Global Islamic Finance Magazine April 2012 by Business Media Group (UK)

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April 2012

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Contents;QWERTYUIIOPDFHJUIIOPDFHJJ 32

News

9 Islamic Finance News Islamic Finance 14 The 20 Most Influential People in the Islamic Finance Industry

Here, Global Islamic Finance Magazine reveals the 20 most influential people in the Islamic finance industry. The people selected have contributed to the Islamic financial industry in truly significant ways, and clearly possess the leadership qualities essential for the jobs they do. As executives, directors and CEOs, the people in this list put in hard work through these challenging times in order to make Islamic finance the rapidly growing industry that it is today...

Risk Management 32 RISK MANAGEMENT: ISLAMIC FINANCIAL POLICIESISLAMIC BANKING AND ITS POTENTIAL IMPACT

Islamic banking is a worldwide phenomenon involving a variety of institutions and instruments, not one “project” or institution. In the past few decades, Islamic institutions and instruments have developed in many countries, including the United States...

Interview 37 Moving the Islamic finance industry forward, interview with Anouar Adham, Head of the Asset Management Division at Qatar Islamic Bank (UK)

Anouar Adham is the Head of Asset Management for Qatar Islamic Bank in the UK. Anouar has extensive experience of working with international banks in Europe, South East Asia and the Middle East...

74 Journalist Tasnim Nazeer Shortlisted for Asian Woman of Achievement Award 2012

Global Islamic Finance Magazine Journalist, Tasnim Nazeer has been shortlisted amongst millions of women in the UK for the Asian Woman of Achievement Award in Media 2012...

Islamic Banking 43 Corporate Social Responsibility and its Implications on Financial Institution: The Mainstream Western Perspective versus the Islamic Finance Viewpoint

60 Shariah Systems: An Alternative in the Making, & Strategies Accelerating the Making

Sukuk 52 Growth and Prospect of Sukuk in Islamic Finance

Years ago, Islamic finance was considered to be wishful thinking. However, serious research and the development of Islamic products has shown that Islamic finance is not only feasible and viable but it is also efficient and a productive means of financial intermediation. …

4 Global Islamic Finance

April 2012

World Islamic Finance Review

58 Mergers & Acquisitions in the Middle East: Balancing Risks, Reaping Rewards

Investment 66 Exploring the Innovative Shariah Compliant Opportunities in ETFs

As an investor, business professional or entrepreneur it is a necessity to become well-acquainted with the relevant Islamic instruments that are being made available for use within the Islamic financial sector. Islamic exchange traded funds are open-ended funds which consist of index tracking and is a trust fund that consists of a collection of stocks that can be listed and traded on a stock exchange platform like a single stock...

Market Review 30 Islamic Banks need to Offer Agriculture Financing in Pakistan

42 Kerala High Court bench gives nod to Islamic banking

The debate on whether Islamic banking is permissible in India took another turn on 10th of February 2011,...

59 Islamic Banking in Saudi Arabia Set to Grow

70 Multi Billion Dollar Sukuk on the Cards for Private Sector

Growing trade in Islamic bonds in the Gulf region this year could be driven further by increased private sector interest in Sukuk on the back of strong activity by banks,...

72 A New Shariah Finance Method: Green Tech Bonds

Islamic finance is growing at an unprecedented rate, and consequently there is a new type of financial model being developed in order to encourage millions of pounds worth of long-term investment in green technology,...

73 Dubai Islamic Investments in Sukuk

The unprecedented Islamic financial Dubai Investments may look to raise up to 1 billion dirhams (US$272.3 million) in 2012 through the sale of Sukuk, or Islamic bond,...

76 Event Review 78 Book Review 80 Events Calendar 82 Business Directory 84 Glossary 86 In the Next Issue GIFM Online Latest Issue Get the instant access to Islamic finance news & articles

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Editor-in-Chief Farhad Reyazat PhD in Risk Management

International Editorial Board

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

Dr Mohammed Obaidullah, Economist at the Islamic Research and Training Institute (IRTI) of the Islamic Development Bank, Saudi Arabia Dr Amal El-Kharouf, Head of Research and Consultancy Department at University of Jordan, Jordan Dr M.Kabir Hassan, Associate Professor and Associate Chair of the Department, University of New Orleans, USA Dr Abdelhafid Benamraoui, Westminster Business School, United Kingdom Dr M. Ishaq Bhatti, Faculty of Law and Management, La Trobe University, Australia Mughees Shaukat, PHD researcher and Assistant Researcher in INCEIF & ISRA, Malaysia Warren Edwards, CEO of Delphi Risk Management, United Kingdom John Sandwick, Islamic Wealth & Asset Management Independent Consultant, Switzerland Brian Kettel, Director at Islamic Banking and Finance Training, United Kingdom Salina Hj. Kassim, Department of Economics at International Islamic University Malaysia, Malaysia Kasim Randeree, Saïd Business School, University of Oxford, United Kingdom Abbas J. Ali, School of International Management Eberly college of Business, Indiana University of Pennsylvania, USA

Contributors Muddassir Siddiqui, UAE Michael Grifferty,UAE Alberto Brugnoni, Italy Haissam Arabi, UAE Dr. Murat Ünal, Germany John Bates,United Kingdom

Abdul Aziz Al Ghurair, UAE Ahmad Mohamed Ali Al Madani, Saudi Arabia Badlisyah Abdul Ghani, Malaysia Prof. Nahed M. Tahe, Bahrain Mansoor Durrani, Saudi Arabia

Thomas A. Timberg, Indoensia Dennis Cox,United Kingdom Anouar Adham, United Kingdom Beebee Salma Sairally, Malaysia Mohamad Zaid Mohd Zin, Malaysia

Arti Sangar, UAE Dhafer Salih Alqahtani, Bahrain Rushdi Siddiqui, USA Shaher Abbas, United Kingdom

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Auwalu Ado, Nigeria Abdulrahman Usman, Nigeria Adeeb Zaki, Pakistan Asim Hameed, Pakistan Muhammad Farrukh Saleem, Pakistan Said Bunu, Qatar

Farhaa Xha, Saudi Arabia Mirak Farook, Sri Lanka Kareem Hammour, UAE Muhammad Zeeshan, UAE Majd Ghanem, UAE Ichrak Bennani, UAE Muhammad Athar Khan, UAE

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Editorial Letter Influence is a tricky concept. Its meaning derives from the Latin word influens, which means to flow inwardly, pointing to an ancient astrological concept: that unseen forces (like the moon) affect human life. Global Islamic Finance Magazine’s Most Influential 20 is a list of people who matter in Islamic finance globally: those whose comments move markets; whose ideas and policies shape corporations, governments and economies. In compiling the list, we have focused on people who matter right now, rather than those who have been influential over the course of a long career. These figures have the ability to affect the field of Islamic finance both directly and indirectly. The GIF Magazine’s list of 20 Most Influential People in Islamic Finance currently ranges from bankers, to regulators, to asset managers.

„

Global Islamic Finance Magazine’s Most Influential 20 is a list of people who matter in Islamic finance globally: those whose comments move markets; whose ideas and policies shape corporations, governments and economies.’’

We have strived to highlight people who are influential in Islamic finance - that is, people whose influence is derived from their practice in Islamic finance, or from the fact that they are promoting Islamic finance internationally. We think that this approach gives valuable insight into the different impacts influencers have on the world of Islamic finance. It also shows the current diversity in how people are influenced by Islamic finance and banking. In a variety of different ways, each person on this list has influence over financing methods. Their influence comes from many sources; however, they are unified by their shared ability to affect the unique way of financing. The people selected have contributed to the Islamic financial industry in truly significant ways, and clearly possess the leadership qualities essential for the jobs they do. As executives, directors and CEOs, the people in this list are putting in hard work through these challenging times, in order to make Islamic finance the fast-growing industry that it is today. We conducted research with experts within the Islamic finance industry in order to finalise a listing, then contacting people to ask whether they wanted to feature in this presentation. Candidates were then asked questions about their positions, their roles, their levels of qualifications and experience, awards and nominations received, and their level of exposure within the Islamic finance

To write the letter to the editor, send an email to editor@globalislamicfinancemagazine.com.

8 Global Islamic Finance

April 2012

industry. This included speeches and attendance at conferences and presentations, and books, interviews, and articles. All the people appearing on the list were chosen based on the research gathered from questions asked within interviews, external comments received, and general internet research taking place between March 2011 and November 2011. This is the first listing of its kind, and our selection process is still in its infancy. The 20 most influential people in the Islamic finance industry have been placed in alphabetical order in this listing. There are no specific numbers assigned or ordering by influence. In this list, Global Islamic Finance Magazine wants to celebrate people who have made a difference in the Islamic finance industry through a variety of ways, by recognising their achievements, the impact they have made on the industry, and the recognition they have earned. We would like to hear what you think about the methodology, if you feel like sharing any comments with us. Who do you think should be considered as the most influential people?

Farhad Reyazat PhD in Risk Management Editor in Chief

News

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Islamic finance news Dubai Islamic Bank Repays $750 Million Sukuk It has been reported Dubai Islamic Bank (DIB) announced that it has repaid in full a US$750 million five-year Sukuk, which matured on March 22, 2012, from its own sources, demonstrating the bank’s financial strength and comfortable liquidity position. Issued in March 2007, the Sukuk was oversubscribed by three times, with 45% allocation in the Middle East, 25% in Asia and 30% in Europe, underscoring the regional and international market confidence in DIB. The only capital market issuance done directly by DIB, the Sukuk was issued through a special purpose vehicle, DIB Sukuk Company Limited, established in the Cayman Islands, and was the first Sukuk to be listed both on the Dubai International Financial Exchange (DIFX) and the London Stock Exchange. Dr. Adnan Chilwan, Deputy CEO – Chief of Consumer and Wholesale Banking, DIB, said: “The repayment of the Sukuk in full is a clear demonstration of the financial strength of DIB. The ability to repay from our own resources without the need to refinance is testament to the robust fundamentals we have built over the past years. The investor confidence gained by the Sukuk across a wide geography further highlight our credentials in successfully strengthening our funding sources, despite the challenging market conditions that prevailed globally. We will continue to explore potential opportunities to expand our funding sources in the future.” DIB reported an operating profit of AED 1.03 billion for 2011 while net profit increased to AED 1.01 billion. DIB’s total assets stood at AED 90.59 billion and the bank’s customer base continued to expand, with customer deposits reaching AED 64.77 billion at the end of 2011, and liquidity position comfortable at 74% Advances to Deposit ratio (ADR). Recently, Tamweel a mortgage finance company majority owned by DIB, launched its own US$300 million five- year Sukuk which was fully subscribed by the market. Dubai Islamic Bank (DIB), established in 1975, is the first Islamic bank to have incorporated the principles of Islam in all its practices and is the largest Islamic bank in the UAE. DIB is

a public joint stock company, and its shares are listed on the Dubai Financial Market. The bank enjoys a reputation as a leader and innovator in maintaining the quality, flexibility and accessibility of its products and services. The bank currently operates 74 branches in the UAE. DIB has been proactive in creating partnerships and alliances at both the local and international level. The bank has established DIB Pakistan Limited, a wholly owned subsidiary which has a network of 64 branches across 26 major cities in Pakistan. DIB has also started operations in Jordan, with the establishment of Jordan Dubai Islamic Bank. DIB has earned the respect of its peers around the world for many years, and its leading position has been reaffirmed by the 79 local, regional and international accolades that it has won between 2008 and 2010. DIB has won awards across diversified areas, including retail, corporate and investment banking, as well as CSR and consultancy services. The bank’s most recent awards include being named “Best Islamic Bank in UAE” for the fifth consecutive year by Islamic Finance News, “Best Islamic Bank” in the UAE for 2010 by NY-based Global Finance magazine, “Best Islamic Bank in the UAE” by Asia money magazine, and being named winner of the first ever pan-Arab emea finance award for corporate social responsibility. Islamic Finance Assets Reported at $1.3 trillion in 2011 It has been reported that a new report from TheCityUK’s UK Islamic Finance Secretariat (UKIFS) indicates that Islamic finance assets worldwide continued a long run of growth to reach an estimated $1.3 trillion in 2011, 150 per cent up over the previous five years. Despite political unrest in some countries the industry has continued to expand, not only in its core markets of the Middle East but also in South East Asia and offshore jurisdictions such as Bermuda. Islamic funds, for example, reached a new high of $58 billion in 2010, with the available pool about ten times larger at over $500 billion. Even so, competition is fierce, with average management fees worldwide down from 1.5 per

cent in 2006 to 1.0 per cent in 2011. Keith Phillips, Executive Director, UKIFS, comments, “Our report once again shows that the UK continues to maintain its position as the leading Western provider of Islamic finance with assets of $19 billion. “The UK also benefited from a globally buoyant Sukuk market in 2011, with issuance up 60 per cent to $84 billion. This was reflected in ten new Sukuk listings on the London Stock Exchange’s markets in 2011 and two in early 2012. There are now 37 Sukuk with a combined value of $20 billion listed on the London Stock Exchange’s markets. Additionally, seven exchange traded funds and two exchange traded products are also listed on these markets.” In the UK, banks, Sukuk issuance and exchange traded products are buttressed by the strong infrastructure of professional support for Islamic finance deals and transactions. This includes over 25 major law firms and the largest four professional services’ firms, and this has yet to be seriously rivalled by any other European financial centre. The UK is also making an increasing contribution to the development of Islamic finance education and skills with four professional institutions and 10 universities and business schools offering qualifications. These include the Chartered Institute of Management Accountants, Cass Business School, the University of East London and Durham University. With Shariah-compliant finance utilised for the redevelopment of Chelsea Barracks and the construction of the Shard of Glass in London, Islamic finance also has a crucial role to play in infrastructure development in the UK. Considerable potential exists for expansion of the industry worldwide, although appropriate legal and regulatory structures are crucial for its development in individual countries. The work that is now being undertaken through UKIFS with its six practitioner-led work streams covering topics from wholesale banking to skills is looking to address these issues by creating more efficient structures and processes and applying greater innovation to drive market development.

2012 April Global Islamic Finance

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News

Isda Launches New Islamic Derivatives It has been reported that the company Isda, in conjunction with the International Islamic Financial Market, announced the creation of the Mubadalatul Arbaah, or profit rate swap, product standard to be used for Islamic hedging purposes. The Mubadalatul Arbaah derivative allows for bilateral exchange of profit streams from fixed rate to floating rate or vice versa. The documentation agreement was approved by the IIFM’s Shariah advisory panel in coordination with Clifford Chance and market participants globally. Islamic finance has seen some significant developments in recent months aimed at capitalising on international demand for Shariah-compliant products, including the launch of an Islamic interbank benchmark rate in November last year. Sixteen local banks launched the Islamic interbank benchmark rate in partnership with data vendor Thomson Reuters, creating the first standardised interbank lending rate in the Middle East. The Mubadalatul Arbaah standard follows a similar product standard launched by Isda and the IIFM in 2010. The Tahawwut Master Agreement, a derivative product standard designed for the management of cash flow, allowed for the hedging of risk for various Islamic capital market instruments such as the Shariah compliant Sukuk bonds. Robert Pickel, Isda chief executive, said: “Isda is pleased to continue its partnership with the IIFM as part of its own ongoing efforts and commitment to building safe and efficient OTC hedging markets, across both global and Islamic financial markets. Islamic Development Bank Lending a Helping Hand The Islamic Development Bank (IDB) has donated a generous amount of $100,000 for the victims of Tropical Storm Sendong in select areas of Cagayan de Oro and Iligan cities. IDB representatives Mohamed Amer ElSayed IDB and Abdo Mohammed Al-Taki, along with their local partner, the Tamparan Medical Foundation from the Autonomous Region in Muslim Mindanao (ARMM) headed by its president Dr. Potri Disommimba-Ali, personally distributed on Monday kits containing school supplies, shoes, uniforms and bags to 500 elementary students in Barangay Balulang, Cagayan de Oro. Infant needs such as one-month supply of milk, infant dress and vitamins were also distributed to lactating mothers in the area. Over the weekend, the group also distributed relief goods to flood victims in Barangays Hinaplanon and Mandulog in Iligan City. Ali said they chose the barangays based on the 10 Global Islamic Finance

April 2012

extent of damage and the status of their Muslim brothers and sisters. Moneerah Integrated School in Merila Ubaldo Laya Iligan, which is being funded by IDB in 2009 and was greatly affected by Tropical Storm Sendong, were also provided with Information Technology (IT) equipment and electrical supply amounting to $40,000. The gadgets include one 50 KVA transformers with complete accessories, one 20 KVA silent generator, 15 computer desktops (Intel Core i7), five Sony Vaio laptops, five L200 all-in-one printer, three Epson printers, one 55-inch TV Mini theatre, one complete sound system, one wireless N-link and one area DLP projector. During the formal turnover on Sunday, an IT specialist immediately installed the gadgets for immediate use of the students. The goods and IT gadgets were bought locally, providing income to local investors. Al-Taki, who represented IDB as relief officer, said the distribution is just their initial activity. “Our institution has approved $15 million for the Philippines to help in alleviating poverty of our Muslim brothers here even if this country is not a member of IDB,” Al-Taki said. Al-Taki, who personally witnessed the condition of his brothers and sisters, said there is a need to focus on development, not just giving immediate relief aids. “Our humanitarian activities should lead to better future in terms of development in which our mission is to provide long-term social reform, development and prosperity,” he said. The IDB project, implemented through its local partner, will also provide scholarship to deserving students and other development programs to the less fortunate Muslim brothers. For her part, Ali said the Philippines is very fortunate to have collaborated with IDB. The IDB is a multilateral development financing institution located in Jeddah, Saudi Arabia, founded by the first conference of Finance Ministers of Organizations of the Islamic Conference, now the Organization of Islamic Cooperation, with 57 shareholder member countries. Over the years, the IDB has evolved into a group of five entities, consisting of Islamic Development Bank, Islamic Research and Training Institute, Islamic Corporation for Development of Private Sector, Islamic Corporation for Insurance of Investment and Export Credit and International Islamic Trade Finance Corporation Islamic Finance Workshop to be Held in Zambia The Bankers Association of Zambia (BAZ) is still waiting for the Bank of Zambia (BoZ) to call for a meeting to explain the terms of reference before the Islamic Bank can be introduced in Zambia.

The process and framework, being spearheaded by the central bank as regulators has already been developed.BAZ president Mizinga Melu said the Bank of Zambia would soon call for a workshop that would explain the terms and other references of Islamic banking. “The Bank of Zambia as regulators, will be calling for a workshop soon for us to be on the same page as long as the regulator is ready. Whenever you are introducing a new product it is important that we are on the same page and put in place a framework,” Ms Melu said. “Most commercial banks are going to start and as Standard Chartered Bank, we are very ready to introduce Islamic banking but we are still waiting for the regulators to call for a workshop,” she said. There is a huge market for Islamic banking in Zambia and Africa has lagged behind. Islamic banking is a system which offers interest-free loans to individuals and the business community. The system is a financial service that meets the requirement of Sharia or Islamic law. It is designed to meet specific religious requirements of Muslims and there is no interest charged. Recently, BoZ said the establishment of Islamic banking services would help people have access to money for capital investment without paying interest. BoZ challenged investors that it was ready for them to come into Zambia and set up Islamic banks. The central bank recently undertook a survey on the Zambian market, which revealed that 80 per cent of respondents were keen on the introduction of Islamic banking products in the near future. Bank Muscat assigns RO150m for Islamic banking window Bank Muscat, the flagship financial institution in the Sultanate of Oman, has assigned RO 150 million of capital for its proposed Meethaq Islamic banking window. The final allocation will be determined by business opportunities in the market and the Board has indicated that the assigned amount may increase if required. The capital allocation will be subject to necessary regulatory approvals. Shaikh Khalid bin Mustahail al Mashani, Chairman of BankMuscat, said: “BankMuscat is proud to be the pioneer of Islamic banking in Oman. The bank is ready to launch its Islamic banking platform and has made headway by announcing a 3-member Shariah board and developing its Meethaq brand. This decision to assign RO 150 million capital for Meethaq reflects the determination of the bank to be the market leader of Islamic banking in Oman.” The Chairman added: “BankMuscat has taken major strides as part of its proposed

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The bank has in place a comprehensive strategy to effectively respond to the directive of His Majesty Sultan Qaboos on Islamic banking and thereby cater to the financial needs of people in accordance with the guidelines and regulatory framework prescribed by the

If you need to engage a lawyer or a doctor you would naturally want someone experienced, well known and reputable. A Shariah scholar’s role should be viewed more like a doctor’s. It involves diagnosing the problems, recommending Shariah compliant solutions and requires personal attention in each case

Muddassir Siddiqui,

Shariah Scholar, Dubai, UAE

Central Bank of Oman. The bank is proud to have on board some of the brightest minds in Islamic finance to chart the way forward.” Sulaiman al Harthy, Group GM — Islamic Banking, said: “Bank Muscat’s strategy is to attract customers through innovative products and services. As always, Bank Muscat takes the lead in offering value added services. The bank strives to increase the range of benefits for customers and we are confident that the proposed Islamic banking window operations will benefit various segments. The bank has always strived to fulfil the needs of customers with ground-breaking solutions and Meethaq is yet another proof of its commitment and dedication to meet customer expectations for Islamic banking. 12 Global Islamic Finance

April 2012

The Islamic banking operations will be managed by an experienced and professional team, independent and separate from conventional banking.” The bank’s Islamic banking operations will be segregated from its conventional counterpart and led by its Shariah board, which consists of world-renowned Shariah scholars.

or Sukuk last month, will go to the bond market on an opportunistic basis, he said. The Sukuk was part of the firm’s 3.5 billion Malaysian ringgit Sukuk programme, which was established late last year.’There is no pressure to go to the market and our capex is funded from our operations,’ Stephen Kersley, chief financial officer, said.

Abu Dhabi’s Taqa Sees 2012 Capex at $2.2 Billion Abu Dhabi National Energy Company (Taqa) expects to increase capital spending to between $2.0 billion to $2.2 billion this year as it pushes ahead with expansion plans. Taqa, which is 75-percent owned by the government of Abu Dhabi, spent $1.9 billion in 2011, Chief Executive Carl Sheldon

Taqa’s total outstanding debt at the end of 2011 was Dh72.1 billion of which nearly half is project debt and the remainder corporate debt, Kersley said. The firm which is a low bidder in Dubai’s Hassyan 1 power project, may consider bidding for Dubai’s mega solar power project, said Sheldon, adding Taqa may also bid for renewable energy projects in Morocco.

Meethaq window launch. Meethaq will reach out to customers by offering a full suite of banking products and services that fully comply with Shariah principles. Inspired by belief and a tradition of trust, Meethaq will assist customers in staying true to their values.” Dr AbdulRazak Ali Issa, Chief Executive of Bank Muscat, said: “As the nation’s leading financial services provider, Bank Muscat is well positioned to provide Islamic financial expertise to diverse segments and thereby promote the good of society as a whole.

Interest in both Shariah compliant and ethical investing is on the rise. Green sukuk can support this trend by expanding the range of available financial instruments. They also support national development strategies by offering longer term finance for essential infrastructure

Michael Grifferty,

The Gulf Bond and Sukuk Association, President, Dubai, UAE

said in a conference call on Wednesday, adding this year’s spending would mainly go towards five long-term projects. ‘This year it (capex) runs in the order of $2 to $2.2 billion in long range projects,’ Sheldon said. Taqa plans to spend on oil and gas drilling in western Canada and the North Sea, as well as in expansion programmes in Morocco, Ghana and the Bergermeer gas project in the Netherlands, he said. The firm made a fourth-quarter loss of Dh1.048 billion ($285 million) according to Reuters calculations, compared with a Dh261 million profit in the same period of 2010. The loss was mainly due to an impairment charge on gas producing assets in Canada, Sheldon said. Taqa, which sold a 650 million Malaysian ringgit denominated Islamic bond

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In the West there is a pent-up demand for retail financial products based on Islamic principles. It is due to the steady growth of the Muslim middle-class and the interest in ‘halal’ products by ethical and social-responsible finance, and is fueled by the conventional banks’ perception that Islamic finance is a lucrative business opportunity

Alberto Brugnoni, Assaif, Chief Executive Officer, Italy

Taqa shares were up 3.2 percent on the Abu Dhabi bourse Wednesday. They have risen 5 percent so far this year.”Despite a strong operational performance, the impact of both the impairment in North America and increased taxes in the UK North Sea can be seen in our net financial result,’ Kersley added. Total revenues for 2011 grew by 13 per cent to Dh24.2 billion ($6.58 billion) as against total revenues of Dh21.4 billion in 2010. There was growth in both the Power & Water and Oil & Gas divisions, from new generating capacity and higher production in the UK North Sea. However, while high oil prices buoyed performance, this was offset by weakening North American gas prices.

News

Here is a crack in the system which needs to be remedied. When you can’t sell or distribute because your Shariah board is different from my Shariah board, you end up not being able to achieve scale and you’re left with a very expensive product. That’s what’s hindered the development of Shariah asset management

Haissam Arabi

Gulf mena Investment Ltd, Chief Executive Officer, Dubai, UAE

Taqa maintained a strong level of liquidity. In December, Taqa successfully issued $1.5 billion in 5 and 10-year bonds at extremely attractive prices, taking advantage of strong market conditions to pre-finance maturities due in the fourth quarter of 2012. As a result of this positive performance and given its confidence in Taqa’s position, the Board of Directors is proposing a dividend of Dh0.10 per share, subject to approval at the Annual General Meeting on April 17. Eco-friendly Sukuk Issuances to Finance Eco-Friendly Investment Projects The Green Sukuk Working Group was launched last Thursday (8/3/12) with the aim of promoting the issuance of Sukuks for projects that are focused upon supplying renewable energy. The move, which has

The Green Sukuk Working Group held its first meeting in Dubai two weeks ago, with several industry experts saying the time is right for such a move. Board Secretariat of the Clean Energy Business Council, Aaron

The net impairment of Dh470 million reflected an impairment of Dh616 million, offset by a deferred tax benefit of Dh146 million. In addition, increased taxes on oil and gas production in the UK North Sea led to a higher effective tax rate which depressed Taqa’s net result. During the year,

been launched by the Climate Bonds Initiative, the Clean Energy Business Council of The Middle East and North Africa and The Gulf Bond and Sukuk Association, aims to channel interest into the area and attract expertise. Green Sukuks are investments bonds for businesses that meet criteria stipulated by the International Climate Bond scheme, and the launch of the Green Sukuk Working Group has been set up with the intention of forming new ideas about green energy projects which adhere to Shariah principles.

As the Islamic finance industry is still emerging, governance standards are not as well established as in other industries. In such an environment social networks or social capital (i.e. the capital people draw from their social relationships) make up for the lack of governance. That`s why people and their relationships still play an important role

Shariah law does not stipulate that projects must be ecologically friendly, with rising concern about rising global temperatures and diminishing fossil fuel supplies, which make up a large proportion of several Middle East economies, renewable energy is a sector predicted to rapidly grow over the next years by many scientists and other experts. Michael Grifferty, President of The Gulf Bond and Sukuk Association, reportedly stated that ‘Interest in both Shariah-compliant and ethical investing is on the rise. Green Sukuks can support this trend by expanding the range of available financial instruments. Green Sukuks also support national development strategies by offering longer term finance for essential infrastructure.’

Total assets of the company fell 1 per cent to Dh114.7 billion compared to Dh116.059 billion in 2010, while the net profits after minority interests showed a decline of 27 per cent to Dh744 million as against the net profit of Dh1.019 billion in 2010. The decline in total assets and net profit was principally due to the lower gas price environment in North America, which led to a one-off impairment following the annual revaluation of Taqa’s portfolio, a statement said.

