by the Shariah.

Khiyanah
A breach of trust, betrayal or treachery. It is prohibited by the Shariah.

Maisir
Gambling. Any activity the involves betting money or an item on the outcome of an unpredictable event. The bet is forfeited if the outcome is not as predicted by the bettor and the person against whom the bet is made takes the bet. This activity is prohibited by the Shariah.

Mal
A thing which is naturally desired by man, and can be stored for times of necessity; it has use and it is permissible by the Shariah to enjoy its benefit.

Mudharabah
(trustee financing)
An agreement between a provider of fund who provides 100% capital for the financing and an entrepreneur who manages the business applying his expertise; profit is to be shared between them according to an agreed ratio, while loss is to be borne solely by the provider of capital.

Muqasah
Debt settlement by a contra transaction; setting off.

Bai Murababah
(cost plus)
A sale based on cost price where the cost price, the profit margin and other costs to the seller are stated at the time of the contract. The settlement of the price is normally made on deferred lump sum payment terms.

Musharakah

(joint venture)
An agreement between two or more parties whereby all parties contribute capital either in the form of cash or in kind to form a company to carry on commercial activities. The profit is shared based on equity participation or as agreed between the parties; loss is shared according to equity participation.

Qabadh
Qabadh means taking possession. Generally qabadh follows urf, viz. the common practices of the local community where it varies from one kind of good to another recognizing the way the possession of a good takes place.

Qardh Hasan
It is a benevolent loan, i.e. a loan contract between two parties with no extra payment over and above the loan. Any extra payment imposed by the lender or promised by the borrower is prohibited. However the borrower is permitted to pay extra on payment at his absolute discretion as a token of appreciation.

Rahnu
Making a property a security for a debt or a right of claim, the payment in full of which is permitted from the sale of the property in the event of default by the debtor.

It is also used as a name for a kind of borrowing with collateral.

Riba
In lending, it is the extra payment imposed by the lender or promised by the borrower over and above the loan. In trading it is mostly the difference in weight in the exchange of gold of different measures of purity, e.g. 10g. of 750 gold with the 8g. of 835 gold; or the difference in time between payment and delivery in foreign currency exchange, e.g. payment of RM10,000 at 10.00 a.m. and delivery of USD3,800 at 3.00 p.m on the same date.

Sarf
A contract of exchange between two currencies.

Shariah
Shariah means fiqh or Islamic Law comprising the whole body of rulings pertaining to human conduct derived from the rulings’ respective particular evidences. The respective particular evidences are the sources of the Shariah, the primary sources being the Quran, the Sunnah, ijma’ and qiyas, the secondary sources being the method of reasoning applied by Muslim jurist in their ijtihad (personal reasoning)

Shariah requirement
It is a general phrase or expression which generally means abstinence from prohibition and fulfillment of essential elements and necessary conditions in performing a human act.

Suftajah
Bill of Exchange

Sukuk
Plural of sok. It is being used as singular. It is a document or certificate evidencing an undivided pro rata ownership of an underlying asset; a capital market financial instrument tradable in the secondary market.

Ta’widh
A compensation agreed upon by the contracting parties as a payment that can be claimed by the creditor when the debtor defaults in the payment of his debt.

Tadlis al-‘aib
An act of a seller intentionally hiding the defects of goods; it is prohibited by the Shariah.

Takaful
It is a protection plan based on Shariah principles. It is Islamic insurance. A person becomes a participant by undertaking a contract of tabarru’ and paying a participative contribution (tabarru’) to a common takaful fund whereby he allows his contributions to be used to help other participants whenever they suffer defined losses. The commercial contracts of Mudharabah and Wakalah are incorporated into tabarru’ contracts to increase the size of the takaful fund.

Tanajush
A conspiracy between a seller and a buyer wherein a buyer purchases an item from the seller at a price higher than that of the market thereby enticing other buyers to buy the items at a price higher than the market price. The seller thus makes a big profit. This act is prohibited by the Shariah.

Ujrah
A payment for manfaah, usufruct on the use of another’s property. Another term related to ujrah is ajr (plural ujur), which is a payment for a service. It is also applied to salary, wage, pay, fee(s), charge, enrolment, honorarium, remuneration, reward, etc.