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The new Saudi Electric sukuk will be very well-received by investors as it promises to be a rare foray into dollar-denominated investmentgrade territory

Dr. Murat Ünal Funds@ Work AG, Chief Executive Officer, Germany

Bielenberg, was reported to have stated that ‘There are a significant and growing number of projects, for example renewable energy in the Middle East, that are ideally suited to Sukuk investors. This group will help investors more easily identify Shariah-compliant, clean energy investment opportunities. Nasser Saidi, chairman of CEBC, is also reported to have placed the value of green Sukuk issuances between US$10 and $15 billion, and that ‘The time is right for a green Sukuk’. Sukuk, also known as Islamic equity bonds, typically work as a profit-sharing device, and through the most recent economic crisis have typically been more stable and thus retained their value to a much greater extent than those of conventional finance. Although

John Bates,

Silk Invest, Head of Fixed Income, London, United Kingdom

Likewise, Nick Silver, co-founder and Chief Actuary of Climate Bonds Initiative, was reported to have said ‘There is an urgent need to mobilise finance for both renewable energy and climate adaption projects in both the Middle East and in other developing Muslim countries such as Bangladesh and Pakistan. Green Sukuks are ideally suited for the financing of many of these projects.’ The eligibility criteria are determined by The International Climate Bond Standards Scheme, which is backed by a mix of investments bodies and NGO environmental groups. gif

2012 April Global Islamic Finance

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Islamic Finance

THE

MOST INFLUENTIAL

People

in the Islamic Finance Industry

Abdel Hamid Shoman, Chairman, Arab Bank Plc, Jordan Abdul Aziz Al Ghurair, CEO and Chairman, Mashreq Bank Abdullah Ali AlHamli, Chairman, Tamweel, Dubai Abdulla Salem Bahamdan, Chairman and Managing Director, National Commercial Bank, Saudi Arabia Abdullah Sulaiman Al Rajhi, Chairman, Al Rajhi Bank, Malaysia Ahmad Mohamed Ali Al Madani, President, Chairman and Board of Executive Directors, Islamic Development Bank, Saudi Arabia Al-Waleed Bin Talal, Saudi Arabia Prince and Chairman, Kingdom Holding Company, Saudi Arabia Sheikh Abdullah Saoud Al-Thani , Governor, Qatar Central Bank, Qatar Badlisyah Abdul Ghani, Executive Director and Chief Executive Officer, CIMB Islamic, Malaysia Ibrahim Dabdoub ,Group CEO, National Bank of Kuwait, Kuwait Khalid Kalban, CEO and Managing Director, Dubai Investments, Dubai Mansoor Durrani ,Vice President and Head of Project Finance, NCB, Saudi Arabia Dr. Mohammed Al Jasser, Governor, Saudi Arabian Monetary Agency, Saudi Arabia Mohammed Ibrahim Al Shaibani, CEO and Executive Director, Investment Corporation, Chairman of the Board of Directors and Director, Dubai Islamic Bank PJSC, Dubai Mukhtar Hussain, Deputy Chairman and CEO, HSBC Bank Malaysia Berhad Global CEO, HSBC Amanah, Saudi Arabia Prof. Nahed M. Taher, Founder and CEO, Gulf One Investment Bank, Bahrain Rasheed Al Maraj, Governor, Central Bank of Bahrain, Bahrain Shaikh Saleh Abdullah Kamel, Chairman, Al Baraka Banking Group, Saudi Arabia Sultan Nasser Al Suwaidi, Governor, Central Bank of UAE, UAE Tan Sri Datoâ&#x20AC;&#x2122; Sri Dr. Zeti Akhtar Aziz, Governor, Central Bank of Malaysia, Malaysia

14 Global Islamic Finance

April 2012

Islamic Finance

ere, Global Islamic Finance Magazine reveals the 20 most influential people in the Islamic finance industry. The people selected have contributed to the Islamic financial industry in truly significant ways, and clearly possess the leadership qualities essential for the jobs they do. As executives, directors and CEOs, the people in this list put in hard work through these challenging times in order to make Islamic finance the rapidly growing industry that it is today.

who have made a difference in the Islamic finance industry through a variety of ways, by recognising their achievements, the impact they have made on the industry and the awards they have earned. The research was conducted through interviews with a range of people within companies such as Islamic banks, law firms, Islamic fund and wealth management organisations, financial advisory and investment companies. The people featured in this article are from a range of countries, including Qatar, Malaysia, Saudi Arabia, the UAE and Bahrain. In March 2012 we will start yet more detailed and comprehensive research

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on our most influential people in Islamic finance, your votes and suggestions, please contact our editorial team. The future looks bright for the Islamic finance industry In the past 10 to 20 years, Islamic finance has been globalising rapidly with the aid of changing technologies and culture. The key concepts of Islamic finance are now shared throughout the world, islamic finance is a flourishing industry full of plans for the future.

We conducted research with experts within the Islamic finance industry in order to finalThe industry has overcome the financial ise a listing and contacting people asking crisis, with its asset value growing by 29% whether they wanted to feature in since 2009, and 8.85% in 2010. The this article. They were then asked Figure 1: Institutions registered for Shariah - Compliant products future looks promising â&#x20AC;&#x201C; the indusquestions about their positions and try has grown from just a few Islamic their roles, their levels of qualifica- 700 finance institutions offering ShariahNumber of Conventions and experience, awards and compliant financial products in the tional Bank with 600 nominations received, and their mid 1970s, to the present hundreds Shariah Windows 199 192 194 level of exposure within the Islamic 500 of institutions in over 40 countries 163 finance industry, including speech- 400 around the world. In addition, conNumber of Shariah Compliant Institutions es and attendance at conferences 300 ventional banks have meaning that and presentations, books and artiIslamic finance is now a flourishing 456 362 420 436 cles published and interviews pub- 200 industry full of plans for the future. lished. 100 Islamic finance is no longer restrictAll the people appearing on the list 0.00 ed to one part of the world. It has 2010 2009 2007 2008 have been chosen based on the renow been introduced to a range of search gathered from both questions countries, and is gaining popularity Source: Islamic Finance and Entrepreneurship: asked within interviews and comall across the globe. Islamic financial Challenges and opportunities ahead ments received, institutions operate in Figure 2: Shariah - complaint assets by country and the general inthe same communiternet research that ties as conventional Shariah - Compliant Shariah - Compliant took place between banks, and fulfil all Rank Country Rank Country Assets ($m) Assets ($m) March 2011 and the requirements of a 1 Iran 314,897.40 14 Pakistan 6,203.10 November 2011. conventional financial This is the first listinstitution. 2 Saudi Arabia 138,238.50 15 Syria 5,527.70 ing of its kind, and 3 Malaysia 102,639.40 16 Jordan 5,042.40 our process is still Islamic financial instiUnited Arab in its infancy. tutions contribute to 4 85,622.60 17 Brunei 3,314.70 Emirates the financial industry 5 Kuwait 69,088.80 18 Yemen 2,338.70 The 20 most inby providing the necfluential people in essary services, but 6 Bahrain 44,858.30 19 Thailand 1,360.80 the Islamic finance their operations are 7 Qatar 34,676.00 20 Algeria 1,015.10 industry have been different to conven8 Turkey 22,561.30 21 Mauritius 992.20 placed in alphational financial institu9 United Kingdom 18,949.00 22 Switzerland 935.50 betical order in this tions. The major Shalisting; there are no riah principles which 10 Bangladesh 9,365.50 23 Tunisia 770.10 specific numbers apply to finance, and 11 Sudan 9,259.80 24 Singapore 725.00 assigned or orderwhich make Islamic 12 Egypt 7,227.70 25 Palestine 612.50 ing by influence. finance different from In this list, Global conventional finance, 13 Indonesia 7,222.20 Islamic Finance are: Magazine is celSource: Islamic Finance and Entrepreneurship: Challenges and opportunities ahead ebrating the people 2012 April Global Islamic Finance

Islamic Finance

gif • • • •

Ban on charging interest (Riba) Ban on uncertainty Risk-sharing and profit-sharing Ethical investments which benefit society Asset-backing

which they can market. Islamic finance can learn from its conventional counterpart, which has a long standing in the financial industry. Conventional finance can be a valuable source for finding out about professional methods and standards.

Islamic and conventional finance can learn from each other, and the two industries often work together to design new products

On the other hand, Islamic finance has developed a niche that conventional finance cannot fit. Figure 1 shows the number of institutions which provide Shariah-compliant products.

•

Figure 3: Estimated Global Issuance of Islamic Bonds (Corporate and Sovereign) 2007-2010

50 45 40 35 30 25 20 15 10 5 0.00 2007

2009

2008

2010

Source: Standard and Poor’s, Ernst & Young and Kuwait Finance House

Figure 4: An overview of Shariah-compliant assets worldwide Islamic equity funds 2.5% Islamic mutual funds 3.5%

Takaful 0.1%

Sukuk 7.0%

2003

Islamic banking 86.9%

2010 Islamic funds 4.6%

Takaful 0.8%

Sukuk 11.3%

Islamic banking 83.4% Source: the Euromoney Kuwait conference

16 Global Islamic Finance

April 2012

The market should not fear the Islamic financial industry, but embrace it, taking advantage of the tailored financial products and the Shariah values. Even though Islamic finance is rapidly spreading across the world, there are countries and regions which are still not familiar with Islamic finance. Education is an important aspect for consideration within the industry. The influential people featured in this list have all written books or contributed chapters, given important interviews, and spoken at conferences. They have all contributed to spreading awareness of Islamic finance. They all promote the benefits of Islamic finance, and regularly take the time to discuss issues and possible solutions within the industry. Islamic finance is taking on a prominent role in the global financial system, with the establishment of more and more Islamic financial institutions. The development of Islamic financial products and services has also contributed to the industry. Proof that Islamic finance has spread worldwide is shown by the location of Islamic financial assets in a range of countries around the world, including Qatar, Thailand and the United Kingdom. The industry will continue to expand within other countries, together with conventional banking institutions, and are providing subsidiaries to cater to the growing market. These will be located in regions such as Japan, Germany and China. Figure 2 shows the distribution of Shariahcompliant assets around the world. Takaful and Sukuk are two sectors of Islamic finance that have played a large part in driving the growth of the Islamic finance industry. The industry may be powerful and growing rapidly, but there are still challenges that need to be overcome. The challenges include the constant changes in the financial environment and the speed of change, the impact of the internet and mobile technology, and the need for an international focus. Influential people and the decision-makers within the industry need to be creative, innovative and master quality management.

The positive side to Islamic finance today is that it is being accepted and embraced in both Muslim and non-Muslim countries around the world. Our listing of the most influential people in the Islamic finance industry shows a wide range of countries where Islamic finance is present. The value of the Sukuk market is estimated to reach over US $200 billion by 2013, which shows that the market for Sukuk looks promising. Global sales of Sukuk are predicted to rise by nearly 60% in 2012 to more than US $22 billion. One of the problems with Sukuk issuance is that it is more expensive than its conventional counterpart. However, within the countries with heavy volumes of Sukuk issuance, the influential people in the industry have altered regulations to tackle this problem. The majority of Sukuk issuance in 2012 is predicted to emerge from issuers in the Malaysia and Middle East region. Issuance could also come from the United States, Singapore and Indonesia. However, the Takaful market is also looking promising, with a prediction from Ernst & Young of a value of US $12 billion by the end of 2011, and US $25 billion by the end of 2015. Currently the Middle East, North Africa region and Malaysian regions dominate the Takaful market. The market is set to expand worldwide, covering regions including Indonesia and the Indian sub-continent. There are four key ways to expand the Islamic financial industry and to ensure a bright future. Influential people within the industry are likely to focus on the following key points throughout their career. • • • •

Providing a diversity of offerings and products Humanising Islamic financial services Creating mutual recognition of Shariah differences Building the infrastructure

By looking at the key points in more detail when building the infrastructure, the industry could promote the issuance of new Islamic licences in order to create an active and competitive environment. The industry could provide a platform through windows in the conventional markets, promoting the option of Islamic finance. When focusing on the diversity of offerings, equity-participation is important as a way of moving away from the debt-financing instruments seen in conventional banking. In the future, the industry could develop highlevel financial engineering products such as Islamic ETFs, Islamic derivatives and structured Islamic products. The purpose of Is-

Islamic Finance lamic finance is to fulfil the financial needs of consumers while abiding by the Shariah principles. There needs to be a mutual recognition of Islamic finance in order to drive global growth of Islamic finance. Humanising Islamic financial services consists of ensuring that the customers have complete trust in the Islamic financial institutions that they bank with, and that the banks meet the needs of the customers. It also includes providing all communities with access to Islamic finance, enhancing their lives by giving back to them financially, and using green technology to promote and develop Islamic finance. Figure 4 compares an overview of the Shariah-compliant assets around the world from 2003 and 2010. Islamic finance broadens the financial industry, providing much-needed resources within Muslim and non-Muslim dominated countries. Dr. Mohammad N. Siddiqi presented his views at the conference ‘Leadership in Global Finance: The Emerging Islamic Horizon’

in Kuala Lumpur. Dr Siddiqi said that, ‘the time has come when innovation should trump imitation. From purification of current financial transactions from haram [the prohibited], to designing new financial ways and means that can serve the maqasid al- Shariah [objectives of Islam] - that is the new direction that the Islamic financial community should aspire to take.’ At the KLIFF Islamic Finance Awards dinner, held in Kuala Lumpur, Nor Mohamed Yakcop gave his views on innovation within Islamic finance. He said, ’for innovation to become an important driver of growth, a critical area that needs attention is addressing the shortage of skilled and experienced professionals in the industry. We need to build a pipeline of talented minds who have the ability and creativity to develop new ideas and the capacity to turn ideas into achievable results.’ Standardisation is one of the major challenges within the Islamic finance industry, and urgently needs a solution.

Figure 5: Comparison of Western and Islamic leadership Points

Western Leadership

Islamic Leadership

Goals

Solution of a problem by group, with no reference to Divine efforts.

Seeking Allah’s pleasure in solving a problem by group.

Participants

Formal and informal leaders, ordinary members rarely involved.

Allah (Swt), Rasul (Sm), the Leader and the followers.

Nature

Leadership is rule-bound and situational and no ‘trust’ is involved.

Leadership relates to ‘trust,’ which is to be rendered back to the participants.

Methodology

Meetings; conferences; study reports; file orders, etc.

Consultation with followers, especially with those with relevant knowledge; memoranda; notifications.

Traits

Mundane knowledge; skills; values as prescribed by organisations.

Knowledge of Islamic Shariah; individual judgement; justice and competence.

Decision making

With reference to rules of business and no reference to any Divine Law.

After consulting, the leader must decide, but put trust on Allah (Swt).

Limitations of leader

Leaders seek leadership, rather than waiting for leadership to come to them.

Leaders must not seek leadership; it must come to them.

Limitation of followers

Followers usually have a passive role.

Followers have an active role in advising and warning the leadership of the consequences of their policy/ action.

Leadership style

Authoritative; laissez-faire; democratic when necessary.

A combination of authoritarian and democratic styles.

Followers style

Responding to the leader’s call for advice, and co-operation with the leader, but no acceptance of partial responsibility. Both the leaders and the followers are primarily accountable to the organisation.

Responding to the leader’s call for advice and co-operation with the leader, and acceptance of partial responsibility for action. Both the leaders and the followers are primarily accountable to Allah (Swt) and organisation.

Source: Managerial Leadership: An Islamic Perspective

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The interest in Islamic finance regulation has risen, as the laws and regulations seem to differ around the world. Shariah law is open to interpretation, but it is problematic that Islamic scholars are not able to agree completely on the laws and regulations that should support the Islamic financial industry. Without the standardisation of the laws and regulations, there could be a rise in Shariahcompliance risk. Another problem that may arise is the validity of contracts made under Islamic law, due to legal uncertainty. Luckily, there have been a number of initiatives trialled with the aim of tackling this problem and improving regulatory practices. If this problem is solved it could improve marketability and acceptance on the Islamic products and services. Leading the way for the future of Islamic finance Leadership is something that all of the influential people featured in our list display every day. They lead teams, and harness expert minds, in order to embrace Islamic finance throughout the world. The people featured all possess a range of leadership qualities, including the ability to recognise and reward achievers, maintaining a respectable image, flexibility, knowledge, honesty and acting decisively. The influential people within Islamic finance all have a level of authority over others; authority is a legitimate power, giving people the right to make big decisions, take action and distribute the resources needed. These people inspire others to make an impact and to achieve things that have never been done before, living up to global innovation. Leadership is not found only in CEO and director roles; it is required at all levels of authority within an organisation. A successful organisation can tell the difference between leadership and management. Management focuses on the workforce’s skills and competition, while leadership focuses on inspiration and meaning. Organisations that acknowledge this difference can use these distinctions to develop hard-working staff. Leadership is not just about meaning - it is also about the shortand long-term results of the organisation. The role of the leader is to support his or her team, giving them the motivation and resources to accomplish the vision of the organisation and constantly meet the mission targets. The leader in any organisation is central to the process of innovation. It is the ideas and activities of the leader, or other influential person, which inspire the policies and devel 2012 April Global Islamic Finance

Islamic Finance

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opments to be implemented. The leader’s ideas are then brought to life by the people he or she is leading. Not only is innovation necessary to compete with counterparts in conventional finance, but also to work together with the conventional financial sector. Working in co-operation with the competition could help Islamic finance by creating a more sustainable ethical financial system around the world. Figure 3 shows the difference between conventional or Western leadership and Islamic leadership. There is a long list of qualities essential to the core concept of Islamic leadership within an Islamic finance institution. The qualities include self-discipline; positivity; honesty; confidence; competence; humanity; proactive approach, and realism. These qualities may apply to both Muslim and non-Muslim leaders within the Islamic finance industry. “Knowledge is power” could be an effective summary of the way to achieve an influential role in the Islamic finance industry. The phrase conveys the message that having access to useful and relevant information gives one an advantage in handling situations and maximising opportunities. Leadership roles within the industry, such as Chief Executive Officer, Director, Chairman and Head of Department, all come with great responsibility for making innovations that not only make sense in theory, but are successful in practice. Innovation in Islamic finance takes the form of new, tailored products and services that have both unprecedented purposes and characteristics. In order for the people in power to use their authority effectively, they need to engage in a range of activities which influence people and which gain acceptance. These activities can be classed into three categories: • • •

Rational Psychological Social

Within the Islamic finance industry, building up a reputation is an important aspect of becoming an influential person. But those in power can rely on alliances and good reputations to get favours, improving their influence and their power of achieving goals. Some of the people featured in the listing have taken on the responsibility of creating new levels of Islamic finance and introducing innovative products and services. For leaders, the innovative process is very important, and challenges the financial products and services already established.

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April 2012

The leader must use a proactive method in order to ensure innovation, and must work with positivity and confidence in his or her ideas. In addition, modesty ensures that the leader is also working with his or her peers, and taking on any suggestions or advice that could help. The finance industry is fast-paced and complex, and it is important that the leaders are respected by their peers and by the competition. An ideal way of gaining respect is to be simultaneously kind to others and confident. The confidence must be based on honesty, and not deceit. The leader must have confidence in his or her suitability for the roles and responsibilities that he or she has taken on, as this will give others confidence in the leader. One key responsibility which leaders face is the distribution of resources, and of managerial roles such as knowledge and financial skills. Leaders must pay attention to the IT opportunities, as these resources ensure that Islamic financial products remain Shariah-compliant. Across the world, Islamic Financial Institutions (IFIs) give a lot of their time to structuring Shariah-compliant products and services - but do they focus enough on the importance of promoting Islamic finance? In order to ensure continuity, and improve the performance of IFIs, leadership programmes need to be made available. Staff training programmes are also very important in attaining a higher standard of human resources and improving customer experience and customer service quality. An IT environment which caters to the Islamic banking requirements will also need to be developed. A well-developed IT environment is an important consideration for market players wanting to enter the Islamic financial market and develop or change their systems to include Islamic banking. The differences between conventional institutions and IFIs could bring challenges in the future. There are differences in the market systems, regulations and practice. The goal of developing a united code of practice within the Islamic finance industry is very important. The code of practice for IFIs needs to be consistent, and to address the different financial and Shariah governance and application methods within the industry. The customers’ views are very important: by understanding the customers’ perspective, IFIs are able to develop the correct products and services to meet their needs. An in-depth understanding of customer preferences will help the public

to tell the difference between the Islamic banks and the conventional competition. When facing challenges within the Islamic finance industry, leaders must be driven by meaning, community, honesty and trust. They must inspire and motivate staff, who invest their time in the organisation, often at the expense of family or personal time. This is one of the challenges that leaders face. Knowledge is an important and powerful tool for a leader; without self-knowledge, how can they understand their organisations, position in the community and customer base? All of the leaders featured in our listing have a high level of qualifications, proving that knowledge is necessary and important within leadership in the Islamic financial industry. Reputation and networking for industry leaders Attending conferences and networking is a good start to building important and beneficial business relationships. All of the influential people on our list have attended numerous conferences, and have also been key speakers or part of the discussion panels. Leaders are always meeting people who share their passion for the Islamic financial industry, and who pass on valuable skills which are important to develop and expand the industry. Reputation is a big part of building a prominent role in the Islamic finance industry. Building on business relationships can help you in the future, and increase your reputation within the industry. However, although reputation is important, some of the influential people featured on the list prefer not to be in the public eye. When Alberto Brugnoni, founder and chairman of the board at ASSAIF, was asked which awards he had won or been nominated for, he said that, ’I always shunned this sort of thing, and focused my energies and time on actions and concrete results for the sake of the value proposition of Islamic finance - although I often receive letters of appreciation. It is perhaps also a question of character: I pretty much shun the public life and prefer the backstage to the spotlight.’ Every leader within the Islamic finance industry is different, but they all have something in common - and that is the drive to make a difference and contributing to the growth and development of the Islamic finance industry.

Islamic Finance

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GIF MAGAZINE RECOGNISES THE MOST INFLUENTIAL PEOPLE WITHIN ISLAMIC FINANCE The influential people featured in this list range from CEOs and directors to heads of department and executives. They are all leaders within the industry, and were chosen based on the changes and impact they have made throughout their careers according to the research gathered. GIF Magazine presents the first listing of its kind, and our process is still in its infancy. The 20 most influential people in the Islamic finance industry have been placed in alphabetical order in this listing; there are no specific numbers assigned or ordering by influence. The information was collected from a range of sources, including the internet, interviews, LinkedIn information, business contacts and the GIF Magazine database. Global Islamic Finance Magazine would like to thank and congratulate the people who are featured in the list. The people highlighted in this article are set to mould the future of the Islamic finance industry.

Abdul Aziz Al Ghurair Job Role: CEO and Chairman, Mashreq Bank Country: Dubai

Abdul Aziz Al Ghurair is a member of the Board of Trustees at the UAE Higher Colleges of Technology. He holds a place on our list because of his level of exposure and the impact he has made on the Islamic finance industry. Chairman of Masafi, and Co-Chairman of the Arab Business Council (World Economic Forum), Mr Ghurair previously sat on the Board of Directors for various companies such as Emaar, Dubai Investments, Visa International and MasterCard. He has also been a member of the Constitutive Council for GCC Leaders and the President of Knowledge Fund. He has huge exposure in the media locally, regionally and worldwide, appearing in all kinds of media organisations, publications, TV and radio shows. As CEO, he participated as a speaker and panellist in an estimated ten conferences during 2011. He has earned Mashreq bank many international accolades, including the “Best CEO” Award from CEO Middle East Magazine in 2008, the “Lifetime Achievement” Award from the Arab Bankers Association of North America, USA. In 2008, the “Best CEO” Award in recognition of his support for the Emiratisation initiative in UAE from the National Career Fair in 2008, and the “Lifetime Achievement” Award from Euromoney in 2008.

Ahmad Mohamed Ali Al Madani Job Role: President, Chairman and Board of Executive Directors, Islamic Development Bank Country: Saudi Arabia

He has also helped Arab countries to overcome the global financial crisis, which had an impact on all sectors. In his own words “The impact of Mashreq Al-Islami on the Islamic finance industry is both qualitative and quantitative. •

•

• •

We have effectively replicated all possible wholesale and retail banking products and services on the Islamic format; our customers can now enjoy same level of efficiency and service standards which they have been used to from Mashreq, if they so prefer to use our Islamic products and services. Mashreq Al Islami has become one of the leading domestic Islamic windows and is an integral part of Mashreq’s drive to be a full service bank. Mashreq Al Islami is fully transparent and discloses all its original Shariah Fatwas on its web site for customers comfort. Based on the Mashreq’s treasury and capital market’s strength, Mashreq Al Islami’s treasury and structured products now being used by few fully licensed Islamic banks.

Impact on the Islamic finance industry Mr Ghurair supports many charitable organisations, both locally and internationally. He has played a vital role in providing advice and suggestions to the UAE’s financial and banking industry.

The Islamic banking industry has recognised our effort and for this we have own two “Best Islamic Window” awards in December 2010 and in June 2011”

Ahmad Mohamed Ali Al Madani earns a place on our listing for his passion for worldwide development, and the impact he has made on the Islamic finance industry. He has a total of 23 years experience, focusing on global development and he has hands-on experience in tackling development issues within the Organisation of the Islamic Conference member countries. Mr Madani has published many articles, speeches, lectures and working papers, covering topics such as Islamic economics, banking and education.

In his own words “Islamic finance tries to ensure health in the financial system by introducing risk-sharing and linking the growth of credit to the growth of the real sector in the economy. In addition, some speculative transactions which aggravate risk unnecessarily without adding any real value to the economy and are termed as gharar (deceptive risk) in Islamic fiqh are also prohibited in Islamic finance. This will help curb the extension of credit for speculative purposes. In addition, sale of debt is also prohibited in Islamic finance to ensure that the creditor evaluates the debt proposal carefully and does not pass on the risk to an unsuspecting third party. The ability to shift the risk of default to others by selling the debt leads to laxity in the evaluation of debt proposals and to excessive lending. The truth of these principles of Islamic finance became vindicated during the financial crisis when Islamic banks were generally able to maintain their health and strength while other banks were exposed to serious problems”

Impact on the Islamic finance industry Ahmad Mohamed Ali Al Madani is able to focus on the issues that arise in the activities of the Islamic Development Bank, and with his experience and qualifications he is also able to manage the challenges that the bank brings. He has made an impact on the industry by helping to create a strong base for the mission of the bank and its development.

2012 April Global Islamic Finance

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Islamic Finance

Abdel Hamid Shoman Job Role: Chairman, Arab Bank Plc Country: Jordan

Abdullah Ali AlHamli Job Role: Chairman, Tamweel Country: Dubai

Al-Waleed Bin Talal Job Role: Saudi Arabia Prince and Chairman, Kingdom Holding Company Country: Saudi Arabia

Sultan Nasser Al Suwaidi Job Role: Governor, Central Bank of UAECountry: UAE

Abdel Hamid Shoman qualified with a BSc in Business Administration from the American University of Beirut. He earns a place on our listing because he has held the Chairman position in a range of companies throughout his career - including AB Capital, Arab Bank plc, Europe Arab Bank, Al Arabi Investment Group Co. and Abdul Hameed Shoman Foundation. Mr Shoman is also a board member of the Arab National Bank and the Central Bank of Jordan.

In 2008, Abdul Hamid Shoman received the “Banker of the Year” award, created by Arabian Business magazine and ITP Group. The award was dedicated to promoting success in Jordan’s business sector. Mr Shoman was recognised for his leadership in one of the most remarkable international banking institutions. His leadership resulted in record financial results year after year, and in high economic levels.

Mr AlHamli has held senior positions in the top public and private sector organisations in Dubai for 16 years, which earns him a place on our listing. He has also served as the Chief of Operations and Information Technology at Dubai Islamic Bank for a total of nine years. With his years of experience within the Islamic finance industry, Abdullah Ali AlHamli has definitely made an impact on the industry. The Chairman has more than a decade and a half experience as Director of Information Systems at the Dubai Ports Authority and Jebel Ali Free Zone.

He is currently a Board Member of Injazat Technology Fund and of the Injazat Technology Fund EC, and since 2009 has held the position of Director at Gulf Finance House EC. Abdullah Alli AlHamli has completed various international professional development programmes, and holds a BSc with majors in Economics and Mathematics from the Al Ain University.

This Saudi Arabian prince qualified with a Bachelor of Science in Business Administration, magna cum laude from the Menlo College in California, in 1979. He also gained a Masters in Social Sciences with Honours from Syracuse University in New York in 1985. Al-Waleed Bin Talal has received many honours and accolades from numerous societies, monarchs and organisations. The Prince has received 14 Honorary Doctorates from universities in regions such as the UAE, Korea, Egypt, Malaysia, Ghana, Palestine, Tunisia, Philippines and many more.

The citations that came with the honours mainly highlighted his involvement in education, international understanding, assisting the victims of natural disasters and the poor and needy no matter what nationally or race they are. He created his own company called Kingdom Establishment for Commerce and Trade which later changed to Kingdom Holding Company. The business quickly grew leading the prince to profitable joint ventures with foreign countries. The Prince became interested in a range of sectors such as hotels, real estate, media, communications and information technology.

Mr Al Suwaidi qualified with a BSc in business administration and finance, and soon afterwards began his career at Abu Dhabi Investment Authority. His career blossomed from then on, as he became the general manager of Abu Dhabi Investment Company, and was then nominated for the role of general manager of Gulf International Bank two years later. The nomination was a success because of the support of seven Gulf countries shareholders

viously offered the role of managing director and CEO of Abu Dhabi Commercial Bank. Emerging Market awarded him the “Central Bank Governor of the Year” Award for the Middle East, presented during the IMF/WB meetings in Singapore.

In 1991, Sultan Nasser Al Suwaidi became governor of the Central Bank of the UAE, but was pre-

Dr Jasser qualified in 1979 with a BA in Economics with Honours from San Diego University. He then went on to gain a MA in Economics in 1981, and then a doctorate degree in economics from the University of California. Dr Jasser began his career at the Saudi Finance Ministry. Years later, he became the executive director for Saudi Arabia at the International Monetary Fund. In 2009, he became governor of the Saudi Monetary Agency after fifteen years experience as the vice governor.

Dr. Mohammed Al Jasser Job Role: Governor, Saudi Arabian Monetary Agency Country: Saudi Arabia

He also chairs Saudi Telecom, one of Saudi Arabia’s biggest telecom companies. Dr Jasser is on the boards of many companies in Saudi Arabia and regional institutions such as Arab Monetary 20 Global Islamic Finance

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Impact on the Islamic finance industry Sultan Nasser Al Suwaidi contributed to the establishment of the UAE Switch, which started in 1996. The switch connected all bank ATMs in the UAE region. Mr Al Suwaidi also supported the creation of an automated Cheque Clearing System in UAE banks.

Fund and Islamic Development Bank. Mohammad Al Jasser was awarded the King Abdulaziz medal of the first order for his services to Saudi Arabia. Impact on the Islamic finance industry Mohammed Al Jasser has made an impact on the Islamic finance industry by helping to plan the central bank’s answers to a decade-long oil price rally. The Governor also supported the dollar as a peg for the Saudi riyal, and helped to negotiate Saudi Arabia’s accession to the World Trade Organisation in 2005.

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Mukhtar Hussain Job Role: Deputy Chairman and CEO, HSBC Bank Malaysia Berhad, Global CEO, HSBC Amanah Country: Saudi Arabia

Mr Hussain qualified with a BSc in economics from the University of Wales, and became a part of the HSBC group in 1982. With 11 years in the company, and various job roles including CEO of HSBC’s Financial Services in the Middle East, Mr Hussain makes our list of most influential people. In 2008, Mr Hussain returned to the Middle East as the CEO of HSBC Amanah and CEO of Global Banking and Markets in the MENA region.

Impact on the Islamic finance industry Mukhtar Hussain made an impact on the industry when he moved to Dubai in 1993 and established HSBC’s regional investment banking business. He also advised the government of Dubai while they established the Dubai financial market.

Rasheed Al Maraj Job Role: Governor, Central Bank of Bahrain Country: Bahrain

Mr Al Maraj has a wide range of experience in sectors including finance, engineering and management, and has worked with the government and private sectors. He also sits on the boards of a range of organisations, including the National Oil and Gas Authority and the Economic Development Board.

Within the Bahraini Government, Mr al Maraj has held numerous positions including Assistant Under-Secretary at the Ministry of Finance and National Economy, and Under-Secretary at the Ministry of Transportation. Before becoming the governor of Central Bank of Bahrain, he held the roles of general manager and CEO at the Arab Petroleum Investments Corporation.

Mohammed Ibrahim Al Shaibani Job Role: CEO and Executive Director, Investment Corporation. Country: Dubai

Mr Shaibani earns his place on our “Most Influential People in the Islamic Finance Industry” listing through his wide range of leadership roles within the industry, wealth of corporate experience and background in Islamic financial services. He is currently the president of the Dubai office, and also the director-general of His Highness The Ruler’s Court.

He has four years experience as the managing director of al Khaleej Investments in Singapore, and is currently serving as a member of the board of directors. He is also serving as director of Emaar Properties PJSC and SHUAA Capital psc. Since 2008, Mr Shaibani has been the chairman of the Board of Directors at Dubai Islamic Bank PJSC.

Khalid Kalban has made his mark within the UAE, becoming a known businessman in the region. He holds a place on our listing because of this wide range of experience in the industrial, financial and investment sectors. His experience and knowledge comes from his association with huge establishments and his high-level qualifications, such as a degree in Business Management, and major in Management, both in the USA.

Impact on the Islamic finance industry Khalid Kalban has made an impact on the industry through his major role in the establishment of some of the top companies in the UAE. He is also a member of the board of directors at a range of companies, such as Emirates International Brokerage LLC, Dumoco LCC, Arab Insurance Group and Emirates Bank International.

Tan Sri Dato’ Sri Dr. Zeti Akhtar Aziz received a Bachelor of Economics with Honours from the University of Malaya, and a PhD from the University of Pennsylvania. She is also one of the founding members, and chairperson, of the Asian Consultative Council.

She also controlled the development of the Financial Sector Master plan, a ten year plan for the development of the Malaysian financial system. Dr Zeti has also made an impact in the development of Islamic finance, and in regional financial co-operation.

Khalid Kalban Job Role: CEO and Managing Director, Dubai InvestmentsCountry: UAE

Tan Sri Dato’ Sri Dr. Zeti Akhtar Aziz Job Role: Governor, Central Bank of Malaysia Country: Malaysia

Impact on the Islamic finance industry Dr Zeti has a long list of achievements to ensure her place on the most influential people in the Islamic finance industry listing. She steered her country back back to recovery through the economic crisis, with the help of her background in maths and finance.

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H.E. Sheikh Abdullah Saoud Al-Thani Job Role: Governor, Qatar Central BankCountry: Qatar

Abdullah Sulaiman Al Rajhi Job Role: Chairman, Al Rajhi Bank Country: Malaysia

Abdulla Salem Bahamdan Job Role: Chairman and Managing Director, National Commercial Bank Country: Saudi Arabia

Ibrahim Dabdoub Job Role: Group CEO, National Bank of Kuwait Country: Kuwait

Shaikh Saleh Abdullah Kamel Job Role: Chairman, Al Baraka Banking Group Country: Saudi Arabia

Since beginning his career in 1982, Mr Al-Thani has held numerous job roles, including deputy governor. He currently holds the position of chairman of the state Audit Bureau, and of council member of IFSB, based in Kuala Lumpur.

In 2006 he became governor of Qatar Central Bank, and is also chairman of the board at Qatar Development Bank. Mr Al-Thani is a member of the board of directors at Qatar Investment Authority.

Mr Rajhi sits as a board member at numerous Saudi business organisations, and is also a regular speaker and advocate of Islamic banking principles. He takes part in various regional and international forums, such as the Islamic Banking and Finance Forum in Abu Dhabi, and the Islamic

Banking and Finance Forum in Bahrain. He was promoted to the position of Director and General Manager in 1996, taking on responsibilities as the Chief Executive of the Group.

Mr Bahamdan has taken part in a range of training and professional development courses in the local and international regions. The courses covered topics such as finance, banking, accounting and marketing. The Chairman has also participated in courses focusing on top management, change management and information systems.

His current managerial roles include the Chairman and Managing Director of the National Commercial Bank and also Head of the Executive Committee.

Ibrahim Dabdoub joined the National Bank of Kuwait in 1961. Since then, he has fulfilled a variety of roles including Head of Credit, Deputy CEO, CEO and finally Group CEO. He is currently chairman of a selection of the National Bank of Kuwait’s international subsidiaries, including National Bank of Kuwait Investment Management in London, and the National Bank of Kuwait in Geneva and Lebanon. He also holds the position of Vice Chairman of the National Bank of Kuwait (International) PLC in London, and member of the Board of the Jordan Mobile Telephone Services Company.

Mr Dabdoub earns a place on our listing through his years of experience occupying numerous job roles, and through the list of awards that he has received. He was elected the ‘Arab Banker of the Year’ by the Union of Arab Banks, and also received an award from Euromoney for outstanding contribution to the development of financial services in the Middle East. This award proves that Mr Dabdoub has made an impact in the financial industry. The Group CEO was also awarded his second “Lifetime Achievement” Award at the banking award ceremony in London, November 2008.

The Al Baraka Banking Group chairman holds a Bachelor of Commerce degree. As the founder and president of Dallah Al Baraka Group and founder of Al Baraka Banking Group, he has proved himself to be an influential person. He also serves as Director on the boards of numerous organisations and associations around the world. Mr Kamel has received numerous high-standard certificates, trophies and accolades from all around the world. The awards include the “Bank Corporate Governance Award” and “Best Regional Bank” from the Hawkamah Union of Arab Banks, presented at the Annual Islamic Business & Finance Awards in December.

strong demand for commodities and raw materials and partly, in the case of a few, due to being able to offer a reasonably safe – if albeit temporary - home for investment for some of the excess liquidity around the global economy, as a result of quantitative easing and continuing trade imbalances amongst the biggest economies. Others, the hydrocarbon-producers and exporters for example, were content to let the laws of supply and demand reassert themselves in tandem with the re-emergence from recession of the oil importers, so that in due course their current account surpluses would once again rise. Still others, even if not so well endowed with natural riches, were able to continue along the path of modernisation, economic reform and progress that they had earlier adopted, and so steered a cautious and balanced course through the choppy waters”

Impact on the Islamic finance industry Shaikh Saleh Abdullah Kamel is widely seen as a pioneer within the Islamic banking industry. He has established successful organisations and received awards for his achievements. “Many emerging economies did not suffer so badly. Some actually prospered, partly from the continuing 22 Global Islamic Finance

April 2012

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Islamic Finance

Badlisyah Abdul Ghani Job Role: Executive Director and Chief Executive Officer, CIMB Islamic Country: Malaysia

Badlisyah Abdul Ghani, is the Head of Group Islamic Banking Division. He is Executive Director and Chief Executive Officer of CIMB Islamic Bank Berhad, Chairman of CAPASIA Islamic Infrastructure Fund (General Partner) Limited, Director of CIMB Middle East BSC(C)(Bahrain), Alternate Director to the Chairman of CIMB Principal Islamic Asset Management Berhad, Alternate Director of CIMB Principal Asset Management Berhad and CIMB Wealth Advisors Berhad and member of the Investment Committee of CIMB Principal Asset Management Berhad. He is also CIMB Group’s Country Head for Middle East and Brunei. Badlisyah manages and oversees the overall global Islamic banking and finance franchise of CIMB Group known as CIMB Islamic. His areas of responsibilities cut

across all legal entities within the Group as CIMB Islamic operates as a parallel franchise leveraging on the Groups’ infrastructure and network both locally and globally.

ment bank in the world and the most profitable Islamic financial institution in Southeast Asia.

of new retail product offerings that never existed in the market anywhere in the world before, including the first retail commodity Murabaha deposit product. This has woken many other Islamic institutions to the full potential of Islamic finance and driven them to be more active in the market.

He is also Chairman of the Islamic Capital Market Committee of the Malaysian Investment Banking Association, member of the Working Group on Islamic Accounting Standards of the Malaysian Accounting Standards Board, member of the Islamic Finance Committee of the Malaysia Institute of Accountant and member of the Law Harmonisation Committee of Bank Negara Malaysia. He was a past Board Member of the International Islamic Financial Market (IIFM), Bahrain.

seconds interview…

with Badlisyah Abdul Ghani What impact and changes have you made to the Islamic finance industry? Since joining the Islamic banking and finance industry 15 years ago, one of the biggest impacts that I have made to the industry is my contribution to the enhancement of the international capital market when I helped introduce and develop the Sukuk market in the early 2000s. I was blessed with the opportunity to lead and undertake the world’s first-ever international or global corporate Sukuk issuance for Kumpulan Guthrie Berhad using a structure called Sukuk al Ijarah that I helped put together with another gentleman, Shamsun A. Hussain. The Sukuk structure used and developed for Kumpulan Guthrie was subsequently used for the world’s first sovereign Sukuk issuance by the Malaysian Government and the GCC’s first sovereign Sukuk issuance by the Qatari Government. I was also directly involved in both landmark sovereign Sukuk issuances. Another significant and meaningful contribution that I have made to the industry is the set up and establishment of CIMB Islamic, the global Islamic banking and finance franchise of CIMB Group. Since starting it in 2002, CIMB Islamic has grown to become the largest Islamic bank in the world by branch network, the largest Islamic invest-

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Its establishment singularly moved the industry’s growth momentum in Malaysia as it transformed Sukuk as the dominant fund raising structure in the Malaysian debt capital market since 2002. CIMB Islamic also reignited the Islamic asset growth in the Malaysian and ASEAN banking sector as it became the fastest growing Islamic bank in the world (in terms of assets) between 2005 and 2010. Throughout my involvement in CIMB Islamic as CEO, we have been successful in building a more robust and dynamic Islamic consumer banking business through a plethora

Through CIMB Islamic, I have directly contributed to the broadening and deepening of the world’s largest Sukuk market in Malaysia by introducing and developing various new and world’s first Sukuk structures such as Sukuk al Istisna, Musyarakah Sukuk, Islamic Asset Backed Securities, Exchangeable Sukuk and many more. I also helped open many new jurisdictions for Sukuk issuances such as Singapore, Hong Kong and China by undertaking maiden Sukuk issuances in those

Islamic Finance

ing and satisfying contributions that I have made while with CIMB Islamic as it allows Islamic financial institutions access to a formal derivatives market to better manage their risks. Aside from all of the above, I have had a high degree of satisfaction in advising and drafting new legislations and regulations in many jurisdictions that wanted to develop Islamic banking and finance industry, in my personal as well as professional capacity. It is these new legislative and regulatory frameworks that enable the industry to prosper and grow. What are your thoughts on the future of Islamic finance? jurisdictions, thus paving the way for others to do the same. In addition, a very healthy impact that I have made to the industry is the development of a formal Islamic derivatives market in Malaysia and Southeast Asia. Together with the International Swaps and Derivatives Association (ISDA), I helped draft an ISDA based Shariah compliant derivative agreement, which eventually became the base for the document that was later adopted under the International Islamic Financial Market (IIFM). It was one of the most excit-

The Islamic banking and finance industry has been growing steadily over the years and will continue to grow in tandem with greater economic prosperity globally, particularly in Islamic countries. However, if financial regulators and governments fail to enable the industry effectively and efficiently, there is a danger that its growth will be stunted from achieving its real potential. Therefore, the appropriate legislative, regulatory and legal frameworks (in the manner seen in Malaysia) must be put in place in the domestic financial market of all jurisdictions that want to broaden and deepen their contemporary financial activities. The future

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of the Islamic banking and finance industry would also be better assured when all parties accept the fact that Shariah is applied on jurisdictional basis and that all interpretations of Shariah are valid and enforceable for as long as it is based on the Quran and legitimate Hadith, the two sources of Shariah. What advice would you give to those wanting to enter your sector of expertise? I would advise those who wish to join Islamic banking and finance to enter it with a clean slate without any biased, preconceived or indoctrinated ideas on Islamic banking and finance. Go back to the very basics, which is the Quran and Hadith. Besides that, candidates should have the passion and not join the industry purely for financial gain. Most importantly, candidates also need to have a high degree of patience and perseverance as there could be more disappointments than successes in the initial stages of their career. They will find that the going is tough as the conventional riba based financial business is very dominant, but good business sense will always prevail and people will eventually see the value of the propositions available under Islamic banking and finance.

2012 April Global Islamic Finance

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Professor Nahed Taher makes our list of most influential people for making an impact in the GCC by becoming the first female CEO of a bank in the GCC region. Her career has consisted of holding the role of Chief Economist and Chairman of the risk and portfolio management committee at The National Commercial Bank, leading to over 15 years of experience in banking, academics and research. She has also qualified with dual Master’s degrees in international finance and financial economics. In addition, she holds a PhD in monetary

Prof. Nahed M. Taher Job Role: Founder and CEO, Gulf One Investment Bank Country: Bahrain

economics from the University of Lancaster in the UK. Prof. Taher is well known in the international economics sector, having presented at a number of global economic forums around the world. She has made major achievements such as being appointed a board member of the IMD in Switzerland in 2008, becoming the first member from the Middle East. She was also awarded the “Businesswomen of the Year” award in 2007.

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with Prof. Nahed M. Taher What are your thoughts on the future of Islamic finance? I personally believe that the future of Islamic finance is rosy despite the many challenges the industry will need to overcome in order to flourish. Indeed, such a rosy picture is shared by many experts in the Islamic finance field and that is why even reputable non-Islamic agencies such as Dow Jones and Morgan Stanley have devised relevant indices to track the performance and sustainability of Islamic finance markets globally. The ethical nature of Islamic finance, grounded in the fundamental principles of assets-backed and interest-free transactions as well as the prohibition of speculative activities, encourages risk management and transparency and thereby shields the industry from risks of financial distress associated with excessive leverage and speculative investments that have bedeviled the conventional financial system. Tying financial transactions to tangible, identifiable underlying assets and interestfree arrangements can eliminate excessive debt obligations and debt burdens. These principles have been cited as the main explanations for the resilience of the Islamic finance industry during the recent global financial crisis, and thereby help to raise the profile of Islamic finance as a credible and viable alternative financing mechanism beyond its traditional niches. In essence, Shariah-compliant assets, currently estimated at around $850 billion, have witnessed a dramatic expansion over the past decade or so, with average growth rate of between 10 and 20 percent per annum. These are expected to grow at exponential rates in 26 Global Islamic Finance

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the future as the industry continues the process of mainstreaming itself into the global financial system. Analysis of the growth prospects of Islamic finance varies markedly across major pundits, but all have envisaged Islamic finance to blossom, with estimated assets ranging from $1.1 trillion by 2012, according to Ernst & Young, to $4 trillion by 2015 according to Moody’s. I strongly believe that these estimates are achievable or even surpassable provided that real and principled Islamic finance business could be structured properly and move beyond retail and trade financing operations of Islamic banking to focus more on productive Shariah-compliant investment products such as private equity and project financing activities that add value to the real economy, leading to sustainable economic growth, equity and social justice. However, these objectives can largely be achieved through profound changes in mindsets as well as in legal, institutional, and regulatory environments that could

attract a large number of transactions. The dearth of skilled labour force in Muslim countries militates against the much needed innovation as well as managerial and analytical abilities required to move Islamic finance to new heights. This is not to mention the challenges posed by limited or absent widespread Shariah-compliant, short-term Islamic money markets and highly under-developed Islamic repurchasing markets. What impact have you made in the Islamic finance industry? As a founder and CEO of Gulf One Investment Bank “Gulf One”, a leading knowledge based investment bank based in the Kingdom of Bahrain, I have stressed and advocated that our operations should always be knowledge-based and in conformity with the Islamic principles. Gulf One Investment Bank is committed to translating these principles into globally beneficial financial solutions through innovative mech-

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bank participation. We at Gulf One Investment Bank are also leading the way in the ethical investment arena that is not only in accordance with the Islamic principles but it also helps to address environmental concerns in the region. Our deep commitment to knowledge-based operations has also led the bank to establish Gulf One Lancaster Centre for Economic Research (GOLCER) in the United Kingdom to focus on Islamic finance as well as on economic and other financial issues in the Gulf region. GOLCER publishes a monthly Islamic finance bulletin that reviews and analyses key developments in the global Islamic finance industry which is acknowledged by a number of players in the industry including the Dubai-based Zawya and the London-based Islamic Finance Information Service, an entity of the Euro Money publishing company.

anisms and instruments. Over a relatively short period of time, Gulf One succeeded in making our impact felt in the Islamic finance industry through the execution of a number of groundbreaking transactions. For one, Gulf One received international recognition for its role as the leading financial advisor to the pilgrimage airport terminal in Jeddah, Saudi Arabia, where Gulf One structured the first ever known Islamic Build Transfer Operate project finance transaction with international, local, and regional development

Noteworthy, Gulf One has zero leverage to its capital, SPVs and funds. We are into full means of profit and risk sharing though equity investments. Therefore we really work hard to calculate the risk in very reliable and deep analysis manners to ensure high return and sustainable performance. Consequently, we managed, thanks to God and our professional work to achieve outstanding results to our investments. What advice would you give to those wanting to enter your sector of expertise?

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Islamic finance is a challenging industry not only in non-Muslim countries but also in the Islamic world and globally as well. Succeeding in such a tough industry requires knowledge, patience, perseverance and innovative solutions. New entrants to the sector should be prepared to move ahead of the curve through financial engineering and innovation supportive of private equity and infrastructure project financing as opposed to real estate business and trade financing activities. The fact that the Islamic tranche in most project financing deals is currently less than one-third speaks volumes about â&#x20AC;&#x2DC;Islamicnessâ&#x20AC;&#x2122; of such projects. Moving beyond this threshold is a desirable challenge to all Islamic finance transactions.â&#x20AC;? Within your career, what changes have been made to the Islamic finance industry? We at Gulf One were met with many challenges in innovating financial structures that are based on asset backed and fair valuations of these assets avoiding capitalism high leveraged financial instrument. I believe the future to Islamic finance will only be through advocacy and leadership by example in our operations, creative solutions. I do trust other participants were able to change or adopt their practices, policies, through collaboration with Gulf One and understanding deeply our approaches to ethical investments.

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With 20 years experiences in sectors including investment banking, private equity and Islamic project finance, Mr Durrani holds a place in our most influential people listing. He has attended numerous conferences and interviews, and has also published a bestseller entitled ‘Venture Capital, Islamic Finance & SMEs’ which is sold in 70 countries around the world’. Mansoor Durrani was awarded a “New Voice of Islamic Finance” Award in 2002 and has also received a number of “Best Islamic Deal” Awards during his career.

Mansoor Durrani Job Role: Vice President and Head of Project Finance, NCB Country: Saudi Arabia

Impact on the Islamic finance industry Mansoor Durrani is the Vice-President and Head of Project Finance at the largest bank in the Middle East. He has led Islamic project finance deals with NCB’s commitments exceeding US $7 billion - an estimated 1/5 of the entire global Islamic project finance portfolio.

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with Mansoor Durrani What are your thoughts on the future of Islamic finance? We are part of an era where capital is playing a pivotal role not just in our economic lives but also our social and political lives. Current paralysis and expected demise of the conventional financial system is both bad and good news. Bad news in the shortrun as it means the economic activity - supported by this system - will get disrupted during the transition phase. Thanks to this system, the entire world has been hijacked by speculators. Since there is no room for speculation in Islamic finance, it is expected to bring the global economic system back to sanity. This is good news and I am positive about the future of Islamic finance. What impact have you made in the Islamic finance industry? Islamic finance is now a trillion dollar industry. A large part of this is allocated to listed Equity Funds and Consumer Finance. My humble contribution or “impact” can be divided into “intellectual” and “practical”. Intellectually, I think my 10-year old doctoral research in Private Equity is still one-of-its kind and increasingly relevant in today’s situation. In order to apply my research, I wanted to set-up an Islamic Private Equity Fund. But it did not take off for reasons beyond my control. So I came to Saudi Arabia where I’ve been fortunately employed by the largest bank in the region. NCB’s balance sheet and management support gave me an opportunity to build an Islamic Project Finance business which is perhaps the largest in the world. What advice would you give to those wanting to enter your sector of expertise? 28 Global Islamic Finance

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This is an important question and very often ignored by the industry advocates. This sector is still in its infancy. It is imperative for the leadership to learn lessons from the mistakes of the current system breathing its last. Financial institutions are not run by sophisticated plants and machinery or super computers; they are rather run by humans. In my view, the mindset of Islamic finance managers is critical. They must realise that Islamic finance is based on very clear dos and don’ts. They cannot afford to be “over creative” in pursuit of “developing” this sector. They must completely shed the “Wall Street mentality” before entering this sector. Within your career, what changes have been made to the Islamic finance industry? Many changes have occurred in the wider sector, but I will mention a few in Islamic Project Finance only. Seven years back, only a handful of power projects had small Islamic tranches. While this continued and developed to the extent that a large power deal was fully financed by Islamic tranche (NCB led this); we also managed to introduce significant Islamic financing in O&G, PetChem, Metals & Mining sectors. But these were all asset based projects.

We are currently working on one large International Airport and one large Motorway deal where the assets will not be owned by the project companies. They will only have operating rights. So we are developing groundbreaking structures where the operating rights will be bundled and ring-fenced to meet Islamic financing requirements. This will be a major milestone in the Islamic financing of mega infrastructure projects.