Uqud Ishtirak
Contracts of participation or partnership

Uqud Mu’awadat
Contracts of exchange

Uqud Tabarru’at
Contracts of gift or donation

Urbun
A deposit or earnest money paid as an installment to confirm contract. If the contract continues to its conclusion the seller realizes it as part of the selling price. If the contract fails the seller forfeits it as penalty for the breach of the contract.

Wadi’ah
Safe custody. Originally safe custody is Wadiah Yad Amanah, i.e. trustee custody where according to the Shariah the trustee custodian has the duty to safeguard the property held in trust. Wadiah Yad Amanah changes to Wadiah Yad Dhamanah (guaranteed custody) when the trustee custodian violates the conditions to safeguard the property. He then has to guarantee the property.

Wakalah
A contract of appointment of an agent where a person appoints another as his agent to act on his behalf.

Zakat
A religious obligation of alms-giving on a Muslim to pay 2.5% of certain kinds of his wealth annually to one of the eight categories of needy Muslims.

(IBFIM)

Islamic finance links:
Islamic finance consulting and training (GlobalPro Consulting- Kuala Lumpur,Malaysia)
Islamic finance consultant and trainer (Ahmad Sanusi Husain-Kuala Lumpur,Malaysia)

Video: Beautiful recitation of Quranic verses from Surah Baqarah concerning Riba i.e. Usury or Interest

2:275
Those who swallow down usury cannot arise except as one whom Shaitan has prostrated by (his) touch does rise. That is because they say, trading is only like usury; and Allah has allowed trading and forbidden usury. To whomsoever then the admonition has come from his Lord, then he desists, he shall have what has already passed, and his affair is in the hands of Allah; and whoever returns (to it)-- these arc the inmates of the fire; they shall abide in it.

2:276
Allah does not bless usury, and He causes charitable deeds to prosper, and Allah does not love any ungrateful sinner.

2:277
Surely they who believe and do good deeds and keep up prayer and pay the poor-rate they shall have their reward from their Lord, and they shall have no fear, nor shall they grieve.

2:278
O you who believe! Be careful of (your duty to) Allah and relinquish what remains (due) from usury, if you are believers.

2:279
But if you do (it) not, then be apprised of war from Allah and His Apostle; and if you repent, then you shall have your capital; neither shall you make (the debtor) suffer loss, nor shall you be made to suffer loss.

2:280
And if (the debtor) is in straitness, then let there be postponement until (he is in) ease; and that you remit (it) as alms is better for you, if you knew.

2:281
And guard yourselves against a day in which you shall be returned to Allah; then every soul shall be paid back in full what it has earned, and they shall not be dealt with unjustly.

(Al-Quran: Surah Baqarah, verse: 275-281)

Islamic finance links:
Islamic finance consulting and training (GlobalPro Consulting- Kuala Lumpur,Malaysia)
Islamic finance consultant and trainer (Ahmad Sanusi Husain-Kuala Lumpur,Malaysia)

Scholars juggle faith and commerce as Islamic banking grows

KUALA LUMPUR, July 8 — Religion may be the bedrock of Islamic finance but influential syariah adviser Mohd Daud Bakar says the bottom line drives the industry.

“Commercial gains are very important,” said Daud, who is listed by consultants Funds@Work as among the world’s most active scholars, sitting on 22 syariah boards.

“We are not a charitable organisation. Shareholders are looking for ROE (return on equity) at the end of the day.”

As Islamic banking tries to reach wider markets, syariah scholars such as Daud are weighing more than just Islamic tenets when they rule on the validity of financial instruments, reflecting commerce’s growing role in the RM3.5 trillion industry.

The desire to win market share, the level of expertise of individual scholars and the scarcity of scholars may all shape Islamic financial rulings and the future of the sector.

Some syariah advisers say it is not always easy to balance religion and business as they grapple with modern funding techniques that sometimes challenge Islam’s basic beliefs.

Once at odds with the syariah’s ban on gambling and excessive speculation, contentious conventional practices such as hedge funds, short-selling and derivatives are slowly finding a place in Islamic finance.

Tasked with applying Islamic law and global financial practices, syariah scholars are powerful gatekeepers, whose approvals are necessary before a product can be marketed as an Islamic instrument.

There are no official figures but some practitioners say there are around 200 syariah scholars worldwide.