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Global Islamic Finance Magazine would like to congratulate all of the influential people who are featured in our top 20 listing. The listing has been produced to recognise key people within the Islamic finance industry, and to celebrate the impact and changes they have made. The article gives the reader an insight into the achievements of the influential people, and the qualifications they have gained over the years. We hope that people and companies will be encouraged to take part in our magazine’s future listings. gif

References and Further Reading •

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Abou-Gabal, N, Khwaja, A. & Klinger, B. (2011). Islamic Finance and Entrepreneurship: Challenges and Opportunities ahead. Retrieved from: http:// belfercenter.ksg.harvard.edu/files/EFL%20Final. pdf Bianchi, R. (2006-2007).The revolution in Islamic finance. Retrieved from: http://heinonline.org/ HOL/LandingPage?collection=journals&handle= hein.journals/cjil7&div=31&id=&page Hassan, I. The Future of Islamic Finance. Retrieved from: http://www.ftbusiness.com/islamicfinance2010/images/contentpage/the%20 future%20of%20islamic%20finance%20-%20 final.pdf Ali, A. (2005) Islamic Perspectives and Management and Organization, Edward Elgar Publishing Limited. Managerial Leadership: An Islamic Perspective by Syed Mohammad Ather and Farid Ahammad Sobhani Vissel, H. & Vissel, H. Islamic Finance: Principles and Practice. Retrieved from: http://books. google.co.uk/books?hl=en&lr=&id=KIXe3rY_ OkgC&oi=fnd&pg=PR1&dq=influential+people+i n+islamic+finance&ots=WXrim61Ovt&sig=PU-m Fq3zbtLjloL0Z5WD5SvKQis#v=onepage&q&f=f

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alse Beekun, R. & Badawi, J. (1998). Leadership: An Islamic Perspective. Retrieved from: http://www. teachislam.com/templates/teachislam_v2/IslamicLeadership.pdf Global Takaful Market to reach $25bn in 2015, says Ernst & Young. (2011). Retrieved from: http://www.ameinfo.com/271095.html Reuters. Sukuk Market seen reviving in 2011. (2011). Retrieved from: http://www.emirates247. com/business/economy-finance/sukuk-marketseen-reviving-in-2011-2011-01-22-1.345365 Almonayea, E. (2011). Sukuk & Islamic Financial Structures in Project/Infrastructure Finance. Retrieved from: http://www.euromoneyconferences. com/downloads/Kuwait11/KFHWorkshop.pdf Thought Leadership: the neglected essence of Islamic Finance. Retrieved from: http://www. deloitte.com/assets/Dcom-Lebanon/Local%20 Assets/Documents/ME%20PoV/ME%20PoV%20 issue%202/Thought%20Leadership%5B2%5D. pdf Innovation key for future success of Islamic Finance System. Retrieved from: http://www. arabbrains.com/2011/10/20/innovation-key-forfuture-success-of-islamic-finance-system/

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Future of Islamic Finance. Retrieved from: http:// www.siddiqi.com/mns/FutureOfIslamicFinance. htm Schulte-Croonenberg, H. & Pock, A. Islamic Finance: What leaders do differently. Lessons learned from Islamic financial institutions in the GCC. Retrieved from: http://www.nzibo.com/IB2/ differently.pdf Ilias, S. (2010). Islamic Finance: Overview and Policy Concerns. Retrieved from: http://www.fas. org/sgp/crs/misc/RS22931.pdf Hanif, M. (2011). Differences and Similarities in Islamic Conventional Banking. Retrieved from: http://www.ijbssnet.com/journals/Vol._2_ No._2;_February_2011/20.pdf Andarakis, A. (2010). Organisational leadership qualities… Retrieved from: http://halalfocus. net/2010/03/29/organizational-leadershipqualities/ Al-Jarhi, M. Islamic Research & Training Institute. Islamic Finance: An Efficient & Equitable option. Retrieved from: http://www.imamu.edu.sa/ Data/abstract/management/acc/Islamic%20 Finance%20-%20an%20efficient%20and%20equitable%20option.pdf

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Market Review

ISLAMIC BANKS NEED TO OFFER Agriculture Financing in Pakistan Source: GlobalIslamicFinanceMagazine.com

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Within Pakistan the agriculture sector contributes 21 percent to the Gross Domestic Produce (GDP), and provides 40 per cent of the country’s employment, as well as placing Pakistan as the fifth-largest milk producer in the world.He pointed out that Nestlé and other international companies have already realised the opportunities available, and accordingly have invested in the dairy sector. He further stated that huge opportunities exist for Islamic banks in the agriculture sector, and they must make efforts to tap into these through agriculture financing.”

It has been reported that Islamic banking in Saudi Arabia is set for continued growth. NCB Capital expects that loan growth for Saudi banks will continue to perform strongly in 2012 as they focus on retail lending. In its latest report, NCB Capital stated that it believes government spending and bonus salaries in 2011 will have a “recurring effect” on banks’ balance sheet growth in 2012.NCB Capital expects the bottom line this year to be driven by volume growth and non-interest income. “Banks focus on the under-penetrated retail segment is a key recurring theme,” said Farouk Miah, head of Equity Research at NCB Capital. “Improved provision coverage, asset quality and capital base make Saudi banks well equipped to continue the strong lending growth recorded in 2011. Overall, we expect loan growth of 12.4 percent in 2012 led by a retail loan growth of 16 percent.” The economics team at the National Commercial Bank estimated Saudi Arabia’s government expenditure during 2012 to be 13 percent higher than budgeted on revenues of SR930 billion, leading to a budget surplus of SR150 billion, or 7.1 percent of its GDP. This continued use of an expansionary fiscal policy, coupled with low-interest rates, should maintain healthy economic growth and boost domestic liquidity. NCB Capital believes the corporate sector will benefit from continuing government support and estimates a corporate loan growth of 11 percent. Lending by the banking sector was also boosted by the government abandoning the “advance mobilization scheme” which provided companies with government contracts up to 30 percent of the required financing. This aided the building and construction sector, which grew 25.4 percent in 2011 with similar growth levels expected in 30 Global Islamic Finance

April 2012

the coming years. According to the report, most of the Saudi banks believed that it was unlikely for the mortgage law to be passed in the near-term. As a way of getting around the problem, banks have focused on mortgage lending to state-sector employees on the high end of the income scale. NCB Capital continues to believe that even if the mortgage law is passed, it will not have an immediate and full effect on mortgage lending until the supply of housing becomes more affordable. A key trigger for mortgage lending, even in the absence of enforced formal institutions, is the introduction of tax on underdeveloped lands, easing pressure on property prices. This will be a key trigger for mortgage lending going forward; while a mortgage law will facilitate bank lending, a land tax will ensure greater supply to meet the demand of home buyers. The NCB Capital report highlighted that banks’ share of demand deposit has increased significantly over the past few years. It currently stands at its highest level of 58 percent, up from a low of 40 percent at the end of 2008’s fourth quarter. “It is no surprise that the switch came after interest rates started to decline; indeed we attribute this to the low interest rate environment which significantly limited the opportunity cost associated with non-interest bearing deposits,” explained Miah. “In addition, the reduced rates had a noticeable substitution

effect as depositors’ preferred short-term liquidity over longer term deposits at limited returns while abundant liquidity reduced banks’ demand for longer maturity funds.”

Going forward, however, NCB Capital expects demand for time deposits to increase as the opportunity cost for demand deposits rises in absolute terms. “We believe conventional banks, particularly those who target high income depositors, to be at most risk. Shariah-complaint banks, on the other hand, face a lesser risk as more conservative depositors forgo interest on religious principles,” commented Miah. “More importantly, however, Shariah-compliant banks target customers on the low-end of the income curve; 90 percent of Al-Rajhi’s retail depositors, for example, are low to mid income earners and hence the opportunity cost, in absolute terms, is limited even in the case of a spike in interest rates.” On a YTD basis, the daily average value traded in the local equity market is up 98 percent YoY to SR8.7 billion and is 130 percent higher from the corresponding period in 2011. NCB Capital expects the TASI to sustain increased level of activity for 2012, supporting a 21 percent sector growth in fee income. According to the report, NCB Capital prefers stocks of established players such as Al-Rajhi, Samba and Riyadh Bank due to their attractive valuations and their ability to take advantage of the opportunity in the retail segment. “These names also stand to benefit most from the strong equity market activity. We downgrade Saudi Investment Bank and Arab National Bank to neutral from overweight” Miah concluded. gif

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Risk Management

RISK MANAGEMENT: ISLAMIC FINANCIAL POLICIES ISLAMIC BANKING AND ITS POTENTIAL IMPACT

Author: Thomas A. Timberg, Freelance Consultant, Nathan Associates Inc.

Abstract: Since the representatives of the Shariah Bureau of Bank Indonesia responsible for the supervision and development of Islamic finance will focus on the experience and progress of Islamic banking in Indonesia, this article will focus on some questions about the impacts of that banking, particularly in rural areas, and aspects that the Bank Indonesia representatives will not focus on. Keywords: Islamic Banking, Indonesia, Bank Muamalat, Islamic Finance

Islamic Banking and Its Potential Impact Islamic banking is a worldwide phenomenon involving a variety of institutions and instruments, not one “project” or institution. In the past few decades, Islamic institutions and instruments have developed in many countries, including the United States. In certain countries—Iran, Sudan, and Pakistan—all or most financial intermediation conforms to Islamic Shariah (religious law) as defined by local authorities. All three of these countries also have banking authorities that govern the general level of charges and returns in the system and these are not usually market-governed systems. In most other countries, including Indonesia, Islamic transactions and institutions make up a small part of the total and must compete with conventional financial institutions. There is even considerable Islamic banking in the United States. If the terms and conditions of Islamic transactions differ too much from those of conventional institutions they become hard to sustain. The terms and con32 Global Islamic Finance

April 2012

ditions of Islamic institutions therefore tend to converge with conventional ones. Islamic instruments are simply a narrow group of familiar financing instruments. Any transaction, with any distribution of proceeds, can be conducted as a lease, a sale, a partnership, a fee-generating transaction, or a loan. Islamic instruments generally avoid loans. Though the scheduled distribution of proceeds may be the same as for a conventional loan, the legal risk in case of default is often different in the different forms of financing. Those who promote Islamic finance often prefer partnership arrangements in which profits or turnover is shared because this conforms more fully to the goals of Islamic banking. One goal of Bank Indonesia in promoting Islamic banking is to increase the proportion of financing involving such sharing. Nonetheless, more than 80 percent of Indonesian Islamic financing is in fixed-term forms, mirroring the pattern throughout the world. Many involved in Islamic banking would like to minimise the differences between Islamic

and conventional banking and thus they welcome fixed-term forms. However, because the instruments differ in some degree they typically require some adjustment from their conventional counterparts. For example, in Islamic transactions, the bank often holds the title of the property concerned. U.S. banking authorities have ruled this unobjectionable provided that title holding is only a matter of form to accommodate Islamic structures. Although U.S. and other banking supervision authorities have accommodated Islamic banking with few changes in procedures, some countries consider that this is not enough. They have moved to develop national and international Islamic institutions, money markets, bank regulators, deposit protection, bank accounting, and so on. Centres have been developed for all these matters for bank supervision in Malaysia, for accounting in Bahrain, and several academic centres, including centres at Harvard and Oxford universities.

Risk Management

have grown from US$52 million to US$302 million but still accounts for only 0.26 percent of assets in the banking system. The figure is somewhat higher if we exclude the considerable assets of conventional banks that represent government recapitalisation bonds of one sort or another. Bank Indonesia has been moving to ensure that support institutions are developed for Islamic banks. I will present some data on the largest and oldest Islamic bank, Bank Muamalat, and the BMT.

The Example of Indonesia Indonesia, with the world’s largest population of Muslims, has come to Islamic or Shariah banking fairly late. Many of Indonesia’s Muslim leaders do not believe that commercial interest in its modern form is prohibited, although others do. After some false starts, Islamic financial institutions are developing rapidly and have the enthusiastic support of many young people and intellectuals. The work of the Shariah Bureau of Bank Indonesia demonstrates that Indonesia, especially in particular parts of the country, has considerable unmet demand for Islamic banking. Islamic banking in Indonesia has some unusual characteristics. Like most microfinance institutions in Indonesia, Islamic institutions, micro or otherwise, are generally private, for-profit institutions based on the intermediation of depositor funds secured on a competitive market. In this they are different from microfinance institutions in almost every other country in the world. They typically have no explicit social goal other than profit maximisation and conformity with Islam, though in some cases a social element is present, as we will see. Social impacts are thus the result of the market impacts of the Islamic institutions. Many Islamic institutions in Indonesia, particularly the Bait Maal Wat Tamwil (BMT) Islamic savings and loan cooperatives are located in rural areas and provide agricultural financing. Nonetheless, the focus of Indonesian Islamic financial institutions is typically urban and geared toward the financing of trading operations. There has been some discussion of Islamic banking for micro credit, but most documented experience that I know of is in Pakistan, where institutions charge a service fee to cover their costs, something that is not permitted now in many Islamic banking systems. In terms of agricultural finance, I have encountered only one institution, a BMT in Solo, that provided crop loans. This transaction, which involved a fixed repayment in kind, also might not meet the standards of many Islamic lenders. I am sure other crop loans exist. A couple of Islamic financial instruments are particularly According to one source, some particular Islamic financial models were traditionally designed for agricultural purposes. The lending of the various venture capital firms in Indonesia, the Modal Ventura, did support a number of agribusiness ventures on an Islamic, profit-sharing basis. The example is not necessarily an attractive one, however, because although repayment was frequently high, the profit-sharing element, in which low profits were reported, and the devaluation of the Indonesian rupiah, led to

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Thomas A. Timberg, Freelance Consultant, Nathan Associates Inc. Dr. Timberg has more than 40 years of experience concerning issues of economic and social development. For more than twenty years he was employed by Nathan Associates Inc., with whom he continues to work as a freelance consultant since his retirement. He has been particularly associated with work on the financial sector, SME development and microfinance. He is at present Senior Adviser and Access to Finance Specialist for the World Bank supported Micro, Small and Medium Enterprise Project in Nigeria with components concerned with access to finance, business development services, investment climate, and public private dialogue. He is also Chief of Party for a World Bank supported study of Shariah Finance in Indonesia.

the recapitalisation of these venture capital firms. Islamic financial institutions in Indonesia include the Bank Muamalat Indonesia, which has been functioning since 1992, several new Islamic branches of regular commercial banks, one other newer commercial bank, 80 Bank Perkreditan Rakyat Shariah (BPRS—smaller banks limited to borrowing and lending in limited areas), and 2,470 BMT (of which a few are reported to be registered with the Ministry of Cooperatives and Small Business). The Islamic commercial banks and BPRS file frequent and detailed reports with Bank Indonesia and thus produce reliable and current statistics. This is not yet the case with BMT. The amount of funds in Islamic institutions has been growing rapidly, as the paper, “The Blueprint of Islamic Banking in Indonesia,” which is also being presented at this session, illustrates. Assets in Islamic banks

Bank Muamalat Bank Muamalat’s position as of December 31, 2002 can be seen in figure 1. Various small approximations were made; precise concepts are specified in Bank Indonesia sources. Bank Muamalat loans, according to its recent annual audited reports, are distributed among Islamic financial instruments as shown in figure 2. About two-thirds of the rupiah financing and half of the foreign currency financing are for less than one year. This is a high level of longer-term financing for a commercial bank. There is a trend toward Mudharabah. The average return on loans seems to be a little more than 10 percent, which is not high by Indonesian standards. Bank Muamalat splits gross revenues with borrowers, not net profit as in other Islamic institutions, and almost always insists on collateral. Its “sharing,” non-fixed term lending is thus easier for it to manage than it would be in some other countries. The bank made a profit when many Indonesian banks were losing money. It used to have a higher percentage of non performing loans, but the situation appears to be improving. The pattern of outside funds deposited in Bank Muamalat by instrument can be seen in the following figures. The cost of outside funds seems to be roughly half that charged borrowers—again somewhat low by Indonesian standards. Bank Muamalat reports that despite its relatively low payment of 10–12 percent on deposits, while other banks were paying in the mid-20s, the nominal amount of deposits declined by only 15 percent. This reflects the strong customer loyalty enjoyed by all Islamic financial institutions. In recent months a number of banks have opened or announced that they will shift to Islamic principles or open Shariah branches, so competition for Bank Muamalat is likely to increase. Bank Muamalat has a specifically social focus, as noted in its 1998 annual report. Its mission is “to become the catalyst for Islamic financial institution development,” and “enhance its role in small scale industry finance.” Almost 17 percent of its lend 2012 April Global Islamic Finance

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Risk Management Dennis Cox, CEO, Risk Reward Limited

What are the advantages and disadvantages of using risks tools to manage risks in Islamic Banks? The only disadvantages are that the tools may not be as effective as in traditional banks due to the limited ability to validate the output to ensure that the model has good predictive ability. However this should not reduce usage, rather it should lead to a review of all output. What are the main differences between the risk management in Islamic Institutions and those appropriate for conventional banks? The key difference is that the Shariah committee are involved throughout the product process. The risk function needs to ensure that any conclusion that they come to also incorporates the Shariah element and therefore solutions need to be compliant with the rules in the country. Of course the variation in what is acceptable globally does make this more complex for the institution operating globally. What are the most challenging issues with risk management in Islamic Institutions? Management of liquidity risk in countries where there are limited products available to offset the risks. Secondly there is the risk posed by potentially increasing interest rates since Islamic finance to date has not operated in such an environment.

34 Global Islamic Finance

April 2012

ing goes to small and medium enterprises, which is above average for commercial banks. Bank Muamalat intends to “selectively [distribute] its financing with emphasis on small businesses by using its Shariah financial institution network,” 29 of the 78 BPRS, and 100 of the 2,000 BMT, and aspires, as well, to serve the kopontren (registered multipurpose cooperatives connected with pesantren, Islamic school dormitories), which often have a savings and credit unit. Bank Perkreditan Rakyat Shariah The roughly 80 Shariah BPRS have Rp 80.5 billion in total assets. They were created as a legal category under the 1988 banking reforms. They are permitted to borrow and lend money but do not have access to the payments system, have lower capital requirements than commercial banks, and are subject to inspection by Bank Indonesia. BPRS have been growing rapidly (as noted in the Bank Indonesia Blueprint) although they still constitute a small portion of the total. Bait Maal Wat Tamwil Islamic Savings and Loan Cooperatives The BMT savings and loan cooperatives follow Islamic procedures as well. So far only a few of these are registered with the Ministry of Cooperation and Small Enterprise and are subject to its rules. The BMT, like the BPRS, more or less follow the general rules for savings and loan co-ops. Most BMT are associated with Induk Koperasi Syariah BMT (Inkopsyah BMT), which was established by 18 registered Islamic BMT and 2,200 unregistered “pre–coops.” Other BMT are associated with other organisations, especially the foundation Dompet Dhuafa and some religious organisations, or are independent. The registered cooperatives are both freestanding savings and loan cooperatives (Koperasi Simpan Pinjam–KSP) or units in broader cooperatives (Unit Simpan Pinjam— USP). I visited one Islamic USP that was part of a multipurpose cooperative that operated a store and garment factory as well as the USP; another was part of a kopontren. BMT, even free-standing ones, typically are closely associated with other Islamic institutions. The Mohamadiya Polyteknik in Karaganyar told us that it has five BMT associated with it. The legal status of BMT, unless they are registered as cooperatives, is ambiguous, although the Ministry of Cooperatives and local governments often work with them. Pusat Inkubasi Bisnis Usaha Kecil (Center for Incubating Small Businesses [PINBUK]) has helped develop a regulatory system for them, and USAID contributed to a national seminar on the subject. A strong consensus exists on the need for some regulatory scheme to be developed, but the form that

such a scheme would take is still unclear. As of June 1998, there were 330,000 members in 2,470 BMT with Rp 187 billion in outstanding loans in this network. The number of BMT rose from 300 at the end of 1995 to 700 at the end of 1996 and 1,501 at the end of 1997. The BMT currently have 8,253 paid staff, mostly university graduates, who have been trained by PINBUK. As of June 1998, of the $20 million of outstanding BMT loans, the overwhelming amount was short term, averaged $100 per loan, and went to micro enterprises. About half of the borrowers are reported to be “micro enterprise groups.” Some of these are possibly guarantee groups of individual micro entrepreneurs, but most are presumably classic NGO group enterprises. The borrowers are predominantly small traders. This $20 million of small lending was 83 percent funded by the savings of members, and 14 percent from the capital of the cooperatives. Apparently, no funds came from BPRS, though some funds have come from Bank Negara Indonesia, a government bank, Bank Maumalat, and some government enterprises, especially Pertamina. The BMT appear to be 100 percent lent up, with no liquid funds in bank accounts or cash. So far, overdue amounts are negligible; less than one-third of amounts due are more than a month overdue. Kopontren Cooperatives Connected with Pesantren The 1,500 kopontren connected with pesantren are registered with the Ministry of Cooperatives. Most of their savings units do not follow the Islamic system, although some are beginning to do so: One hundred to 300 of the kopontren savings units are estimated to have shifted to Islamic banking. The Islamic financial institutions look on them as an important target market segment, but much of the kopontren leadership does not want to identify solely with Islamic financial institutions. Because the pesantren are mostly in rural areas, their cooperatives and credit are frequently connected with agriculture. Findings and Recommendations Though Bank Muamalat and the BPRS offer a full range of Islamic deposit and credit products, most Islamic credit in Indonesia has taken the form of trade finance (bai al salaam, bai bitsama ajil, istishna, or murabaha), though the proportion declines as the partnership or trust provision of working capital (musyarakat and mudharabah) increases. Rates (charged and paid) differ considerably between institutions and from time to time, but the average rates on Islamic credit often approximate those of other institutions.

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Risk Management

Although Bank Muamalat did not suffer as consumers and is often given in the lamic finance should be encouraged by reguseverely as many large banks from the ficontext of a movement to assist them; lation and supervision that accommodate its nancial crisis, it did require some managebut forms while ensuring that their unfamiliarity ment change and has begun healthy growth • Requires some adjustment, mostly for- is not exploited to defraud clients. Normal again. BPRS and BMT have been growing mal, of techniques and regulation to prudential and supervision norms should be despite the monetary crisis. The BMT have take account of Islamic values. adequate. The IMF study does, however, sugmobilised a great deal of savings and providgest that higher capital adequacy ratios and ed financial services to a large constituency, Islamic finance, as part of a financial sector more detailed disclosure requirements may many of whom have never been served be- development strategy, ought to be encour- be appropriate. The paper suggests a modifore. They have a large prospective market aged, mainstreamed, and adjusted to. An fied CAMEL (capital adequacy, asset quality, and the advantage of building on the infor- IMF study on the matter concludes that Is- management, earnings, liquidity) system mal network created by the Islamof banking supervision for Isic institutions with which they are Figure 1 lamic banking. Special risks are associated as well as the moral the generally uncollateralized sanction that comes with that afnature of Islamic banking and Nonperforming Bank Assets Credit Deposits Loans (%) filiation. However, as largely ungreater risks in the profit-sharing supervised and not guaranteed forms of lending. To the extent Bank Muamalat 238 190 190 4.8 institutions, many of which are that Islamic banking is collatBank Mandiri 28,103 7,101 20,444 6.6 run by relatively inexperienced eralised or does not engage in Banking System 123,556 45,556 92,778 8.1 personnel using new methodoloprofit-sharing forms, the issues gies, they clearly present prudenare less serious. tial dangers, though not different Figure 2: Bank Muamalat Loans by Type of Shariah Instrument in principle from those posed by (Rp billion) Nonetheless, the Islamic banks all savings and loan cooperatives are often more comfortable Financing Instrument 1998 1997 in Indonesia. with specialised regulations and For Rupiah infrastructure that recognise Bai Bitsaman Ajil 141 179 In form rather than substance their peculiarities. The BMT in Murabahah 83 130 Islamic finance is familiar. Many particular need adequate suMudharabah 68 29 of its instruments are the same pervision and some guarantee Musyarakah 13 12 as those used by other financial for their depositors, though Al Qardhul Hasan 1 1 institutions leasing, advance purnot as elaborate as those proTotal 306 351 chase, etc. The difference lies vided commercial banks and For Foreign Currencies in the first instance in the social BPRs. Islamic banking should Bai Bitsaman Ajil 78 86 impulse for sharing responsibility, be mainstreamed by maximisMurabahah 71 21 risk, and property. Consequently, ing the interaction between Is7 1 Mudharabah fixed-interest transactions in lamic institutions and the rest of Total 156 108 which risk is assigned entirely to the financial system, subject to Grand Total 462 459 the borrower are avoided. More the constraints of Shariah. The important for participants, Isfinancial system and its reguFigure 3 lamic finance represents part of lation should be adjusted as Savings and Returns 1998 Amount 1998 Returns a divinely sanctioned economic necessary to accommodate the gestalt into which they fit. other two thrusts.Donors should Mudharabah Time 221 28 ensure that their assistance to Deposits Thus Islamic finance financial system development Securities *** 23 • Enables financial services to includes Islamic financial instiMudharabah Savings an otherwise underserved tutions. This will help include 103 7 Deposits group, including small, rural, otherwise excluded groups and Wadiah Deman and agricultural producers; avoid regulatory loopholes. gif 68 3 Deposits • Furthers a social thrust to Others 3 assist smaller producers and References and Further Reading • • • • • • • • • • • •

Financial Times, March 25, 2003, inter alia. Mahmoud Amin El-Gamal, A Basic Guide to Contemporary Islamic Banking and Finance, June 2000, at http://www.ruf.rice.edu/~elgamal/files/primer.pdf Zamir Iqbal, “Islamic Financial Systems,” Finance and Development, June 1997 V. Sunderarajan and Luca Errico, Islamic Financial Institutions and Products in the Global Financial System: Key Issues in Risk Management and Challenges Ahead, IMF Working Paper No. WP/02/192, Washington, D.C.: IMF, 2002, at http://www.imf.org/external/pubs/ft/wp/2002/wp02192.pdf Perbankan Shariah: Islamic Banking Statistics, Bank Indonesia, December 2002. Bank Indonesia, Blueprint of Islamic Banking Development in Indonesia, http://www.bi.go.id/bank_indonesia2/utama/publikasi/upload/syariah%20blue%20printengl.pdf Comptroller of the Currency, Administrator National Banking, Office of the Counsel, NY. Interpretative Letter #867, November 1999, 12 USC 34 (7), 12 USC 29; No. 806, December 1997, 12 USC (7), 12 USC 371. From bibliography at http:/www.failaka. com/Failaka/20Research.html Dr. Amin Aziz, “The Development of Micro Enterprise Institutions in Indonesia: The Case of National Board of Revenue Sharing Micro Enterprise Cooperatives (Induk Koperasi Syariah Bmt, Baitul Maal Wat Tamwil), presented at the Symposium of the APEC Center for Entrepreneurship, Jakarta, August 10, 1999. Luca Errico and Mitra Farahbaksh, Islamic Banking: Issues in Prudential Regulations and Supervision, IMF Working Paper, March 1998. Operations and Government Debt Management under Islamic Banking, IMF Working Paper, September 1998. These documents can be accessed at http://www.imf. org/external/pubind.html V. Sundararajan and Luca Errico, op. cit., pp 21–22.

36 Global Islamic Finance

April 2012

Interview

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MOVING THE ISLAMIC FINANCE INDUSTRY FORWARD, interview with Anouar Adham, Head of the Asset Management Division at Qatar Islamic Bank (UK)

He was formerly with Qatar Islamic Bank as a senior banker, and was involved in real estate projects, industrial development and corporate advisory services. Anouar, a Chartered Financial Analyst (CFA), has a Masters degree in Finance from the University of Clermont-Ferrand in France and holds the Islamic Finance Qualification. What does your job role entail? I lead, manage and develop a team of professionals to develop and distribute Shariahcompliant investment products.

What are your thoughts about the future of Islamic finance within the UK? We can clearly say that London is the Islamic financial hub of Europe with several Islamic banks operating in the UK. We are seeing new entrants in the market which demonstrates that the UK continues to attract foreign investment in the Islamic finance sector. However, Islamic finance in the UK has difficulties in competing in the retail market, as we have seen some failure in the retail space over the last couple of years. Over the long-term, the industry will have to be competitive for retail investors if Islamic finance wants to succeed and offer a real alternative to customers in Europe. The UK Government also has an important role to play in promoting Islamic finance as a credible alternative, unfortunately the UK cancelled what would have been the first sale of Islamic bonds by a Western federal government and since the German Sukuk (Saxony-Anhalt Sukuk), nothing else has been issued.

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Anouar Adham is the Head of Asset Management for Qatar Islamic Bank in the UK. Anouar has extensive experience of working with international banks in Europe, South East Asia and the Middle East. His experience includes investment, finance, development, asset management and advisory for HNWI (High Net Worth Individuals).

2012 April Global Islamic Finance

Interview

What impact has Qatar Islamic Bank made on the Islamic financial asset management sector? One of the main contributions of QIB (UK) in the sector was to present innovative products such as: • QIB (UK) Global Sukuk Plus Fund: today the largest in the market and one of the first pure Sukuk funds in the market. • Islamic Financial Institutions Fund: one of the only funds invested exclusively in Shariah-compliant financial institutions globally. • Hemaya structured note program: one of the only Shariah-compliant 100 percent capitals protected notes giving you access to equity markets such as Qatar, Saudi Arabia and Abu Dhabi. I have read that Themar, a new Shariahcompliant product, is being managed by Qatar Islamic Bank, particularly by your department. What does this product offer and what other products have been introduced? Themar is a new and innovative product that provides the investment flexibility needed to meet customers’ demands. This innovative product allows customers to have a diversified exposure by assets (Sukuk and equities) and by country, as the product is investing globally. Basically, it will allow clients to invest regularly or with several lump sums in the Sukuk market and in Islamic financial institutions’ stocks around the globe. This 38 Global Islamic Finance

April 2012

plan is allowing customers to access securities that might normally be out of reach or be too expensive to access. With this product we wanted to help clients to take the first step in building a diversified portfolio. What do you believe is the most successful Islamic finance product? I think that Sukuk are the most successful Islamic finance product. Generally speaking, Sukuk have been increasingly popular with investors. I am not surprised that issuance of Islamic bonds have more than doubled in the first half of 2011. 2010 was a though year but 2011 should have a better positioning. Indeed, 2011 should mark a positive trend that should be confirmed in 2012 as a lot of refinancing will happen with quite a few Sukuk maturing. However, the Sukuk arena has not been isolated from default, with rating agencies downgrading and price compression. Therefore we believe that the best way to get exposure to the Sukuk market is to invest through funds managed by professionals. Do you think Islamic finance could be as successful in a conventional dominated country as it is in a Muslim dominated country? The short answer will be yes, but we need to look at each component of the Islamic banking sector separately. Retail banking has a different dynamic to corporate finance or even asset management. My focus here will be on asset management; corporate

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The asset management sector is a long-term business and that is one of the main reasons why it was neglected by the Islamic finance industry initially. Indeed, it takes time to gain investors’ trust and build up a strong track record. Unfortunately, we can see a lot of new asset managers coming into the market with an insufficient amount of seed capital and close after a year or two. Indeed, in 2010, more Shariahcompliant funds were closed than created

Interview

However, to be as successful as it is in Muslim countries, Islamic asset managers in Europe will have to invest considerable time and money to be as competitive as conventional players in order to attract non-Muslim investors, as being Shariah-compliant does not give you a differentiation hedge, as is the case in Muslim countries. Assets of the global Islamic finance industry are estimated to grow to around US$1.6 trillion by 2012. Do you agree with this statement and why? I have seen different numbers ranging from 1 trillion to 2 trillion, and I think we need to be careful what this number really represents and how these numbers are calculated. You have in the Islamic finance sector several sub sectors or regional dynamics that paint different pictures. For example, in the Gulf Cooperation Council (GCC) region, Takaful business is booming, whereas the retail business is still maturing. What challenges does Qatar Islamic Bank face when catering to both Islamic and non-Islamic clients? We do not build our strategy by segregating Islamic and non-Islamic finance. We struc-

ture products that need to be competitive and answer clients’ needs. What are your thoughts on the future product innovation, investor developments and sales within Qatar Islamic Bank? In term of products, our target is to offer a one stop shop for investors with the full range of products. On the investor side, our focus has been primarily institutional clients, especially Takaful and ReTakaful operators. In 2012 we will continue to serve institutional investors but we were also looking at the opportunity to target HNWI via our Wealth Management Platform. What are the benefits of the mutual fund platform? The mutual fund platform is allowing investors to invest in different asset classes and countries via a vehicle offering a simple and cost-effective structure.

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social responsibility (CSR) has been a very successful concept over the last few years and we have today funds managing billions in Europe. Islamic finance is part of this CSR trend and we can see that customers respond positively to the message of investing more “responsibly”.

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I think that Sukuk are the most successful Islamic finance product. Generally speaking, Sukuk have been increasingly popular with investors. I am not surprised that issuance of Islamic bonds have more than doubled in the first half of 2011

What advice would you give to those wanting to invest in the asset management sector? The asset management sector is a long-term business and that is one of the main reasons why it was neglected by the Islamic finance industry initially. Indeed, it takes time to gain investors’ trust and build up a strong track record. Unfortunately, we can see a lot of new asset managers coming into the market with an insufficient amount of seed capital and close after a year or two. Indeed, in 2010, more Shariah-compliant funds were closed than created. gif 2012 April Global Islamic Finance

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Kerala High Court bench gives nod to Islamic banking Source: GlobalIslamicFinanceMagazine.com

The debate on whether Islamic banking is permissible in India took another turn on 10th of February 2011, with a division bench of the Kerala High Court dismissing writ petitions filed against the government sanction for starting a non-banking finance company by the Kerala State Industrial Development Corporation (KSIDC), based on Islamic principles. The bench consisting of Chief Justice J Chelameswar and Justice PR Ramachandra Menon dismissed the petitions filed by Janata Party president Subramanian Swamy and others. The court observed that when KSIDC proposed to carry on NBFC business in a Shariah-compliant manner in addition to complying with the laws of the country, it could not be treated as promoting a religion.

others, who had kept funds in Shariah-compliant banks. Subramaniam Swamy had argued that the setting up of a financial service company with government participation, which would follow the canons of Muslim religion, went against the secular principles, and that the company had been formed in accordance with the Shariah. He pointed out that the government order said 11% of the equity was held by KSIDC. He submitted that this showed the identification of KSIDC with Islam, and that the setting up of a company with co-ownership of the state was antithetical to equal treatment for all religions. The state government had refuted the allegation that the company functioned as per Shariah law.

The government had pointed out that Al Barakh FinanEarlier, there had been a court restraint on the government cial Services, was registered under the Companies Act, and KSIDC from particiand that it was a joint pating in it in any way, venture with private financially or otherwise, participation from big in the newly-formed industrialists and enThe NBFC. The petitioner, terprises. It also subi d e a however, could not mitted that the compabehind the banking demonstrate how the ny was not controlled system is to make use of impugned government by the government. funds without interest, diorder had the effect rectly or indirectly, for infraof directly promoting a The division bench’s structure projects in Kerala particular religion. decision comes just and reward the investors three months after through profits The company, Al Barakh Prime Minister ManmoFinancial Services, welhan Singh had said in comed the green signal Kuala Lumpur that he for its venture. “It is a would ask RBI to study very favourable develthe demand for estabopment and the board lishing Islamic banking of directors will meet in India. to decide on the plan of action,” Al Barakh direcEarlier last year, RBI tor EM Najeeb told ET. governor D Subbarao had said in Kerala that “The idea behind the Islamic banking was banking system is to not possible under the make use of funds withprovisions of the presout interest, directly or ent Banking Regulation indirectly, for infrastrucAct. ture projects in Kerala and reward the investors Observers here say a through profits,” Najeeb new legislation may said. He pointed out that have to be put in place there were thousands of to usher in Islamic Keralites in Gulf counbanking in the country. tries, both Muslims and

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CORPORATE SOCIAL RESPONSIBILITY AND ITS IMPLICATIONS ON FINANCIAL INSTITUTIONS: The Mainstream Western Perspective versus the Islamic Finance Viewpoint Author: Beebee Salma Sairally, Researcher, International Shariah Reseach Academy for Islamic Finance (ISRA), Malaysia

Abstract: Corporate Social Responsibility (CSR) is a growing business practice worldwide. While for some businesses CSR represents philanthropic activities that the organisation gets involved in on a voluntary basis, others perceive CSR as an integral part of business policy that is meant to add value to society as well as improve the competitiveness of the organisation. Within these two CSR approaches–the American and the European model respectively–there is a broad continuum of CSR responses that businesses tend to endorse, from being proactive to being reactive. Financial institutions, by virtue of their interface with society, can not be dissociated from their social contexts. They are also called upon to meet their corporate social responsibilities. This paper discusses the implications of CSR on financial institutions from both a mainstream Western perspective and from the viewpoint of the Islamic finance paradigm. It is observed that there is increasing tendency for endorsement of CSR practices by mainstream banks in the UK. Moreover, other financial institutions have evolved which tend to consider CSR as their way of doing business–notably, the Socially Responsible Investment (SRI) movement. Within the Islamic finance discourse, the standard issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) on CSR for Islamic Financial Institutions (IFIs) attributes mandatory and voluntary CSR conduct to IFIs. Nonetheless, the call for endorsement of a more socially responsible approach in the practices of IFIs is being currently reiterated in several Islamic finance forums. The discussion revolves around the best possible approach for making the practices of IFIs better reflect the maslahah principle (protection of public interest) in line with the broader objective of achieving the maqasid al-Shariah (objectives of Islamic law). Keywords: Corporate Social Responsibility, Corporate Social Performance, Socially Responsible Financial Institutions, Islamic Finance, Islamic Financial Institutions, Shariah

It is common practice for businesses, including financial institutions, to get involved in different forms of social provisions. Until the 20th century, the social responsibility of European and American businesses has remained mostly implicit and voluntary, taking the form of charitable donations or corporate philanthropy. Recent discussions on the social responsibility of businesses have, however, extended the concept of CSR to involve more than philanthropy. The trend since the 1990s, particularly in the European context, has been for CSR to represent a more explicit practice of businesses and it is increasingly changing from being a voluntary practice to being mandatory by law. The participation of businesses in CSR has in turn broadened, to encompass such issues as socially responsible products and processes, socially responsible employee relations, socially responsible investments, ethical trade, corporate social reporting, stakeholder engagement and business codes and standards.

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Within the financial sector, the interface of financial institutions with society inevitably raises the question pertaining to their social responsibilities. Like other businesses, it can be argued that they cannot be dissociated from their economic and social contexts. Particularly in today’s world where inequalities in wealth and life chances prevail, financial institutions are called upon to play a key role towards the alleviation of poverty and reducing social and economic exclusion. Hence, commercially-oriented high street banks have been seen to be actively participating and publicising their CSR initiatives. Also, new groups of ‘socially responsible’ financial institutions have emerged which embrace CSR as an integrated way of doing business. The practice of CSR is certainly also relevant to the Islamic finance discourse, as the discipline is grounded on core ethical values, rooted on religious tenets and as IFIs are called upon to institutionalise the Islamic ethical values by promoting socio-economic welfare. The fact that IFIs are expected to comply with both the form and substance of the Islamic law (Shariah) should affect the financial institutions’vision and mission, objectives, organisational structure and management, procedures, modus operandi, products and services, training requirements, regulation and corporate governance. Firstly, adherence to the Shariah entails legal implications which subject the practice of Islamic finance to a strict application of the textual directive of the religious law and jurisprudence–necessitating the elimination of all dealings prohibited by Shariah and the promotion of Islamic exhortations. Secondly, adherence to the Shariah also includes abidance by the spirit of the maqasid al-Shari’ah (objectives of Islamic law) which attributes a more long term holistic objective to IFIs–that of working towards the optimisation of human well-being. In this respect, a social role is often assigned to IFIs in addition to the objectives of being economically and financially viable and of being Shariah-compliant. This paper seeks to examine the implications of CSR on financial institutions, including IFIs. It thus discusses the relevance of CSR to financial institutions from both a mainstream Western perspective and from the viewpoint of the Islamic finance paradigm. Section II therefore starts by elucidating the various definitions, dimensions and variants of CSR promulgated in the literature. Section III then discusses the concept from a firm’s perspective, providing the arguments for and against the adoption of CSR as a management practice and highlighting the increasing attention attributed to it at the corporate level. This section also discusses the two 44 Global Islamic Finance

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ethical, moral issues; accounting, reporting and corporate governance; the environment and sustainability; responsible business behaviour, and social responsibility in financing and investing. Nonetheless, the underlying principle in these terms is that corporations are concerned not only with the quest for profits and economic performance. Rather, other social and non-economic criteria of evaluating firm performance are deemed important.

Author: Beebee Salma Sairally, Researcher, International Shariah Reseach Academy for Islamic Finance (ISRA), Malaysia

broad models on CSR: the European model where CSR forms part of an explicit and integral strategy of the core business, and the American model where CSR represents an implicit and peripheral policy of the business and carried out as a voluntary philanthropic exercise. Based on Carroll’s four-part definition of CSR, Section IV then discusses the CSR of financial institutions from a Western perspective and Section V delineates the practice of CSR by mainstream financial institutions as well as socially responsible financial institutions (SRFIs). Section VI finally discusses the implications of CSR on IFIs and in this respect compares the Islamic view of CSR – as defined by the AAOIFI (2010) standard on CSR–with its mainstream perspectives. Section VII concludes by highlighting the current debate in the Islamic financial industry which calls for the endorsement of a more socially responsible approach in the practice of IFIs in line with the maslahah (protection of public interest) principle under the broader objective of achieving the maqasid al-Shariah (objectives of Islamic law). CSR: DEFINITIONS, DIMENSIONS AND VARIANTS A plethora of terms are used in the literature to connote the social responsibility of businesses. Examples include CSR, corporate citizenship, corporate accountability, corporate governance, business ethics, ethical corporation, corporate responsibility and sustainability, stakeholders’ interests, sustainable corporations, and the triple bottom line approach. The wide array of terms inevitably reflect the broad arena of concepts involved under the umbrella term CSR: social,

CSR Definitions A variety of definitions of CSR can be found in the business and management literature. Different organisations and authors have submitted their respective definitions, with some focusing on the notion of sustainable development, increased economic welfare, search for a balance between positive and negative impacts of the firm, and meeting the legal, ethical, social, and commercial responsibilities of businesses. Overall, the idea of social responsibility is associated with the concern of corporations about the impact of their actions on the welfare of society. With a view to have a “positive and productive” societal impact, CSR thus represents the set of standards of behaviour that corporations subscribe to. One of the most widely accepted definitions is the one provided by Carroll. He utilises a sophisticated approach in defining CSR in terms of four responsibilities that society expects corporations to shoulder: economic, legal, ethical, and discretionary. •

•

The economic responsibility required of a business is for it to be foremost profitable, efficient, and viable. It would, for instance, include producing goods and services that society demands, supplying quality products at fair prices, earning a reasonable return for its shareholders, providing safe and fairly paid employment to the workforce, and above all to operate in such a way as to stay in business. The legal responsibility required of a business is for it to obey the laws and regulations of the jurisdiction in which it operates. The ethical responsibility expected of a business refers to those over and above the legal requirements – responsibilities that embody ethical norms, but not necessarily codified into law. According to Carroll, the ethical responsibility “embraces a response to the “spirit” of laws and regulations and helps guide business actions in those decision arenas in which regulations are ill-defined or non-existent”. Some examples would include: ensuring compliance to societal values, norms and standards;

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showing concern for the environment and sustainable development; adopting fair practices in employee recruitment; discouraging child labour; not engaging in misleading advertising, and showing concern for Third World debt. The discretionary responsibility is the desired social expectation that the firm will assume social roles over and above those aforementioned. It will act as a good corporate citizen by caring for and investing in the society it operates in. This may take the form of corporate philanthropy, which is considered the highest level of responsibility desired by society, assumed after the economic, legal and ethical responsibilities have been respectively met. Corporate philanthropy may include monetary contributions to charitable causes, supporting educational institutions and NGOs, offering managerial expertise and technological resources for causes the institution supports, providing staff welfare, and sponsoring community events. Discretionary responsibility is said to be connoted with social roles which are adopted purely on a voluntary basis to help society and is not necessarily expected of businesses in a moral sense.

It is noted that the core debate within CSR, as defined by Carroll, relates mainly to the voluntary corporate policies with respect to the ethical and discretionary responsibilities. Despite the voluntary nature of these two types of responsibilities (since they are expected and desired of corporations), it has been observed that many corporations have begun to include them as part of their business strategic objectives. Often, the concept of CSR is being defined as a “decision-making strategy” rather than as an “ethical commitment”. CSR Dimensions and Markets Besides the four-part CSR definition of Carroll, CSR may also be examined in terms of its four-part dimensions and the three markets it impacts on Figure 1. With regard to the CSR dimensions, CSR is reported to have the following spheres of influence on businesses: •

•

At the ‘workplace’ in terms of responsible business practices, good corporate governance and ethics, human resource management; At the ‘marketplace’ in terms of consumer responsibility, responsible behaviour in the production and sales of goods and services; At the ‘environmental’ level in terms of the impact of businesses on the environment through the building of sustainable business enterprises; At the ‘community’ level through cor-

porate philanthropy, corporate involvement in community development, community investment. This integral concept of CSR is especially relevant to the European context where CSR is asserted to be growing into a mainstream management issue through its adoption as a core business strategy. The above CSR influences on the strategies of businesses may alternatively be classified according to the impacts on the markets in which firms compete. Valor specified three markets where the social performance of firms has gained attention: product, labour and capital. Some of the CSR issues involved within each of the markets may be elaborated as follows: •

•

Product market – through ethical sourcing and purchasing, subscription to fair trade principles, promotion of ethical consumerism, abidance by socially responsible marketing and advertising standards, and instilling quality management procedures. Labour market – through abidance by human rights standards, development of high standards in the area of human resource management, establishment of good working conditions, opposition to child labour and oppressive regimes. Capital market – through socially responsible investment, support for cooperative or mutual banking, development of community and social banking, financing of micro-enterprises, promotion of Islamic financing.

CSR Variants The literature highlights two other extensions to the concept of CSR. These relate to the terms ‘Corporate Social Responsiveness’ and ‘Corporate Social Performance’. These terms were developed in the 1970s when discussions on CSR progressed from the definition of CSR issues to the need for evaluating action and eventually assessing social performance. The three facets of CSR principles, responsiveness to CSR principles, and measurement of CSR outcomes have been denoted by Frederick as CSR1, CSR2 and CSP. After the identification of socially responsible issues by firms (CSR1), corporate social responsiveness (CSR2) is the second stage of the CSR philosophy which addresses the “philosophy, mode, or strategy behind business (managerial) response to social responsibility and social issues … [it] can range on a continuum from no response (do nothing) to a proactive response (do much)”. Carroll further classified this continuum of corporate behaviour in terms of Wilson’s definition of four possible business strategies: reactive, defensive, accommodative, and proactive (RDAP). These possible strategies

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were further clarified by using the definitions of McAdam and Davis and Blomstrom. From Table 1, it is observed that a firm’s initial ‘reaction’ could be to resist a change in its behaviour, or at best, ensure that its actions are in the first instance strictly legal. According to Sethi, a ‘reactive’ firm is motivated by the ‘search for legitimacy’. If its actions are raising social pressures and turning into an economic issue where its profitability is at stake, it can ‘defend’ these issues through public relations approaches. However, if the issue is turning into an ethical and economic concern, it can perhaps adopt the ‘accommodative’ stance by changing its response to conform to the expectations of society. A ‘proactive’ firm progresses to ‘solve the problem’ and ‘lead the industry’ through exemplary behaviour. The action-oriented variant of CSR–corporate social responsiveness–is expected to yield a societal impact. The literature has, to this effect, discussed the ‘outcomes’ or ‘results’ of the implementation of CSR policies and their measurement–the Corporate Social Performance (CSP). According to Wood, the CSP outcomes relate to •

• •

the social impacts of corporate behaviour, regardless of the motivation behind such behaviour or the process by which it occurs; the programmes utilised by companies to implement CSR issues; the policies put in place by companies to manage social issues and stakeholder interests.

These important additions are said to have turned Wood’s work into a key contribution to CSP modelling in the 1990s. CSP measurement, according to Wood, therefore embraces the three aspects of CSR1, CSR2 and CSP: •

•

CSR1 defines the CSR principles as classified by Carroll in terms of the economic, legal, ethical and discretionary responsibilities expected of a firm by society. This aspect focuses on obligation and accountability; CSR2 relates to corporate social responsiveness, examining the responses of firms towards the CSR principles. This aspect focuses on action and activity; CSP discusses the outcomes of the implementation of CSR policies and their measurement. This aspect focuses on outcomes and results.

PROJECTING CSR ONTO CORPORATIONS: A FIRM’S PERSPECTIVE The debate about the social responsibility of corporations in the first instance centres on their roles in society. One challenging ques2012 April Global Islamic Finance

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tion posed is whether s corporations should be solely profit oriented, or should corporations balance their economic and financial prerogatives with social welfare objectives? In this respect, is it meaningful to assign ethical and social responsibilities to corporations? Earlier discussions on the social responsibility of businesses, which developed in the USA, are usually associated with the views of Friedman. Friedman proposed that ‘the social responsibility of business is to increase its profits’ and thus defined a socially responsible business as one which ‘uses its resources and engages in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud’. In other words, Friedman believed that the financial priorities, whilst undertaken within the framework of the law and ethics, should rank as the prime concern of a business. To this end, he asserted that the social benefit of the business would be in terms of its contribution in the creation of wealth and employment. Moral responsibilities, in terms of charitable activities, were not perceived by Friedman as part of the objectives of a business. His reasoning was based on three key premises: •

•

moral responsibilities are to be assigned only to individuals and in this case the corporate executives, not the corporation which is considered an independent legal entity; it is the management’s fiduciary responsibility to protect the interests of shareholders and increase their wealth rather than giving it away through overt charitable activities; social issues should be addressed by the State rather than be the prerogative

of corporate executives who are neither trained to set and achieve social goals nor democratically elected to do so. Friedman’s position that corporations should pursue profits and work to increase shareholders’ value has been associated with the worldview of neo-classical economics which is motivated by the self-interest principle as opposed to a concern for the social interest. His argument is also referred to as the ‘efficiency’ view of CSR or the ‘economic model’ of CSR. Others, such as Sethi, Carroll, Wartick, Wood and Cochran–believed that businesses can simultaneously seek to be philanthropic or society-concerned while maintaining a profit-seeking strategy. The best practice, according to this viewpoint, is not merely the maximisation of profits, economic efficiency or fair dealing. Rather, it is about businesses endeavouring to uphold the moral standards acceptable to society and fulfilling their responsibilities towards the general community. The model of CSR has therefore progressed from the ‘economic’ to a ‘social’ model–or, in other words, from a shareholder-centric to a stakeholder-centric model–whereby not only the benefits of the corporation are sought but also those of the stakeholders, including shareholders and the larger society. Several theoretical explanations have been put forward in the literature which set the foundational basis for firms to embrace a socially responsible approach which extends beyond profit maximisation. The social contract theory, for instance, establishes a formal or explicit relationship between society and businesses in the form of compliance with laws, regulations, rules and procedures; such relationship may also be informal or implicit in the form of adoption of commonly

accepted traditions. The explicit or implicit contracts provide a reference point to businesses with regard to society’s expectations of them. Wood’s put forward three propositions that could be used to explain the motivations for businesses to abide by social contracts: • • •

the ‘principle of institutional legitimacy’; the ‘principle of public responsibility’; and the ‘principle of managerial discretion’.

According to the ‘principle of institutional legitimacy’, legitimacy and power are granted to businesses by society such that business institutions are expected to use this power in a socially responsible way. Those who abuse this power will otherwise tend to lose their ‘license to operate’ in the long run. Preston and Post added that socially responsible behaviour is expected of firms because they exist and operate in a shared environment. The ‘principle of public responsibility’, on the other hand, argues that business organisations are responsible for the outcomes related to their primary and secondary areas of societal involvement. To this end, they are deemed responsible for solving problems they have caused and those related to their business operations and interests. Lastly, the ‘principle of managerial discretion’ focuses on the discretion possessed by managers as moral actors to promote socially responsible outcomes and not to shun their responsibility ‘through reference to rules, policies, or procedures’. In any case, it is found that firms are motivated to act responsibly for reasons like safeguard of their reputation and attracting investment. In fact, several studies have re-

Figure 1: Dimensions and Impacts of CSR Product Market Labour Market Capital Market

Responsible Business Practices In terms of labour standards, good corporate governance, transparent reporting

Sustainable Enterprise In terms of economic, social and environmental implications

Consumer Responsibility In terms of ethical sources, products, marketing, distribution

Source: author’s own

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Corporate Philanthropy In terms of charitable activities, community involvement and development

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ported on the business case for CSR. Some of the recognised benefits for adopting CSR as a management strategy are argued to include: • •

• •

•

improved corporate reputation from the media, government, investors, community, employees, clients; better management of long term risks by protecting the business from being involved in irresponsible social and environmental scandals and avoiding government regulations; build up in credibility and trust which assist in hiring and retaining staff and increasing employee satisfaction; stimulation of learning and innovation as companies identify new market opportunities and improve their business processes to maintain competitiveness; improved market positioning and long term profitability.

Over the last decade, investments towards CSR initiatives have been growing in response to a combination of forces, such as market forces, government involvements and social regulations. For instance, the growing consumer demand for ‘ethical’ products has led to the rise in the fair trade and ethical trade movements. The growth in investor pressure for the integration of environmental, social, and governance (ESG) criteria in investment selection can also be emphasised here. This has encouraged the setting up of socially responsible investment (SRI) funds which have especially taken off in the USA and the UK. This growth in consumer demand can perhaps be explained by the rise in demand for ethics at both the institutional and individual levels as a result of increased occurrences of issues like bribery, corruption, money laundering and terrorist financing. Worthington et. al. noted the growing stakeholder demands for CSR and social reporting in the light of a series of corporate scandals and environmental preoccupations. These scandals entail both legal and moral risks–whether through adverse consequences of non-compliance with the law or reputational damage–which corporations seek to mitigate through CSR compliance. The increased involvement of government in promoting CSR is relevant to the case of the UK where the government has made domestic and global CSR policies one of its priorities. It has appointed a cabinet minister to coordinate CSR policies since 2000. It has also amended a number of regulations requiring the disclosure of ESG factors in investment decisions, for instance:

•

Amendment of the 1995 Pension Act and enactment of the SRI Pensions Disclosure Regulation in July 2000, requiring trustees of occupational pension schemes to state their policy regarding the extent to which ESG factors are taken into account in their investment strategies. Enactment of the Charity Trustee Act 2000 in February 2001, requiring charity trustees to ensure that investments are “suitable” financially and ethically and are in line with the charities’ aims and purposes. Enactment of the Companies Act 2006 requiring all large companies to prepare a Business Review as part of the director’s annual report and quoted companies to also disclose information on environmental, employee, social and community matters.

As a result of growing government initiatives, therefore, the institutionalisation of CSR policies in the UK is increasingly taking the form of a voluntary, yet explicit business strategy. The business policy on social responsibility in such a case is taken as part of the wealth creation process and viewed as a means to increase the competitiveness of the business and the value to society. This is the general view adopted by the European approach to CSR. This compares with the case of the American model where CSR policies are not promoted at a governmental level but left to be determined by market values. The prevailing belief is that market forces will reward the ethically-conscious and penalise the corrupted, hence coercing corporations to act

responsibly. Government regulation is instead commonly regarded as ‘interference with private liberty’. In the Americal model, CSR is also driven by a strong culture of individualism where decision making on ethical issues is perceived to be the responsibility of every individual rather than being the State’s responsibility. The key actor in the development of CSR policies is therefore viewed to be the corporation, with CSR guidelines being developed in the form of corporate codes of ethics and internal compliance programmes at the individual firm level. According to Baker, CSR practice in the American model is not taken as an integral part of the core business but viewed as a peripheral and implicit policy of the business. CSR in such a case is mostly viewed as an extra activity–a voluntary philanthropic exercise-and not internalised as part of business policy. CSR AND ITS RELEVANCE TO FINANCIAL INSTITUTIONS Financial institutions are above all considered legally operated businesses with an economic purpose. Regarded as profit maximisers, they are evidently not taken to be charities. Nonetheless, their involvement with the public instils upon them their own set of ethical and philanthropic responsibilities. Therefore, Carroll’s four-part definition of CSR is believed to be applicable to financial institutions. The four-part area of influence of CSR namely–responsible business practices, consumer responsibility, sustainable enterprise, and community involvement–are also deemed relevant to their operations.