Some syariah advisers say the drive to grow the industry influences their decisions on whether certain products meet the syariah’s standards.

Ahmad Hidayat Buang, who advises Islamic insurer Takaful Ikhlas, says Malaysian scholars try to meet companies’ business needs, reflecting a popular view that the country is more liberal in its syariah interpretation than the Gulf.

“We see what happens, then we try to adopt the more flexible view of syariah in order that our product could be introduced,” said Hidayat.

“It’s not necessarily a question of syariah. When you decide on the matter many aspects have to be taken into consideration.”


STAR ENDORSEMENTS?

Syariah scholars are not formally accredited by a single authority so their qualifications can vary vastly, raising questions about the ability of some to understand complex financial structures, especially if they are pressed for time.

With newer financial firms, “they know that the syariah board can be very powerful so they bring in very junior scholars and give them very little information or not enough information within a very limited period of time,” said Megat Hizaini Hassan, a Kuala Lumpur-based Islamic banking lawyer.

“So these scholars may be under pressure to give approvals or certifications.”

A select group of syariah scholars are highly sought after as the bigger a scholar’s name, the greater the drawing power of the product he approves. The industry’s most influential figures can make or break markets with their decrees.

Bankers say Islamic bond issuance fell sharply last year after Sheikh Muhammad Taqi Usmani, chairman of the board of scholars at influential industry body AAOIFI, declared about 85 per cent of sukuk were un-Islamic.

Among the most active scholars are Bahrain’s Sheikh Nizam Mohammad Saleh Yacouby, who sits on 46 advisory boards, and Syria’s Abdul Sattar Kareem Abu Ghuddah, who is on 45 boards, according to Funds@Work.

This has raised concerns about whether some scholars have enough time to thoroughly vet contracts, some of which consist of reams of documents detailing complex financial instruments.

There are also concerns about the possibility of Islamic financial rulings being affected by conflicts of interest where a scholar sits on various boards.

“Syariah board conflicts of interest are part of the practice of modern economic institutions,” said Mousa Isa, a syariah adviser in Saudi Arabia. “There should be transparency.”

Other contentious issues include giving scholars incentive-based payments linked to the success of products they approve. This echoes complaints about the hefty bonuses of some Wall Street bankers which analysts say fuelled excessive speculation and helped trigger the recent credit crisis.

Ayashi Faddad, syariah adviser at Islamic Development Bank, said scholars’ fees should be approved directly by shareholders, not management, to reduce potential for conflicts of interest.

But scholars say some lines cannot be crossed. In cases where there is no room for Islam to accommodate a structure or product, Daud said “the commercial must adjust to the syariah”. — Reuters

Islamic finance links:
Islamic finance consulting and training (GlobalPro Consulting- Kuala Lumpur,Malaysia)
Islamic finance consultant and trainer (Ahmad Sanusi Husain-Kuala Lumpur,Malaysia)

Britain seeks Malaysian expertise in Islamic Finance

KUALA LUMPUR: Britain welcomes the liberalisation of Malaysia’s financial services sector, in particular, the areas concerning Islamic finance.

The Lord Mayor of London Alderman Ian Luder said Britain and Malaysia had long established links in the field of Islamic finance.

“We are particularly keen to follow this up by working with Malaysia in areas such as professional exchanges between Islamic finance staff, experts and student and joint education programmes,” he said in his speech at the Malaysia-UK Islamic Finance Forum here on Wednesday.

The liberalisation measures include the issuance of five new legal licences for international law firms in Islamic finance.

Bank Negara has also raised foreign ownership limits of local Islamic banks, investment banks and insurance companies to 70% from 49%.

“We also believe we should work together on policy exchanges and mutual recognition of standards, and we are very keen to work with your expertise in developing the market,” Luder said.

He said syariah-compliant finance was a global growth area, with Muslims making up a fifth of the world population.

“Indeed, Britian has become the leading Western country for syariah-compliant by assets and London has been providing syariah-compliant financial services for 30 years,” he said.

He added that Malaysia had an “even longer” history in syariah-compliant finance.

Islamic finance links:
Islamic finance consulting and training (GlobalPro Consulting- Kuala Lumpur,Malaysia)
Islamic finance consultant and trainer (Ahmad Sanusi Husain-Kuala Lumpur,Malaysia)