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Islamic Banking Economic Responsibilities of Financial Institutions The primary purpose of a financial institution is to provide a range of financial services to customers, public authorities, private individuals and businesses to further their own objective of economic and financial gains. The following economic functions have specifically been attributed to financial institutions in the literature. • Provide indirect financing. Acting as financial intermediaries, transferring resources from savers to borrowers and investors; • Accumulate capital. Funding long term projects by pooling funds from various savers; • Provide liquidity. Reconciling the liquidity preferences of borrowers and savers; • Select projects. Screening and funding viable projects; • Monitor funds. Ensuring that funds are used as agreed; • Enforce contracts. Ensuring that repayments are made by borrowers; • Manage, transfer, share and pool risks. Raising funds, determining repayment rules as well as establishing who bears the risks; • Diversify risks. By pooling a large number of investment projects together; • Record transactions. Keeping records of the payment systems and all exchange transactions. As financial institutions provide the above services, they add social and economic value by offering products and services needed by society and generating employment in society. These are considered important contributions of financial institutions towards socio-economic development. Nonetheless, as in the case of businesses and firms, it is commonly argued that financial institutions should promote other social responsibilities over and above their economic and legal responsibilities.

Figure 2 (Table 1): The RDAP Scale of Corporate Social Responsiveness CSR Responses Wilson (1975)

Reactive

Defensive

Accommodative

Proactive

McAdam (1973)

Resistance to change behaviour

Do only what is required

Be progressive and adapt to society’s expectations

Lead the industry

Davis and Blomstrom (1975)

Withdrawal

Embrace a public relations approach

Deny responsibility (Doing less than what is required)

Admit responsibility but fight it (Doing the least that is required)

Clarkson (1995)

Adopt a legal approach

Bargain for a compromise

Solve the problem

Accept responsibility (Doing all that is required)

Anticipate responsibility (Doing more than what is required)

Ethical and Discretionary Responsibilities of Financial Institutions Zeegers noted some of the ethical and discretionary responsibilities of relevance to financial institutions: •

• •

Do Nothing <------------------------------------------------------> Do Much Sources: Adapted from Carroll and Clarkson

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Providing security guarantees to their depositors for funds entrusted to them so that confidence in the financial system is maintained; Exercising care in the use of funds deposited with them; Showing concern for local social needs by ascribing funds to meet these needs; Showing concern for the environment

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by not lending to or investing in polluting industries; Combating social and financial exclusion by allowing access to its services by all groups in society; Operating on the basis of mutual trust and transparency; and Combating fraudulent and dubious activities.

Other authors like Hodgson and Ogrizek attributed to financial institutions the social responsibility of ‘know the customer’. Knowledge of the customer is believed to reduce the information asymmetry problem inherent in lending as well as the likelihood of fraud and money laundering transactions. Douglas et. al. further noted that the societal expectations of financial institutions include ‘strengthening corporate governance, fighting money laundering, preventing tax evasion, protecting financial privacy, equal opportunity employment, and promoting environmental awareness’. Decker mentioned such issues like ‘secure products … appropriate for the lifestyle of a cross section of society’, ‘trust, customer knowledge, prudent management of funds, proximity and accessibility’, ‘channelling funds from savers to productive uses’ and ‘promoting social cohesion’.

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Global Sullivan Principles (Proposed in 1999). Standards which address social, economic and political justice issues such as human rights and equal opportunities in employment for endorsement by multinational companies and their business partners. UN Global Compact (Launched in 2000). Advances ten principles in four key fields, namely labour standards, human rights, the environment and anticorruption. Global Reporting Initiative (Revised in 2000). An international voluntary reporting standard promoting the reporting of the economic, environmental and social dimension of an organisation’s activities, products and services. The Forge Group. Relates to a group of major financial services providers which published its “Guidance on Corporate Social Responsibility Management and Reporting for the Financial Services Sector” in 2002. This was meant to provide a practical toolkit to financial institutions to understand and address CSR issues relevant to the financial services sector such as financial inclusion, involvement and investment in the community, labour standards and other ethical issues. The Equator Principles (Launched in 2003). Voluntary guidelines relating to credit risk management when assessing environmental and social risk in project financing by financial insitutions, especially for infrastructure and industrial projects in emerging markets with total project capital costs exceeding US$10 million. Currently 73 financial institutions in 27 countries have adopted the principles. Principles for Responsible Investment (Launched in 2006). Set of voluntary guidelines for investors addressing environmental, social and corporate governance issues. There are over 950 signatories to the principles. OECD Guidelines for Multinational Enterprises (First adopted in 1976. Updated in 2011). Recommendations for voluntary responsible business conduct that 42 adhering governments encourage their multinational enterprises to observe wherever they operate.

These financial instituiotns are mainly prominent in the USA and Europe, in particular the UK.

THE PRACTICE OF CSR BY FINANCIAL INSTITUTIONS As a business practice, CSR is impacting on the operations of all types of businesses, including financial services providers. This section discusses the CSR practices of two types of financial institutions:

It was observed that banks like Barclays, Lloyds TSB, Northern Rock, Royal Bank of Scotland and the Co-operative Bank were the best performers in terms of their ESG screening, with the Co-operative bank being judged as the best overall performer. The Cooperative Bank, in particular, is considered one of the main UK high street banks with a clear commitment to social responsibility. The bank developed its ethical policy out of a survey conducted in 1991 wherein it found

•

Inevitably, these social responsibilities could be argued to represent a challenging task for financial institutions to undertake. Specifically, it is noted that the literature does not attribute philanthropic responsibilities per se to financial institutions–for example, in terms of donations and charities. Rather, the emphasis appears to be on the need for developing responsible corporate behaviour, professional and ethical business practices, customer responsibility, and developing social responsibility in project financing. These have in turn been encouraged through the establishment of voluntary CSR codes of conduct relating to financial institutions which seek to promote responsible corporate behaviour. Examples of such global CSR guidelines are as follows: •

•

Caux Principles (Issued in 1994). Recommendations which promote ethical and responsible corporate behaviour, especially addressing the social impact of company operations on the local community. Principles for Global Corporate Responsibility: Benchmarks for Measuring Business Performance (Endorsed in 1999, Revised 2003). Include over 100 principles, 129 criteria and 118 benchmarks that could be used as a model framework to assess corporate social performance.

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high street banks in the UK, and socially responsible financial institutions

The Case of High Street Banks in the UK Some of the above voluntary codes of conduct have been endorsed by even commercially-oriented high street banks such as the Hong Kong and Shanghai Banking Corporation (HSBC) which since the mid-1990s has been seen to publicise its CSR initiatives. In its CSR Report, the bank states ‘For HSBC, good CSR is good business’ and is thus observed to perceive CSR as a long term business practice for addressing the needs of its stakeholders. In recognition of its leadership and innovation in integrating ESG objectives into its operations, it is noted that HSBC (UK) had been nominated in the runner-up category of ‘Sustainable Bank of the Year’ for the Financial Times Sustainable Banking Awards 2010. The practice of CSR by high street banks in the UK has been much influenced by the moral suasion used by government to address CSR issues and make retail banks comply with government schemes. The government, for instance, instituted a universal banking programme whereby it required ‘banks to either set up basic bank accounts as part of their existing product range or participate in the Post Office’s “universal bank” scheme’. The UK government’s expectations for banks to ‘meet their social obligations’ as well as ‘discharge financial exclusion obligations’ were also incorporated into the Banking Code – which is reported to have largely influenced the behaviour and strategies of banks to demonstrate appropriate CSR policies. EIRIS reported on the following non-financial performance of thirteen leading UK high street banks on issues such as: their holding of third world debt, publication of ethical lending policies, operations in countries under oppressive regimes, publication of policies addressing financial and social exclusion, environmental policy, equal employment policy, and community involvement commitment.

2012 April Global Islamic Finance

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Islamic Banking

that 84 percent of its 30,000 sampled customers wanted the bank to have an explicit ethical policy. This support from its customers, according to the bank, had increased to 97 percent in 2001. The bank considered such strong support of ethics as a ‘mandate to pursue’ and it is today well-known for the institutionalisation of its ethical policies. According to Becker, some high street banks in the UK are addressing the challenges presented by CSR by collaborating with other banks, social organisations, and other financial institutions embracing a socio-economic mission like community development financial institutions (CDFIs) and credit unions. In this way they participate in addressing problems like financial exclusion and assist in community regeneration. As an act of good corporate citizenship, many banks also set up socially-oriented foundations under which they fulfil their social obligations. Retail banks like Lloyds TSB, for instance, have been seen to support charity works in the fields of social and community needs and encourage education and training programmes through its various UK foundations. The Case of Socially Responsible Financial Institutions Besides the promotion of CSR by mainstream financial providers, it is observed that since the 1990s there has been an elevation in the provision of financial services to a prominent social role such that banks and non-bank financial institutions (NBFIs) have been re-engineering their products, processes and services in order to increase their social impact. These suppliers of financial services are said to ‘take a positive interest in the social outcomes and effects of their activities’ whilst being driven by financial returns. In some cases, ethics is another key motivating factor of these financial institutions. This trend could be recognised under the labels of ‘social banking’, ‘socially responsible investment’, ‘ethical banking’, ‘micro-financing’, ‘community reinvestment’, and ‘co-operative banking’. To this end, a diverse range of financial institutions have emerged which, above all, seek to service the local economy and the community. Some of these experiences have developed in Third World countries, like the micro-credit movement, which have been in turn employed in industrialised countries to serve their respective local needs. Microcredit institutions act as ‘social banks’, taking initiatives to support the disadvantaged, the poor and small and medium businesses which are otherwise excluded from financial assistance. 50 Global Islamic Finance

April 2012

In the UK, the emphasis on the social goals of financial institutions has led to the development of a number of ‘mutual’ financial institutions–like credit unions, savings and loans funds, retail cooperatives, friendly societies, provident and building societies. According to the Government Policy Action Team 14 of 1999, the scope for developing credit unions in the UK was looked into as a government strategy to combat financial exclusion among communities in disadvantaged areas. Mutual financial institutions are said to play an equally, if not more, important role in the retail financial market in countries such as Australia, Germany and the USA. Community development financial institutions (CDFIs) are another type of financial institution with a social mission. They subscribe to a variety of structures, including, community development banks, credit unions, loan funds, venture capital funds, and micro-enterprise development loan funds. Their key role is to serve in the social, economic and physical renewal of under-invested communities, by creating jobs, economically empowering individuals, building local businesses, and developing entrepreneurial capacity. Importantly, they seek to help people out of poverty by developing a ‘culture of empowerment, entrepreneurship and initiative, rather than dependency’. The CDFI industry registered a dramatic boost in the USA in the 1990s, and based on its success, the CDFI sector in the UK was modelled in the ten years follwing 2000. The number of CDFIs in the USA is reported to be between 800 and 1000, operating in every state and serving both urban and rural communities. In the UK, it is reported that there are 66 CDFIs operating across 175 branches as of 2010, which form part of the Community Development Finance Association (CDFA). Some financial institutions have taken one step further by specifically promoting social and ethical issues, over and above embracing professional ethics. They have labelled themselves as ‘socially responsible’ or ‘ethical’ financial institutions whereby their financing and investment strategies will combine the criterion of financial performance as well as social, ethical, environmental and governance issues. Examples of such institutions are Friends Provident (UK), Triodos Bank (Netherlands) and Jupiter Asset Management (UK). These socially responsible financial institutions (SRFIs) adopt a number of screening methodologies to ensure adherence to ESG values. Two of the most common screening

techniques are ‘positive’ and ‘negative’ screening whereby SRFIs select investments in companies whose activities will make a positive impact on society (e.g. proenvironment, human rights, animal welfare) and avoiding companies engaged in socially negative behaviour that will cause harm to society (e.g. pornography, weapons, alcohol, gambling). Other screening methodologies used include ‘best of sector investing’ to include companies which make the greatest effort in addressing ESG issues, ‘community investing’ to promote investment in underserved communities, and ‘shareholder advocacy’ whereby investors utilise their rights as shareholders to advocate for socially responsible changes in corporate policies. A study by Sairally indicated that the CSR policy of these SRFIs is observed to represent an integrated business practice whereby the SRFIs have a formal system to manage CSR responsibilities. The following observations were noted to form part of the CSR compliance system of some of the SRFIs: • • • • • • • •

CSR was embedded in mission and vision statements; CSR, corporate governance and SRI policies were clear; CSR departments were established and CSR staff appointed; External and internal committee boards were set up to ensure CSR/SRI compliance; Abidance by legal rules governing the industry and by global ethical standards were observed; Guidelines were developed on how to implement CSR/SRI policies; Stakeholder consultations were conducted when setting SRI research process; Transparency in reporting CSR policies and practices was observed.

Today, the SRI industry is fast expanding in different parts of the world, with a greater prominence in the USA, the UK and some European countries. As of September 2010, the SRI industry is reported to be encompassing a worldwide industry worth €6.9 trillion (approx. US$1 trillion), with Europe holding the largest share of €4.9 trillion followed by the USA at €1.5 trillion. For the UK-the main SRI market in Europetotal SRI assets under management is estimated at £938.9 billion as of 31 December 2009. This includes £9.5 billion being invested in UK green and ethical retail fundsup from £2.4 billion ten years ago. gif

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Sukuk

GROWTH AND PROSPECT OF SUKUK

IN ISLAMIC FINANCE

Author: Mohamad Zaid Mohd Zin, Centre for Islamic Thought and Understanding, University Technology Mara, Malaysia

Abstract: Over the past decade, Islamic finance has been growing at an average rate of more than 30 percent per year. This impressive performance has greatly benefited many national economies, irrespective of faith or race, by fostering significant growth and increased employment opportunities. No doubt, Islamic finance has been identified as one of the important growth areas for the National Key Economic Activities. Today, Sukuk (Islamic bond) is among the most successful Islamic financial product in the industry and one of the fastest-growing sectors in the global financial landscape. However, this operation is still new in the market, and only limited research has been undertaken on this topic. In view of this limitation, this article aims to explore the practice and prospect of the Sukuk market in Malaysia. The application and mechanics of Sukuk market will also be discussed. The article also aims to look at the differences between the Sukuk market and the conventional market. Subsequently, understanding among the investors was also examined, and opportunities and challenges that need to be addressed will be reviewed. As will be evident in this article, this system has its own advantages and values, making it the system of choice in meeting specific investment interests and needs. Keywords: Effectiveness, Financing, Sukuk, Bond, Islam 52 Global Islamic Finance

April 2012

Sukuk Years ago, Islamic finance was considered to be wishful thinking. However, serious research and the development of Islamic products has shown that Islamic finance is not only feasible and viable but it is also efficient and a productive means of financial intermediation. The development of the Sukuk market has accompanied the transformation of the economy, which in turn has now become more diversified and private sector-driven. The market, initially dominated by government debt securities, now reflects the growing demand for the long term financing requirements of the private sector. In this highly competitive environment, the presence of a deep and liquid Sukuk market thus contributes towards the stability of the financial system. Sukuk also proved its abilities to help develop an economy, even during an economic downturn. For example, Sukuk, [Islamic equity bonds], was issued by the World Bank in 2005 for the redevelopment of Acheh following the 2004 Boxing Day tsunami, as it was for the Kuala Lumpur International Airport in Sepang, Malaysia through which many foreign delegates arrive in Malaysia today, was financed by Sukuk in 1996. Nowadays, Sukuk or Islamic fixed-income securities that have emerged over the past 15 years have become an increasingly important asset class. These products have a number of objectives, one of which is to enable organisations to raise capital in a Shariah-compliant fashion, whilst at the same time expand the investor base and offer investment opportunities to new groups.

Nonetheless, Sukuk share some similarities with conventional debt securities, in that they are similarly structured based on assets that generate revenue. The underlying revenue from these assets represents the source of income for the payment of profit on the Sukuk. Regulations Framework of Sukuk Al-Jarhi and Abozaid impose rules and conditions (ahkam) related to the tradability of the Sukuk in primary and secondary markets. To begin with, Sukuk must be issued against some tangible assets and not against cash or debts. Therefore, the tradability of Sukuk at the time of issuance (primary market) as well as in the secondary market must follow these rules: •

If Sukuk are issued against specific assets (‘ayn) or services, then this issuance implies the sale of these assets to the Sukuk holders in return for cash money based on current values of assets or services, and therefore the Sukuk becomes tradable.

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If Sukuk are issued against described assets or services to be manufactured or constructed in the future (mausuf fii zimmah), then this issuance implies the sale of these assets to the Sukuk holders in return for cash money, and these Sukuk are not tradable until the deliverability of assets or services.

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If Sukuk are not issued against assets or services, but for the purpose of utilising the proceeds to acquire some assets, then Sukuk do not become tradable until the stage at which those assets or services are purchased. This is because the Sukuk up to that point represent liquid proceeds, i.e. cash money, and money cannot be sold against money unless the Shariah rules of sarf are observed.

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If there is any mixture between ‘ayn and dayn, then ‘ayn must dominate dayn in Sukuk issuance.

Considering their relative infancy, Islamic securities can be structured in a number of increasingly sophisticated ways. Indeed, new products are being consistently developed and introduced. Therefore, it is essential to remain conversant with the important principles of structuring Islamic securities. Sukuk may be defined as certificates of equal value that represent an undivided interest (proportional to the investor’s interest) in the ownership of an underlying asset (both tangible and intangible), usufruct, services or investments in particular projects or special investment activities. Through this concept, Sukuk enjoy the benefit of being backed by assets, thereby affording the Sukuk holder or investor a level of protection which may not be available from conventional debt securities. Furthermore, unlike conventional debt securities that mirror debts or loans on which interest is paid, Sukuk can be structured based on innovative applications of Islamic principles and concepts.

Products of Sukuk In theory, Sukuk are certificates of equal value representing undivided pro-rata ownership of tangible assets, usufruct or services. Although Sukuk are in principle nonrecourse asset-backed instruments, the Originator typically undertakes to repurchase the underlying assets at a fixed or referenced price, rendering the Sukuk asset-based and giving certificate holders exposure to the credit risk of the Originator. Although in principle Sukuk are required to represent underlying assets that are tangible (‘ayn) as opposed to a debt (dayn), there

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have been Sukuk issuances in which the underlying assets are a mix of cash and tangible assets. There have also been issuances of convertible and exchangeable Sukuk. Sukuk can be structured alongside different techniques. While a conventional bond is a promise to repay a loan, Sukuk constitutes partial ownership in a debt (Murabahah Sukuk), asset (Al Ijarah Sukuk), project (Al Istisna’a Sukuk), business (Al Musyarakah Sukuk) or investment (Al Istithmar Sukuk). Recently, there has been a new type of Sukuk introduced, known as the hybrid Sukuk. •

Ijarah Sukuk: It is divided into purchase agreement, lease agreement, servicing agreement and purchase undertaking. It is based on letting property rights to any other benefits based on the agreed price. Al Ijarah Sukuk is issued on a sale and leaseback arrangement (Ijarah) of real estate and has been a popular structure for sovereign issuers in particular. The issuer applies the Sukuk proceeds to purchase real estate from the Originator and then leases it back to the Originator. The Originator undertakes to repurchase the real estate at maturity or upon early settlement at the original purchase price. The Issuer is required by Shariah law to undertake the major maintenance of the asset but will often appoint the Obligor to carry out such activity on its behalf.

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Mudharabah Sukuk: It is divided into Mudharabah agreement and purchase undertaking. It is a cooperation agreement between two parties that investors and managers of capital. Mudharabah Sukuk are investment Sukuk that represent common ownership of units of equal value in the Mudharabah equity; the holders of Mudharabah Sukuk are the suppliers of capital (Rabb almal) and own shares in the Mudharabah equity and its returns according to the percentage of ownership share. Mudharabah Sukuk holders have the right to transfer the ownership by selling the deeds in the securities market. Mudharabah Sukuk also should not contain a guarantee from the issuer or the manager for the fund, for the capital or a fixed profit, or a profit based on any percentage of the capital.

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Musyarakah Sukuk: It is divided into Musyarakah agreement, management agreement, purchase undertaking, it involves the cooperation of two parties to incorporate a capital for a motivation. Al-Musyarakah Sukuk was a popular structure among corporate issuers until the Accounting and Auditing Organisation for Islamic Financial Institutions 2012 April Global Islamic Finance

Sukuk

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(AAOIFI) ruling on Sukuk at the beginning of 2008 clarified the prohibition of the use of nominal value purchase undertakings in such Sukuk. In an alMusyarakah Sukuk, the Issuer contributes the subscription proceeds to enter into a joint venture with the Originator who contributes either his own capital/ asset or makes a contribution in kind. The Issuer and the Originator share the profits according to an agreed ratio but Shariah requires that any losses must be shared according to the ratio of capital contributed. Besides that, the AAOIFI ruling confirmed that while it is permissible in an al Ijarah Sukuk for the lessee to undertake to purchase the Sukuk assets at nominal value upon redemption, it is not permissible for a Sharik (partner) in an al Musyarakah Sukuk or a Wakil (agent) in a Sukuk al Wakalah bil Istithmar to undertake to do so. The Shariah considers such undertakings to effective guarantees of principal which are not permitted by Shariah in partnership and agency contracts. The AAOIFI ruling created a significant dent in the issuance of al Musyarakah Sukuk and al Mudharabah Sukuk. •

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of the commodity to the Sukuk holders and such trading in debt on a deferred basis is not permitted by Shariah. •

Mohamad Zaid Mohd Zin, Mara University of Technology, Malaysia Mohamad Zaid Mohd Zin is a lecturer at Centre for Islamic Thought and Understanding, Mara University of Technology, Malaysia. He received his B.S degree in Syariah From Al Azhar University, Cairo, Egypt (1999) and Master Degree in Islamic Studies (Syariah) from Malaysia National University (2005). His research interests in Islamic finance are in the areas Syariah issues and Sukuk. He is a member of International Economics Development and Research Center (IEDRC) and joined over 10 International Conference as a presenter at Malaysia, Indonesia, Singapore and Dubai. Currently, he is a PhD student at Malaysia National University under Faculty of Islamic Studies.

Hybrid Sukuk: The innovative structures. Based on various demands of investors, a more diversified kind of hybrid Sukuk or mixed Sukuk emerged in the market. The assets can comprise of Istisna’a, Murabahah as well as Ijarah. Islamic Development Bank issued the first Hybrid Sukuk for US$400 million. The assets comprised 66 percent al-Ijarah Sukuk, 31 percent Murabahah and 3 percent al-Istisna’a Sukuk. The hybrid Sukuk structure represents the potential of new structures and benefits to the investors.

Sukuk Market in Malaysia In this decade, greater focus was given to the institutional arrangements to develop the Sukuk market. The Sukuk market now accounts for more than 50 percent of Malaysia’s bond market. The market has drawn the participation from a wide range of international corporations and multilateral agencies in raising funds and investing in the Sukuk issuances out of Malaysia.

Istisna’a Sukuk: Absale and purchase More recently, there has also been continuagreement in order to finance a project ous innovation and an increasing number item. Istisna’a Sukuk are certificates of issuances in foreign currency. Malaysia that carry equal value and are issued to offers international participation in the Ismobilise funds required for production lamic financial system and also offers to of goods products that will be owned be an international gateway, particularly in by the certificate holders. The issuer of strengthening the link between the two imthese certificates is the manufacturer; portant dynamic growth regions of Asia and the subscribers are the buyers of the the Middle East. intended product, while the funds realised from subscription are the cost of Malaysia’s Sukuk market started with a the product. The Islamic bank funding simple issue size of RM125 million by Shell the manufacturer during the MDS Sdn. Bhd... In 1990 and is now construction of the asset, ac- Figure 1: Breakdown of Global Sukuk Issues by Country for growing in size and is increasingly quires title to that asset and up sophisticated. This development is year 2010 on completion either immedievident in the largest Sukuk issuBrunei Darussalam 0.5% ately passes title to the developance, recently valued at RM15.4 Japan 0.2% er on agreed deferred payment billion (US$4.7 billion) by Binariang Turkey 0.2% terms or, possibly, leases the GSM Sdn. Bhd. Now, the Sukuk Pakistan 1.9% Gambia 0.0% asset to the developer under an market in Malaysia is among the United Kingdom 0.0% Bahrain 1.4% Ijarah Sukuk. Shariah prohibits fastest growing in the world, with Pakistan 1.9% these certificates to be traded an average annual growth of 22 UAE 2.1% in the secondary market. percent issued for the period from 2001-2007. Qatar4.1% Murabahah Sukuk: In the case of Murabahah Sukuk, the is- Saudi Arabia 5.8% After introducing the first sovereign suer of the certificate is the global Sukuk in the world in 2002, seller of the Murabahah comMalaysia has continued its sucmodity, the subscribers are the Indonesia 6.0% cess by introducing innovative Subuyers of that commodity, and kuk structures such as convertible they are entitled to its final sale musyarakah Sukuk by Khazanah price upon the re-sale of the Nasional Berhad, the Malaysian commodity. Murabahah Sukuk government investment holding cannot be legally traded at the company. This is a historic issue secondary market, as the cerand the first of its kind in the world, tificates represent a debt owwhich combines the features of the ing from the subsequent buyer first full convertibility, usually for Malaysia 77.7%

54 Global Islamic Finance

April 2012

Source: Zawya Sukuk Monitor.

Sukuk conventional equity-linked transactions. For 2010, Malaysia remains a frontrunner in the global Sukuk issuance, contributing 77.7 percent of the total Sukuk issued in 2010. Meanwhile, countries that do not have a majority Muslim population also showed interest, such as the United Kingdom and Japan, in engaging in global Sukuk issuance. The Government of Malaysia recently issued the second benchmark dollar sovereign Sukuk for Malaysia’s domestic funding needs. The Government’s investment arm, Khazanah Berhad, recently issued a Singapore dollar Sukuk out of Malaysia through its existing multi-currency programme. The Islamic Development Bank has also closed the book-building exercise for a 500 million US dollar benchmark Sukuk issue in Malaysia for developmental projects of member countries. In addition, the Dubai Government’s Department of Finance is proposing to launch a multi-currency Sukuk programme soon. Malaysia, therefore, is well-positioned as a multi-currency issuance platform for Sukuk. In the area of capacity building, Malaysia has also given priority to two areas, one being human capital development and the second being catalysing mutual recognition of Shariah interpretations. The International Centre of Education in Islamic finance (INCEIF) was established in 2006 for advanced education for practitioners in Islamic finance, and in 2008, the International Shariah Research Academy (ISRA) was established to conduct applied Shariah research on the contemporary Islamic finance issues and to provide a platform for active international engagement among Shariah scholars. Malaysia will also continue to collaborate with other regulatory authorities to ensure financial stability in the Islamic financial system. This will be through Malaysia’s active involvement in the Islamic Financial Services Board (IFSB), the Islamic Financial Stability Forum (IFSF), the initiatives by the Islamic Development Bank (IDB), and finally in the newly formed International Islamic Liquidity Management Corporation (IILM). Secondary trading in the Malaysian Sukuk market has increased the depth and liquidity of the market with the participation of more companies, including foreign-owned companies’ continued use of this market for funding purposes. A large number of corporate issuances is to finance long-term funding needs. The diversity and size of the Sukuk transaction and the increasing value proposition is attractive to investors who want to diversify their asset portfolios, thus creating a vibrant secondary market. gif

Rushdi Siddiqui, Shari’ah Advisor for Thomson Reuters, USA The Sukuk industry is growing at an unprecedented rate. Do you expect this growth to be consistent? The Sukuk product has become the poster child for Islamic finance. Sukuk became a global phenomenon on the back of the petroliquidity spike - and as many expect oil prices to remain above USD80 per barrel for the forseeable future, and as GCC and Arab Spring countries still need to build out their infrastructure, Sukuk is here to stay, continually growing and developing as a financing and investment tool. Sukuk illustrates an interesting aspect of Islamic finance: its position in financing real economies. One interesting recent development is the actions taken by some GCC entities to raise money in Malaysia. These funds the ‘regulatory Sukuk efficiency’ of Malaysia, combined with available liquidity. It seems to me that the development of Malaysia’s Sukuk market development can be loosely compared to the early days of the Eurobond market: it has become efficient in the ‘shelf registration’ model. For example, Kazanah’s recent exchangeable Sukuk, priced negatively, is a good example of the innovation the industry aspires to. The industry is on track to expand the breadth of its offering, allowing it to compete with conventional institutions. Sukuk defaults are actually good for development, as these will result in the future in better documentation and tighter pricing of Sukuk, as some of the ‘uncertainty’ premium is removed. Finally, Thomson Reuter’s launch of its ‘IIBR’ (Islamic Interbank Benchmark Rate) will eventually allow lenders and borrowers to reference Sukuk prices from an indigenous benchmark designed to reflect different geographies’ individual funding costs. Why is Sukuk becoming an increasingly popular commodity within Islamic finance and banking? Much like conventional finance, Islamic finance is biased towards the debt capital markets. At USD180 billion, the Sukuk market makes up about 18% of the USD1 trillion debt capital industry, where Islamic funds are estimated to make up only 5%. (However, this figure makes the incorrect assumption that Islamic funds all relate to the Islamic equity capital market.) Entities raising capital, whether these are sovereign entities, corporate entities, or quasi-sovereign entities, find it easier to comprehend Sukuk when the asset is explained as an equivalent to a ‘bond,’ asset-based and asset–backed. Under this parallel, the ‘Islamic’ aspect becomes a collateral issue of compliance. And if I’m a seeker of capital, I want the widest range of available financing options on

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my dashboard - i.e., GE in 2009. I argue that the excess liquidity which petroleum prices have caused in the GCC should be deployed. Within and without the GCC, capital seekers currently have limited options, in light of the financial implosion in Europe. Sukuk presents an ‘agnostic’ opportunity to raise capital in a world which is not doing ‘business as usual’. Frankly, the Islamic finance industry needs to do more to educate the whole non-Islamic financial community about the benefits of Sukuk. Currently, the industry focuses too much on Sukuk’s weak point: supply! Capital-raisers should lobby as stakeholders for regulations, including taxation where appropriate, in order to level the playing field for Sukuk. These are typically the first order of business. What do you think about Turkey’s entrance to the Sukuk market in 2012? Turkey, a secular Muslim democracy - i.e., a non-cheerleader of Islamic finance - has taken a ‘go slow’ approach to Islamic finance, due to its history with ‘Shari’ah law.’ To start with, Turkey does not call this financial model ‘Islamic’ or ‘Shari’ah’ banking, but ‘Participation’ banking – a term which actually captures the essence of this USD1 trillion industry rather well. Secondly, it has learned an appropriate ‘banking’ model for the country. Turkey’s model seems to be aligned to the more holistic approach to Islamic banking taken in Malaysia. Finally, Turkey has not made an overt declaration of intent to be a hub for Islamic, but seems more inclined to develop as a facilitating platform for an inclusive capital market approach. Turkey’s efforts can be seen as a ‘kite-flying exercise’ for Islamic debt capital market development within the country and in the CIS region. Turkey’s influence in the region cannot be denied, and so the ‘traction’ of Sukuk in Turkey presents a compelling opportunity in (compliant) financing of the infrastructure buildout within CIS, possibly aided by the GCC’s petro-liquidity. Additionally, Turkey’s entrance into the Sukuk market further refines Islamic finance, adding the impact of a European influence, which will build bridges towards the development of the industry in capital-challenged (eastern) Europe. What makes Shari’ah-compliant Sukuk unique? The answer to that depends on who you’re asking. From a Shari’ah scholar to a banker, from an issuer to a buyer to a trader, each has his or her unique prospective. As the industry has not arrived at a universally defined standard for Sukuk, the appropriate contract relies on the needs of the issuer. As a capital-raising instrument, Sukuk is tied to a four-part issue including: (1) the underlying compliant asset (2) the structure (modality of the contract), (2) use of the proceeds and (3) trading (if appropriate).

2012 April Global Islamic Finance

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Sukuk Shaher Abbas, Shari’ah Advisor and Auditor for Islamic Finance Advisory and Assurance Services, United Kingdom

The Sukuk industry is growing at an unprecedented rate. Do you expect this growth to be consistent? Although historically concentrated in the Gulf and south-east Asian countries, Islamic finance has shown strong growth over the last decade in many different parts of the world. This strong growth has been generated mainly by the significant increase in the issuance of Sukuk. Interest in this new Islamic capital market product is encouraging a wide spectrum of countries in Europe and the far east to modify their approach towards Islamic finance, in order to accommodate Sukuk issuance. In the wake of the ‘Arab Spring’ and the recent political developments across the Arab world, which brought significant changes to almost all North African countries, the new-formed governments are now more receptive to considering this potential funding instrument. The West African Economic and Monetary Union (UEMOA) is currently reviewing its legislation to allow provisions for Islamic banking and Sukuk issuance. Together with the ongoing expansion of Islamic finance in east Africa, and positive measures taken by a vast number of countries, these events point to a sustainable growth for Sukuk over the years to come. Why is Sukuk becoming an increasingly popular commodity within Islamic finance and banking? Sukuk is the backbone of the Islamic finance and banking industry. It is used as a real alternative to conventional financial products by most financial institutions, governments, corporate organisations (Islamic and conventional) and investors. Due to Sukuk’s popularity, the number of Islamic financial institutions and other parties interested in the industry is growing continuously. Sukuk serves various purposes for these institutions and individuals, providing access to the Islamic capital market, a tool for the management of liquidity, a new asset class for investors and a new funding channel for governments. Sukuk’s provision of direct ownership of the underlying asset, and the right to sell in case of default by the issuer, makes it more popular in the eyes of investors, who usually prefer to have optimal ownership and control over their assets.

What does the future hold for the Islamic Sukuk sector? The market for Sukuk is growing rapidly yearon-year, as is the demand for new issuance of Sukuk, backed with different types of assets. This growing demand will be the main engine behind future expansion of the Sukuk sector. However, the industry urgently needs to resolve issues such as the struggle between innovation and standardisation, and between credit risk and rating considerations, in order to unlock the huge potential of Sukuk as a product. Many institutions and individuals have called for standardisation of the Islamic finance and banking industry. So far, AAOIFI (Accounting and Auditing Organisation for Islamic Financial Institutions) and IFSB (Islamic Financial Services Board) have both done a lot of work towards this goal. However, the standardisation process may take a long time. This should not hinder efforts to innovate new products, which are urgently needed at this early stage of the industry’s life. The other important issue that we need to resolve is problems with solicitors and other industry professionals’ understanding of the nature of Sukuk, and of the credit and others risks associated with this product. Most institutions currently work on the assumption that Sukuk is a substitute to conventional bond products, and make their analysis and judgment on Sukuk as a product based on this assumption. Unfortunately, many Sukuk products have been developed with this issue in mind, which undermines the development process, and leads in many cases to a replication, in substance, of a conventional bond. A lot of hard work still needs to be done in order to create better awareness among the industry practitioners, and to impress on them that Sukuk is a wholly different asset class, requiring a different approach towards credit and legal analyses to that usually taken towards conventional bonds. Until new mitigation tools are developed to tackle the specific risks associated with Sukuk, Sukuk’s real potential will remain overshadowed by conventional bonds, and by the performance of the conventional capital market. How does Sukuk differ from conventional bonds? Sukuk differs from conventional bonds in both substance and form. The following table provides a snapshot of the main differences between the Sukuk and conventional bonds:

Description

Bond

Sukuk

Financing Category

Debt instrument

New asset class, representing undivided ownership of specific underlying assets

Underlying

No underlying asset usually, unless forming part of collateral

Underlying asset is compulsory, usually a tangible asset

Capital

Guaranteed

No capital guarantee, but capital protection might be provided

Total Returns

Fixed income (known/ predetermined cash flows)

No guarantee of overall returns

Objectives of Funding

Unrestricted

Restricted for use in Shari’ah-compliant assets

56 Global Islamic Finance

April 2012

References and Further Reading •

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Ayman H. Abdel-Khaleq and Peter Young, Vinson & Elkins RLLP, (2008) “Structuring and Offering Sukuk Products Involving Assets in the US: Challenges and Opportunities”, pp 56. Abozaid, A & Al-Jarhi Mabid, (2010), “Reasons for Failure of Some Sukuk Issuances”, International Fiqh Academy, IRTI & Islamic Economics Research Center Conference, Islamic Sukuk: Examination & Reevaluation, King Abdul Aziz University & Westin Hotel, Jeddah, Saudi Arabia, May 24-25. Central Bank of Malaysia Financial Stability and Payment Systems Report (2007), pp 56-57, website: http://www.bnm.gov.my/ files/publication/fsps/bm/2007/ cp02_rencana_01.pdf General Council for Islamic Banks and Financial Institution, Islamic Financial Industry News Centre, website: http://www.cibafi. org/newscenter/english/SpecificProductsAndServicesNews. aspx?SubC=70 (accessed on 4th February 2011) Islamic Financial Training, “Sukuk & Islamic Capital Markets: Products & Documentation”, website: http://www.islamicfinancetraining.com/sukukpdnov.php Muhammad Taqi Usmani, president of the AAOIFI Shariah Council, “ Sukuk and Their Contemporary Applications, website: http:// www.failaka.com/downloads/Usmani_SukukApplications.pdf (accessed on 6th February 2011) Malaysian Debt Securities and Sukuk Market, (2009). “A Guide for Issuer and Investor”, A joint Publication by Central Bank of Malaysia and Securities Commission Malaysia, pp 29-34.

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World Islamic Finance Review

MERGES & ACQUISITIONS IN THE MIDDLE EAST: Balancing Risks, Reaping Rewards Author: Arti Sangar, Partner, Diaz Reus & Targ, LLP, Dubai

Arti Sangar, Partner, Diaz Reus & Targ, LLP, Dubia Arti Sangar is a partner at Diaz Reus & Targ, LLP where she heads the firm’s Dubai office, located in the Dubai International Finance Centre. She concentrates her practice in the area of mergers and acquisitions and project finance. Miami-based Diaz Reus is a full-service international law firm. The firm maintains offices in Orlando, Florida, Shanghai, Mexico City, Frankfurt, Caracas (Venezuela), Bogota (Colombia), Buenos Airesand Sao Paulo/Belo Horizonte (Brazil).

Fuelled by tremendous growth potential and an increasingly progressive regulatory environment, the Middle East is fast becoming a hotbed of merger and acquisition activity. Today, for example, the UAE is experiencing an upsurge in cross-border merger and acquisition activity. As a result, dealmakers throughout the Gulf Cooperation Council, including Bahrain, Saudi Arabia, Oman, Qatar, and Kuwait, should be ready to strike while the proverbial iron is hot. As dealmakers survey the wealth of opportunities available in the region, they should be alert to certain trends particular to the Middle East. This article offers a brief overview of key issues to keep in mind as deals unfold. Due diligence: Comprehensive due diligence is critical to a successful deal. It is worth keeping in mind, however, that companies in the Middle East are generally not required to disclose as much information as their counterparts in the U.S. and Europe. Indeed, deal teams may be surprised to learn that UAE laws do not require as much disclosure as other jurisdictions. However, this is changing. Although there is little history of corporate disclosure in the Middle East, some countries are taking steps to improve transparency and communication with foreign investors. Foreign ownership restrictions: Certain jurisdictions require a local partner with an ownership stake. For example, with the exception of branch and representative offices, every company established in the UAE must have at least one partner who is an Emirati national, who owns at least 51 percent of share capital. If the business involves a real-estate brokerage, 100 percent national ownership is required. Notably, these requirements are waived for companies established in free

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zones like the Dubai International Financial Centre. A company can establish its operations here without incurring the time and expense of locating and vetting a local partner. Deal structure: Careful thought must be given to the drafting of agreements. Any plan to assign control and profits must be thoroughly reviewed. This is especially important since different countries within the region may impose penalties for agreements that violate local laws. Investors must also have a well-planned exit strategy. It is common to have a formal agreement for significant transactions of any type, including acquisitions of shares in private companies. There is typically an initial agreement between the buyer and the shareholders, such as a memorandum of understanding, followed by a more complete share purchase agreement and a shareholders’ agreement. There is also likely to be a confidentiality agreement and possibly an exclusivity agreement. Regulatory compliance: Before considering an acquisition in the Middle East, investors must determine if it is permitted by law. In most Middle Eastern countries, merger and acquisition deals can occur only with the prior approval of the relevant government authorities. Thus, acquisitions should always be conditioned upon securing official consent and the flow of funds should reflect this requirement. Escrow arrangements are therefore frequently the preferred option for managing the movement of funds. There are other regulatory issues to consider, such as key documents requiring court notarisation. Once the documents are signed, they may need to be submitted to the appropriate authority to register the transaction. Parties based outside the jurisdiction

will need to obtain the necessary powers of attorney in advance. In most cases, companies operating in the Middle East will require a trade license permitting them to carry out their specific business. In the case of an acquisition, the transfer of an existing license should be executed. Financing: The gradual relaxation of world credit markets will further drive merger and acquisition activity in the Middle East but investors will need to find other sources of funds as Western markets continue to restrict lending. Islamic financing offers one such option. Yet, investors may still face some challenges, including a lack of global consensus over the application of Shariah laws and higher transaction costs than those for conventional finance vehicles. Employee Consultation: There are no requirements for a company’s board to inform or consult its employees prior to a merger or acquisition. However, consideration should be given to requirements under UAE labour law relating to minimum notice periods, holidays and end of service gratuities. The merger and acquisition market in the Middle East is no longer in its infancy and the region’s continued development will offer significant opportunities to investors. It is vital that any merger and acquisition strategy accounts for challenges that may arise as a result of local business laws and practices. Sufficient time and resources must be dedicated to ensuring that any cross-border venture is secure, legal, and profitable. Foreign investors looking to take equity stake in the Middle East should carefully consider the structure of a proposed deal from the outset, and then carry out a carefully planned, timed, and well-executed strategy. gif

Market Review

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Islamic Banking in Saudi Arabia Set to Grow Source: GlobalIslamicFinanceMagazine.com

With Islamic banks having been working in the shadow of conventional banks, both in the international and domestic markets, he stated that the agriculture sector and SMEs (small and medium sized enterprises) are of paramount importance for achieving growth, but that these opportunities have been largely ignored. He went on to urge Islamic banks to tap into the huge opportunities available in the agriculture sector. Within Pakistan the agriculture sector contributes 21 percent to the Gross Domestic Produce (GDP), and provides 40 per cent of the country’s employment, as well as placing Pakistan as the fifth-largest milk producer in the world. He pointed out that Nestlé and other international companies have already realised the opportunities available, and accordingly have invested in the dairy sector. He further stated that huge opportunities exist for Islamic banks in the agriculture sector, and they must make efforts to tap into these through agriculture financing. He argued that inclusive growth is wholly beneficial for society, and that Islamic banks should be more aggressive in increasing their outreach beyond major cities, deploring the fact that 70 percent of their branch networks are confined to the 12 major cities of the country.

He also said the SBP is working to provide many critical issues, which needs to be adIslamic interbank market to Islamic banks dressed to sustain the growth momentum and a regulator has been taking measures on long-term basis. Despite all of the aforeto help Islamic banking in Pakistan. He pos- mentioned issues, he stated that he was opited the notion that the Islamic banking sys- timistic about the global and domestic role tem has to come out of the shadow of con- of Islamic banking, considering it to be the ventional banks and overcome the lack of most dynamic area of financial services. understanding about risk management, capacity obstacles and training. Yaseen said Continued use of an expansionary fisthat Islamic banking has been growing at cal policy, coupled with low-interest a very robust rate of rates, should maintain healthy economaround 30 percent ic growth and boost domestic liquidity’ for the last six years, currently constituting 8.5 percent of the total deposits of banking sector. Furthermore, he stated that over 886 The financial and economic devastation branches of Islamic banks have been work- caused by the recent financial crisis has ing in the country but the industry is still fac- provided further impetus to the healthy rate ing challenges that require addressing. He of growth, as the Islamic financial system is affirmed that the debate has now started increasingly being looked at as a prudent, on how the Islamic banking system should stable and viable alternative against the move towards stability. conventional system. The governor of the State Bank said that it was very encouragHe said Islamic finance is a profitable eco- ing to see that Riphah International Univernomic opportunity, and that Pakistan should sity had arranged the second International pay heed to the lessons taught by the global Conference to discuss the important issues financial crisis. Yaseen said that despite this currently pertaining in the areas of Islamic financial crisis, the fundamental concepts financial products, monetary policy in an of the economics of Western countries are Islamic economic system and liquidity manvery deep, and it would be a misconception agement, and congratulated the institution to assume that their system has collapsed. for organising such an important event at an He said financial institutions have to be cau- international level on a regular basis. tious and prepare themselves in order to be resilient against any sort of crisis. Yaseen He said the State Bank, being the regulator also said Islamic financing has been lacking as well as the promoter and facilitator of the in the areas of risk management and due industry, will look into the recommendations diligence, and a key challenge lay in working of the Conference for possible adoption and in international and domestic markets with implementation of the ideas brought up conventional banking currently dominating throughout the event. gif both. He said despite all the positive developments during the last decade, there exist

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It has been reported that State Bank of Pakistan (SBP) Governor Yaseen Anwar announced that Islamic banks need to offer agriculture financing in order to tap into the huge potential of the sector. Speaking as chief guest at the inaugural session of the two-day 2nd International Conference on Islamic Business (ICIB 2012), organised by Riphah International University at National Institute of Banking & Finance (Nibaf), Anwar voiced his regrets that Islamic banks have not been able to come out of the shadow of conventional banks, as well as lacking better risk management and due diligence.

2012 April Global Islamic Finance

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Islamic banking

SHARIAH SYSTEMS: AN ALTERNATIVE IN THE MAKING,

& Strategies Accelerating the Making Author: Dhafer Salih Alqahtani, Principal, Rusmal Consult, Bahrain

Abstract: The financial crisis and its lingering effects might drag the global economy into a double dip during 2011, and we might witness an exact repeat of the 2008 crisis and the global economy slowly slide into a recession. These turbulent and chaotic market conditions present the Islamic banking industry, as well as potential new entrants to the industry, with an opportunity to join forces and resources in certain regions, specifically in Islamic countries, and to come to the forefront by reinventing and reinvigorating themselves as major mainstream providers of debt and equity, creating a globally recognised alternative to the present interest-based conventional system that is sustainable and reliable with full transparency and disclosure, in contrast to the current conventional system. During the 2008 financial crisis, when the industry confirmed its resiliency and sustainability as a versatile and ethical financial alternative, it was the first time that Islamic investment and finance was being considered as an alternative to the conventional structures and schemes in terms of financial products and solutions. Yet again, in 2011, the same calls are echoing louder to address the debt crises using Sukuk. Between the two crises, the Islamic Financial Institutions (IFIs) unfortunately went into hibernation, content to go through those stormy four years with minimum disturbance. Unfortunately, the uncertainty in the market place might extend to 2012 and 2013, and that reason, among many others, is enough for the industry as a whole to come together and abandon the silos mentality. It is important to capitalise on these calls to enhance the Shariah-compliant system as a logical choice and alternative to the present interest-based system, with both systems co-existing side by side in the global financial market for the benefit and prosperity of individuals, societies, institutions, businesses and countries regardless of their beliefs and political orientations as stipulated by Shariah law. Keywords: Shariah-compliant, Financial Crisis, Malaysia, Islamic Financial Institutions

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Islamic banking

es and resources in certain regions specifically in the Islamic countries to come to the forefront by reinventing and reinvigorating themselves as major mainstream providers of debt and equity, creating a globally recognised alternative to the present conventional system (interest based) that is sustainable and reliable with full transparency and disclosure which is in the contrary to the conventional (interest based) system Moving forward and being transformational With that as backdrop, IFIs, in Islamic countries in particular, must immerse themselves in the main source of Islamic banking and finance; that is, Shariah law. This immersion can evolve only through innovation, creativity, development, groundbreaking structures, and new Islamic funds as well as regulations and standardisation while preserving and protecting the industry’s reliability, accountability, and integrity.

While clinging to its present marginal position in global financial markets, Islamic banking and finance has a long way to go to transform itself into a major player, mainly through standardisation, uniformity, governance, transparency and innovation, in addition to consolidation. This could be possible and accelerated by the evolution and advancement of a Shariah-compliant System, Shariah-compliant financial products and services that are in line with international best practices. The financial crisis and its lingering effects might drag the global economy into a double dip during 2011, and we might witness an exact repeat of the 2008 crisis and the global economy slowly slide into a recession. These turbulent and chaotic market conditions present the Islamic banking industry players as well as potential new entrants to the industry with an opportunity to join forc-

Implementing Islamic financial regulations at the national or regional level for investment and finance (i.e., the regulators) (central banks and capital market authorities), eventually leads to a well defined regulatory and supervisory structure through a deeper commitment and engagement in terms of resources and human capital as well as Shariah expertise to establish and strengthen the Shariah activities and processes inside the regulator organisations while segregating the Islamic banking from conventional ones. Accordingly, the Shariah side under the regulator should cover all Shariah-compliant activities in term of regulations including finance companies, Islamic leasing companies, Awqaf Islamic endowment, mortgage companies and Islamic microfinance, beside the generic IFIs, while simultaneously forbidding (by the power of laws and regulations) private efforts by individuals, organisations or institutions from assuming the regulators’ role or operating outside the regulator circles and jurisdictions as such irregularities could only harm the reputation and the integrity of the industry, not to mention the heavy blow to the confidence in IFIs, particularly at the customers’ level. The success of Malaysia is an unblemished testimony for national government involvement that turned the

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country into a major centre for Islamic banking. Similarly, the Arabian Gulf Cooperation Council Countries (GCC) recently proposed a unified GCC’s Shariah Supervisory Board (SSB) which was definitely a long awaited and wished-for move in the right direction, something I was criticised for when I called for such unification during a conference in Bahrain in 2008. Maybe the boldest and most extreme move in the industry by a regulator was by the Central Bank of Qatar (CBQ), when it ordered the shutdown of Islamic banking windows (IBW) in the conventional banks, thus restoring confidence and integrity in Islamic banking, also preventing the combining of funds and assets between Shariah-compliant and conventional transactions and deposits as required by Shariah guidelines which have been a gray area in the industry and subject of debates and disagreement due mainly to the commingling funds. Regardless of what drove CBQ to take this stance, it set a precedent for others to evaluate and consider, particularly in the GCC region where over 50 percent of Islamic banking industry is domiciled. In the same line of thinking, national and international IFIs jointly with their regulators and education institutions should collectively invest in research and development (R&D) of Shariah-compliant products and structures to foster uniformity and conformity of Shariah-compliant structures and products. This development should be in perpetual motion and public in nature, and should also be parallel to the contributions towards educating the public and raising awareness about Shariah-compliant investment and finance as part of IFI’s corporate social responsibility. Similarly, educational institutes should advance and expand their curriculum for undergraduate and post graduate degrees making it more relevant to IFIs by developing Islamic finance degree streams covering related syllabus of risks, ethics, economics, accounting, finance and investment from a Shariah prospective pertaining to IFIs and its industry. Equally, governments of Islamic countries should also foster the growth of Shariah-compliant products in addition to issuing regulations by utilising Islamic finance 2012 April Global Islamic Finance

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Islamic banking

instruments (i.e. Sukuk) to finance major infrastructure developments, power grids, transportation projects, housing and mining projects, and at the same time allowing its citizens at the individual levels (retail segment) to become Sukuk unit holder thus participating in financing those projects through those Sukuk while getting reasonable returns on their participation while having the comfort from knowing the underlying assets. Allowing the participation of individuals in the Sukuk will eventually create products for preserving wealth and encouraging savings for citizens, while gradually developing a vibrant secondary market. A particular R&D area that needs more attention, commitment and resources is innovation, as it is one of the major drivers for promoting growth within the industry, which will eventually expand products’ and services’ offerings and mix. As a result, growth will be ignited in the industry as a whole; however, innovation should come only from within the Shariah guidelines and not mimicking or Islamising conventional structures and products. Also, innovation should be driven by needs and demands, not just for the sake of innovations or for short-lived publicity. For instance, an area that is underdeveloped and underutilised, and yet is one of the missing pillars for the industry, is Islamic Endowment (Waqf). As a concept, structure, and tool, Waqf needs to be renewed in term of structure and to be regulated to evolve as a major tool for the development of Muslim communities. In order to develop Waqf funds in terms of structure and regulations, Waqf needs a major R&D work to revive its role in the community and the economy alike, en route for putting it to a good use to advance predominantly universities, cultural institutions, R&D centres, hospitals and medical research centres among other vital segments in the economy as in the developed countries where endowments are well developed and organised with renowned and celebrated contributions to the welfare and progress of their communities. Standardisation and Institutionalisation One of the global financial crisis’s major impacts is that the global financial industry will be more heavily regulated as the crisis unfold and beyond. This will have direct influence and implications in banking transactions including Islamic banking, thus existing Shariah-compliant structures and their Fatwas have to be very responsive and adaptive to those changes. Accordingly, Shariah-compliant products and services have to be repositioned, where those products

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undertake, thus it should be initiated at all fronts covering IFIs, academia, scholars, lawmakers and regulators jointly with standards and regulations setting bodies who should take the leading role. We should also concentrate on the fact that a revised Islamic investment and finance and associated new products should be accepted globally by embracing best international practices in terms of transparency, disclosure, compliance, governance, and risk without compromising the adherence to Shariah guidelines as a threshold towards globalisation.

Dhafer Salih Alqahtani, Principal, Rusmal Consult, Bahrain He is a Principal at Rusmal Consult and also a senior banker and renowned visionary and strategist professional in the Islamic banking industry. With over two decades of diverse and extensive experience with the reputable financial institutions, he spent the most recent 11 years in leading executive roles (i.e. CEO, Co-CEO, COO, CIO) in the Islamic banking, in both finance and investment lines of work. The earlier 10 years of his career were with leading regional conventional banks in the corporate banking and distribution segment. Mr. Alqahtani is recognised as one of the prominent names in the Islamic finance industry for being an advocate of standardisation and consolidation as well as absolute transparency in the industry. He is a strong promoter of innovation in the retail segment through exploring its true needs in the Islamic countries.

and services should be revisited, reviewed and consolidated as well as documented, thus establishing stronger foundations by going back to the basics which will pave the way to standardisation and eventually the globalisation of uniform structures and formats that are Shariah-compliant and acceptable to the critical mass, both Muslims and non-Muslims, without compromising the industry’s authenticity and integrity. The standardisation could start by consolidating Islamic industry bodies (standards-setting bodies) namely AAOIFI, IIRA, IIFM, CIBAFI and IFSB under a supreme platform or body as frequently been echoed in the industry versus working in silos. With that said, standardisation is a major assignment to

Institutionalising Shariah-compliant products and structures, which could come from the new supreme body that resulted from the consolidation of those Islamic industry bodies mentioned earlier, should be a priority at the national level for the institutions as well as the regulators, and that could only become a reality through creating a Unified Shariah Supervisory Board (USSB) under the central banks and capital market authorities for any given country as is the case with the GCC countries which presently is a Work In Progress. The USSB will have the overall authority of IFIs in-house SSB and the final say, thus enhancing the standardisation of Fatwas and structures while eliminating doubts and suspicions at the client’s level about the industry and its products and structures by bridging the gap between the Fatwas and actual practice. This will also eradicate disputes over conformity among practitioners, scholars and investors. Tawarruq transactions and structures are excellent examples of such conflicting Fatwas and applications that have to be resolved once and for all. Sukuk, a pivotal pillar of the industry No dialogue or intellectual discussion about IFIs or its industry as a whole will be complete without discussing one of the mainstays and pillars of Shariah-compliant investments and finances (i.e. Sukuk) even though as an instrument it is only over one decade old. Nonetheless, during its remarkable growth in such short time, Sukuk has survived intensive scrutiny about being a workable real Islamic financial instrument in particular the conflict between the Sukuk documents and the governing law of the Sukuk, particularly in the case of cross boarders Sukuk, aside from the transfer of the underlying asset to Sukuks units holders through the trust in case of default which differentiate true Sukuk from none complaint ones. Such setbacks and others that might rise by the present financial crisis and the recently increasing issuance of Sukuk are needed to push the envelope further for refining and tuning Sukuk structures and documenta-

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tions then and now. Naturally, new innovative structures and more complex ones will emerge, consequently bringing with it new challenge and concerns. Accordingly, and under the present market conditions with the intimidation of possible global recession, the time is right for the Sukuk to move to the next level of its development and advancement, as well as carving a place for Sukuk in the global debt market. With that said, I want to reiterate my previous and ongoing public calls through various venues by stating a few pointers on how can we make Sukuk more appealing in the new world order of the global financial market as well as to our direct markets. Those pointers are; •

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SSB duties and mandates should go beyond issuing a signed and sealed Fatwa for Sukuk or any product for that matter, SSB must be fully responsible and accountable as well as proactive, from the concept level passing by Fatwa process to implementation and execution ending with operations and trading, and eventually the attainment of the maturity for the instrument or security. (This role should apply to all related Shariah-complaint structures and products, which should be in line with IFI governance as well) where the Shariah Compliance and/or audit Officer should spearhead such crucial functions under a direct mandate from the Shariah board. Introduce Sukuk at the retail level by allocating sizeable tranches to the retail segment thus expanding the trading platform of Sukuk to augment accessibility, consequently expanding secondary market. In the same time add another attractive and viable asset class for investors (i.e. Sukuk) beside the traditional equity and real estate

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Contribute to the expansion of the secondary market by issuing larger Sukuk to address the volume concerns, which will enhance its liquidity and marketability.

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Increase the number of Long Term Sukuk (10 years or greater) which will enlarge diversity and attractiveness of the Sukuk, particularly for long term investors (i.e. pension funds and Takaful companies).

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Advance and encourage issuance of Sukuk for the other two terms (short/ medium) to expand the breadth and depth of secondary market as well as number and diversity of Sukuk.

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Governments as an issuer to promote Sukuk as a saving instrument option for individuals through allowing them at the retail level to participate in major issuances through creating a retail portions for private individuals.

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Sukuk issuance cost to be to driven down, allowing cash starving MedCap businesses to become issuers to finance their expansion and growth to fulfil their vital role in the economy mainly jobs creation, this could come mainly through more standardisation in terms of Sukuk structures and types that is lead by AAOIFI for both format, (i.e. asset based and asset backed Sukuk).

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Infrastructure, development and mega projects originators and issuers both governments and quasi-governments should utilise Sukuk for its financing needs instead of using their surpluses, thus expanding the volume of Sukuk market while directing those surpluses to more needed and pressing issues at the social level like education and healthcare.

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Explore and encourage innovative features and structures that is hybrid in nature beyond the 14 Sukuk types of AAOIFI to enhance versatility and adaptability in meeting issuer’s complex needs and situations. Encourage new asset classes as the underlying asset other than the traditional assets (i.e. real estate and IFIs) such as infrastructure, education, and health care sector thus widen its diversity as well as the risk profile and currency.

Considering those pointers and recommendations which mainly address the creation of vibrant secondary market as well as accessibility, will enhance the growth and confidence in Sukuk and attract sizeable liquidity by opening a new window for private individual’s savings which an area that yet to be developed, also expanding secondary market. By the same token, give more choices and flexibility to asset manager for better asset allocations as well as developing more innovative products in the fixed income products sector with different tenors, returns and risks involving Sukuk, particularly Sukuk fund that is battling to gain market share in the mutual and fixed income funds sector as well 2012 April Global Islamic Finance

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Islamic banking

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One of the global financial crisis’s major impacts is that the global financial industry will be more heavily regulated as the crisis unfold and beyond. This will have direct influence and implications in banking transactions including Islamic banking, thus existing Shariah-compliant structures and their Fatwas have to be very responsive and adaptive to those changes’’

as the difficulty in attracting investors due to the lack of breadth and depth caused by the shortage in diversity and volume on top of that the low variety of sectors in relation to the underlying assets in Sukuk issuance. On the issuance side, governments through its central banks will have a stable tool to manage the money supply as well as the fiscal and monetary budget. Risk and Shariah-Compliance Risk The prolonged financial crisis highlighted the importance of all types of risks and compliance issues that are common to both IFIs and conventional banks. Nevertheless, the crisis forced a new risk to emerge into our daily practices that is very unique to Shariah-complaint institutions which is to be considered seriously for all IFIs. As a term it’s called Shariah Compliance Risk, or SCR, which is a risk that arises due to the possibility that the financial services or products is not or will not be in compliance with the established Shariah principals and standards as stipulated in its fatwa during the tenor of the instrument, security or transactions, thus it will be non permissible as far as Shariah concerns and a corrective action have to be taken to minimise further implications on the IFI operations as a Shariah-compliant institution. However, the corrective action will have a negative impact due to certain consequences on the IFI traditional risks. SCR arise by executing the corrective action to make the instrument, security or transactions Shariahcomplaint again or liquidate its position in such instrument as an extreme option. SCR, as a term, definition and process, is a risk that should be incorporated in the financial risk management process for IFIs as well as instruments, transactions, Sukuk and funds plus indices. SCR should be integrated in every risk assessment process and manual while treating it as a standalone risk in the risk management process and strengthen its ‘what if scenarios’ structure, thus it should not be diluted or merged with other risks. SCR is to be tested and challenged on a regular basis by every risk officer involving the Shariah internal auditor and the SSB. The regulators 64 Global Islamic Finance

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too should check the SCR for all IFIs including their products, thus become part of their check and balance system and audit inspection program. The recent troubled transactions and Sukuk was a strong indication for the need of a well identified SCR and it’s mitigates that is usually is not found in the fine print of these instruments documentation. To further highlight the impact of non-Shariah compliance on IFI, it will strike the IFI in traditional risk such as financial, business, operational, liquidity and market risk, eventually it will go far beyond the financial losses, customers distress and shareholders disappointment as it will negatively dent the credibility and the reputation of that IFI for a start with the first causality is its market share, the spill over of such incident will cast doubt on the industry as a whole as we have seen in the some of the instruments (i.e. Sukuk) when experienced debt servicing default during and after 2008 crisis. Opportunities While waiting anxiously for a nerve racking volatility and uncertainty to settle at an acceptable and tolerable level for doing business as well as bringing back a runaway confidence in the global financial sector and the world economy, in the same time, hoping that the indecision over the European sovereign debt crisis that is driven by a short sighted political agenda to reach a resolution to avoid escalating and spreading the already crumbling Western European economy and resolve the euro zone fiscal and debt calamity, along with ending the protracted agony of US economy which is being dominated by bickering politicians to get in its way to recovery, all this add up to a bigger fear, that the urgency of reaching a long-term solutions to those crisis in both sides of the Atlantic to avert sliding into a global recession is not getting serious and timely attention thus reducing the options for solutions and escalating further the global economy deterioration with austerity measures spreading like fire all over the globe, leading to incomprehensible level whose implications are profoundly negative. What is ironic about all this, is the fact that sovereign debt was created specifically to solve economic problems and to stimulate

market economy, but instead over time the solution (i.e. sovereign debt) has become the problem in itself. Accordingly we now have two major problems, which raise a question about if capitalism, particularly as the Western version is in self denial about what it promised to deliver, and the only thing it has to show for it is over- leveraged economies and over-borrowed countries. With such market conditions and its eventual impacts is overshadowing everything around us, IFIs and its industry, beside the Shariah-compliant system, are an intricate part of this cycle and are not isolated from its impact and progression. Accordingly, IFIs should rise above the situation and leap forward to take advantage of this turmoil as solutions providing for the crisis, with rapid adaptation to changes in the market place. IFIs should be able to see and capture opportunities in the crisis while having some risk tolerance. Similarly, gearing themselves for the growing competition among themselves as well as from IBWs who are supported by their head offices balance sheet strength beside the new comers who tend to be more aggressive for market share as they are all allured by the enormous growth potential of the industry that still hovering around 15 percent to 20 percent annually. With that in mind, new strategies have to evolve to explore the abandoned opportunities in their markets and beyond such as venture capital, private equity, real estate funds, Waqf funds, retail Sukuk, Islamic microfinance and Islamic REITs alongside the major component of Islamic banking which is retail banking where innovative products and services for retail clients are to be developed to meet the needs of their existing clients and newly acquired ones who expect the IFIs to deliver exceptional customer experiences, knowing that the customer these days are growing increasingly sophisticated and knowledgeable, with immediate access to information and data, particularly the youth segment. In the same time, those customers are mirroring the economy and market place conditions, as they are already in deep risk-averse mode and retrenched for protection from the

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IFIs should not be abstracted or sidetracked by those agitators from creating a real economy that is robust and sustainable which is purely providing an ethically and socially responsible financial alternative to enhance the prosperity and welfare of individuals and communities alike, while fighting poverty and elevating livelihood in spite of those individuals faith or religious convictionâ&#x20AC;&#x2122;â&#x20AC;&#x2122;

crisis with their own austerity plans protecting their capital and savings. Business is not much better as they are struggling to stay afloat with fear of further credit tightening and consumers are avoiding spending. In parallel, IFIs should study and evaluate the expansion of their geographic reach to new markets with large Muslim populations that are being underserved by the industry, including Asian, African and CIS countries or the countries that have just been freed as a result of the Arab Spring ( Egypt, Libya and Tunisia), which will eventually position those IFIs to enjoy the upside of the global economy. IFIs should rediscover their niche and grow into those untapped segment, markets and products in addition to new geographic areas as dictated by needs and demands and not by trends or imitations. Venture capital, private equity, particularly the small and med-cap enterprise (SME) segment the back bone of any robust market economy, is one of the asset classes that yet to be tapped by IFIs with great potential for growth since its in alignment with the fundamentals and core nature of Islamic real economy with great emphasis on job creation that is a necessity for economy recovery particularly in the emerging market countries where most of IFIs are operating. In a nutshell, IFIs, Islamic banks, Asset and fund Managers should find the need to fill a niche. Understanding that any given strategy is not time oriented, but events driven, for that reason IFIs need new strategies for new realities as they unfolds and uttered by the present financial crisis, thus strategies must be revisited and reviewed, if not a completely revamped or abandoned to adapt new ones. Both internal and external environment of the IFIs should be involved including clients and services providers. IFIs, Asset and fund Managers should be ready to bounce back and get ahead of events to be transformational. Conclusion Looking ahead, We should be aware and well informed about the growing well orchestrated animosity and uneducated blind criticism which the least can only be described

as a classic hostile rhetoric of Shariah law and Shariah-compliant system and dismiss any hint of profiling or politicising its mission, while doing so, IFIs should not be abstracted or sidetracked by those agitators from creating a real economy that is robust and sustainable which is purely providing an ethically and socially responsible financial alternative to enhance the prosperity and welfare of individuals and communities alike, while fighting poverty and elevating livelihood in spite of those individuals faith or religious conviction. IFIs as industry should be categorised and analysed as well as criticised by the other camps and critics through its added value, governance, transparency and compliance to Shariah guidelines while holding to best international practices as induced by institutionalisation and standardisation which eventually enabling the new Shariahcompliant system to be a worthy contender and player with equal footings in the growing global financial market thus, making it a sustainable and unswerving alternative for Muslim and non-Muslim alike. In closing, going back to the basics is not an option under the present market place conditions and the shifting global landscape, it is a must process to master our basic products and services as an institutions while rebuilding Islamic banking industry future on a solid and sound foundations, thus creating a real economy for the benefit and prosperity of individuals, societies, institutions, businesses and countries regardless of their beliefs and political orientations as stipulated by Shariah-compliant system. Islamic countries governments through their regulators should set in-motion the IFI industry evolution and transformation in all fronts instead of being hostage of procrastination and Indecisiveness of fully embracing Islamic finance as a financial system. Along the same line of thinking at the micro level, IFIs should Shift more assets and resources as well as human capital to the retail banking segment through the introduction of creative and innovative products and services along with expanding their branch network meeting the growing demand and exodus to

Islamic banking in conjunction with meeting the needs of its customers who are mainly in the youth segment, the same youth who lead the Arab Spring. Expanding Sukuk industry in all directions and capitalise on the fact that 2011 is going to be a record year for Sukuk issuances, particularly from the corporate side, such as intensifying Sukuk funds and Sukuk secondary market besides the rollout of more retail tranche Sukuk. Investigate Waqf and bring it to the present best practices and regulations as well as its accessibility, to attract high level liquidity. Introduce more Islamic funds to address investor needs and savings inspirations. Establish Islamic REITs (IREIT) as an attractive proposition while developing more solid regulatory platform and legal framework in the GCC for IREIT. Strongly endorse and encourage the separation of Islamic banking windows into a standalone legal entity with its own balance sheet from conventional (interest-based) operations instead of shutting them down wherever it exist to protect the integrity and the creditability of the industry. At the lower end of income, Islamic Microfinance is to be administered and regulated under a legal framework by the regulator at the national level so the disadvantaged and destitute individuals are well protected and can reap its real benefit without being exploited or held as a hostage for its basic needs by unregulated gung-ho operators who are in fact a micro loan shark. Last but not least, promote investing in SME through venture capital and private equity either by direct investment or through fund structure due to its importance in developing real economy that is sustainable and resilient which are what Islamic investment and finance as well as Islamic banking is about. Accordingly, IFIs must be transformational which requires stepping out of the box and being innovative and creative in conducting Shariah complaint investment and finance with absolute transparency and without compromising the adherence and compliance to Shariah guidelines. gif

2012 April Global Islamic Finance

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Investment

EXPLORING THE INNOVATIVE Shariah Compliant Opportunities in ETFs Author: Tasnim Nazeer, Global Islamic Finance Magazine Editorial Team, United Kingdom

Abstract: In this edition of Global Islamic Finance Magazine we will be taking a comprehensive look into the scope of opportunities for Shariah-compliant exchange traded funds (ETFs). The Islamic finance industry is growing at an unprecedented rate and is estimated to reach over US$2 trillion dollars in value by the end of 2012. In this article GIF will give you an insight into the emerging potential for exchange traded funds in Islamic finance in addition to giving you a thorough analysis of the sector. As the global financial market is set to further improve within the foreseeable future, there is potential within this sector, with many investors and business professionals wanting to tap into this area. Both Muslims and non-Muslims are finding Shariah-compliant financing an ethical and lucrative way of managing their finances, and with further opportunities being brought out by the financial sector the Islamic finance industry has the potential to further grow. Could 2012 be the year of Islamic ETFs and what does the future hold for this bright opportunity which many people around the world are already finding lucrative opportunities within? This article is a must read for any investor, business professional or student wishing to know more about the exchange traded funds in Islamic finance and the various opportunities that ETFs hold. GIF magazine will also take you through the various processes and structures of the Islamic ETF which is a must read to get the latest inside knowledge on this profitable sector of investing in Islamic financial ETF. Through a comprehensive understanding of Islamic ETF you can have the edge over other companies. Keywords: Islamic Finance, ETFs, Investments, Investors, Business, Global Markets, Middle East, Shariah-compliancy, Islamic Shares, Transparency

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In Islamic financial hubs, such as Malaysia, ETFs have been a crucial presence in boosting the country’s capital market.

An Introduction to Islamic Exchange Traded Funds (ETF) As an investor, business professional or entrepreneur it is a necessity to become wellacquainted with the relevant Islamic instruments that are being made available for use within the Islamic financial sector. Islamic exchange traded funds are open-ended funds which consist of index tracking and is a trust fund that consists of a collection of stocks that can be listed and traded on a stock exchange platform like a single stock. The main objectives of an Islamic ETF are outlined in Figure 1.

with the Shariah principles and practices at all times. Figure 2 outlines the structure of an Islamic ETF and goes through the processes so you can get a better understanding of the structure and dynamics of the concept of Islamic ETFs in comparison to conventional ones which you may be more familiar with.

In an Islamic ETF it works by tracking a benchmark index which is comprised wholly of constituent securities all of which are made to be Shariah-compliant whereas a conventional ETF may track any benchmark index regardless of the Shariah status of its constituents.

Who Participates in the Islamic ETF Structure? It may be beneficial to know who can participate in Islamic ETF structures as some investors are not aware that there are many groups of people who can successfully work together to participate in Islamic exchange traded funds. These participants are outlined in Figure 3. Exploring the Opportunities for ETFs in 2011 Islamic ETFs are growing in popularity and in 2011 there is growing potential for the sector to receive further investments from investors around the world. This realisation is becoming increasingly widespread as the Islamic finance industry continues to receive unprecedented attention from the global financial world.

In addition, an Islamic ETF is directly managed under the Shariah principles and guidelines of Islamic finance and follows the principles of the Shariah wholly. Islamic ETF is then regulated and overseen by an appointed Shariah committee or group of Shariah regulatory scholars. The Shariah committee or regulatory Islamic financial body then conducts regular reviews and audits on the Islamic ETF to ensure strict compliance

Many investors, both Muslim and non-Muslim, have recognised and acknowledged the scope for Islamic financial investments, and in particular they have seen a rise in Islamic ETFs as the perfect alternative to conventional ETFs. Islamic ETFs have to adhere to the principles of Shariah law, otherwise they would not be ‘Islamic’, and they would be no difference to their counterpart of a conventional ETF.

One of the key differences between a conventional ETF and Islamic ETF is the benchmark index that the Islamic ETF tracks, as this is unique and complies to the principles of Shariah-financing.

Figure 1: Main objectives of an Islamic Exchange Traded fund (ETF) To track or replicate the performance of a benchmark index. Provide investors, in a single transaction, a cost-efficient and convenient way to gain exposure to the basket of securities represented in the index. Create a unique creation and redemption mechanism supported by a system of participating dealers and liquidity providers. ETFs are listed and therefore their units can be bought and sold anytime during stock exchange trading hours. Investors buy and sell ETF units through their stockbroker rather than through unit trust agents.

Source: Financial Islam 2012 April Global Islamic Finance

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Investment

At a recent investment conference which was held in Riyadh, Saudi Arabia, Director of iShares, Robert Broadwell talked about the scope for ETFs in 2012. He said: “iShares currently has three Shariah-compliant ETFs in the market, that track the Islamic MSCI indices: iShares MSCI Emerging Markets Islamic, iShares MSCI USA Islamic and the iShares MSCI World Islamic, domiciled in Ireland.” He further added that “Currently the assets under management in these three ETFs are around US$160m. The turnover in them during the last 18 months was half a billion dollars” and that in the last three weeks “US$20m was invested in [our Shariah-compliant] ETFs.” The global ETF market currently stands at $1.3 trillion dollars worldwide, including conventional ETFs and Islamic ETFs, which are building up their presence in this highly competitive market. The advantage that Islamic ETFs have over conventional ETFs is the fact that it follows the very attractive principles of Shariah law, which is why many investors choose to use Islamic instruments and ETFs rather than conventional ones. Major Banks Opening up Opportunities in Islamic ETFs Many major banks, such as HSBC, alongside Islamic banks, have opened up the opportunities for investors interested in Islamic ETFs. One such example is HSBC Holdings Plc, the second largest underwriter of Islamic bonds, who opened up the opportu-

nity for Islamic ETFs in the Persian Gulf in 2010. ETFs can help the local markets to attract some of the US$49.4 billion that EPFR Global says poured into emerging market stock funds in 2010. However as there were restrictions on international participation in Gulf markets it was slightly difficult to attract the major market share. Investors have sidelined most countries in the Middle East and North Africa due to a recent surge in capital inflows to emerging markets caused by debt restructurings, according to an International Monetary Fund report. The National Bank of Abu Dhabi PJSC started the Gulf’s first non-Shariah-compliant ETF in March 2010, followed by Falcom Financial Services’ Islamic fund in Saudi Arabia that same month. However, many people feel that Islamic ETFs have a significant edge over conventional ETFs due to their widespread market capacity and the ability to track investors from around the world in attracting them to its Shariah-compliant ETF mechanism. “We are at an advanced stage of launching Islamic ETFs in the fourth quarter,” said Razi Fakih, Deputy Chief Executive Officer of HSBC Islamic Unit in Dubai “ETFs will make up as much as ten percent of the Islamic fund industry in the coming five years”. ETFs have much opportunities and scope from foreign participants. Dow Jones Islamic Market World Index is unprecedented in providing tracking shares that comply with Shariah principles. Dow Jones Islamic World Index has a market capacity of over

US$12 trillion dollars, which is a staggering number. ETFs which are index-based investment products can provide the opportunity for investors to buy or sell shares of entire portfolios of stock in a single security. The funds are unique in that they combine the opportunities of indexing with the advantages of stock trading and Islamic ETFs have an edge by following the principles of Shariah financing. The Potential for Islamic ETFs The scope for Islamic ETFs is growing at an unprecedented rate with many opportunities expanding in the sector. There have been many Islamic financial institutions and banks that have received demand for Islamic ETF, and many investors have looked into the alternative of investing in Islamic ETFs, as opposed to conventional ones, because of the benefits of Shariah-compliancy. It had been reported that the total number of assets invested in Asia ex-Japan exchange-traded funds (ETFs) hit US$55.1 billion in October 2010, with the number of ETFs totalling 188 with 293 listings, according to iShares. To date, the growth momentum of ETFs has yet to benefit the Islamic sector, with just three Islamic ETFs listed on Asian bourses. These three Islamic ETFs-listed in Malaysia, Singapore and India-have attracted US$217 million in assets, or just 0.4 percent of the total market. Raja Teh Maimunah, head of Islamic markets at Bursa Malaysia, says the Bursa imposes the same set of rules governing

Figure 2: Islamic ETF Structure and Processes Shariah Adviser/Commitee

Advisory on Shariah Matters

In-kind creation

Buy ETF units

Basket of securities

Basket securities

Investors

Trustee

Manager Islamic ETF New ETF units

Existing ETF units

Basket of securities

Participating Dealers

ETF units Sell ETF units

In-kind creation Buy/Sell ETF units

Stock Exchange

Buy/Sell basket of securities

Source: Financial Islam

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April 2012

New ETF units

Existing ETF units

Liquidity Providers

Basket of securities In-kind creation

Investment market-makers regardless whether they are providing liquidity for conventional or Islamic ETFs. “We require them to make bid-offers just like any other. On short-selling for Islamic ETFs, there is no pronouncement by the Shariah advisory council permitting such acts at present” says Maimunah. ETFs are set to grow substantially and could be a real spearhead for the Islamic financial sector. In Islamic financial hubs, such as Malaysia, ETFs have been a crucial presence in boosting the country’s capital market. It has also helped to spearhead more foreign investments by attracting investors from all over the world.

such as Dow Jones, which has made a significant presence for itself in the ETF sector. The scope is vast for the Islamic financial sector, and with Islamic ETFs pushing the industry along investors can see promising scope for lucrative investment deals. MIDF Amanah Investment Bank’s equity economist Imran Nurginias is reported to have said that the expected investment in the Islamic ETF will be useful to help cushion any fall in investments caused by the global credit crunch. Interest in Islamic investments from around the world is on a high as many investors, business professionals and entrepreneurs are looking into the various Shariah-compliant forms to make investments and obtain lucrative profits.

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investments and with the rising demand for such products, [and] this Islamic ETF by iVCAP is definitely good news for investors. Couple this with the sharp rise in oil revenues and the opportunities for the ETF are very bright,” RAM Holdings Bhd’s chief economist Dr Yeah Kim Leng reportedly said. In conclusion, GIF has highlighted the various possibilities for Islamic ETFs in the highly competitive financial market. There is huge potential for further expansion within this sector and a further rise and demand from customers around the world who want to tap into the lucrative industry. Many investors from around the world see Islamic ETF as the perfect alternative to conventional ETF.

The Dow Jones Islamic Market Malaysia, for This is mainly due to the fact that Islamic ETF example, is opening up a world of oppor- It has also been reported that the Shariah- follows the principles of Shariah financing tunities for the Islamic ETF sector, and will compliant fund has an authorised fund size and investors know the various advantages help to push the country forward for lucra- of 10 billion units and an initial size of 840 when dealing with Shariah-compliant methtive investments. RAM Holdings Bhd’s chief million units. It also has the participation of ods of financing and Islamic instruments. economist, Dr Yeah Kim Leng, announced Government-Linked Investment Companies The prohibition of interest is particularly adin a statement “With the conducive environ- (GLICs). “There is a shortage of good Islamic vantageous for investors when it comes to Isment and excess glolamic contracts and it Figure 3: Participants in the Islamic ETF Structure bal financial liquidity, is particularly benefithere is still a huge cial when Investors The participants in ETF structure are as follows: amount of funds are considering the out there, both priadvantages of dealThe Manager: Manages/Administers the ETF in line with the trust deed and securities laws. vate and sovereign, ing their investments The Trustee: Acts as custodian of an ETF’s assets. It also ensures ETF is administered in line with that are looking for on an Islamic ETF the trust deed and securities laws. places to invest. One global platform. The good place [for these scope for Islamic ETF The Participating Dealer: Performs or facilitates in-kind creation and redemption of ETF units. It can are] Islamic ETF[s]”. looks promising with also act as a liquidity provider to facilitate the trading of ETF units on the stock exchange. a bright future in proThe other Liquidity Providers (if any): Aid in providing liquidity to the ETF. Islamic ETFs present moting and spearinvestors with variheading the Islamic The Investors: Invest in ETF units via their brokers. ous opportunities finance industry into around the world, esthe estimated US$2 Source: Financial Islam pecially on platforms trillion sector. gif

References and Further Reading • • • • • • • • • • • • • •

Islamic ETFs (2011) Financial Islam all about Islamic Banking and Insurance, Retrieved from: http://www.financialislam.com/islamic-etf.html J. Foster (2011) Islamic ETFs are a go go, Zawya, Retrieved from: http://www.zawya.com/story.cfm/sidZAWYA20110529085730 G.Lee (2010) New Frontiers for Islamic Finance, Retrieved from: http://www.risk.net/asia-risk/feature/1933074/frontiers-islamic-finance T. Shamsiah (2010) Islamic ETF Good for Malaysia Economy, Retrieved from: http://islamicfinancespot.blogspot.com/2008/01/experts-islamicetf-good-for-malaysias.html Z. Akhtar Aziz, (2006) Focus on Human Capital Development in Malaysia, BIS Review, Retrieved from: http://docs.google.com/ viewer?a=v&q=cache:QNpjzL5F-68J:www.bis.org/review/r061220b.pdf+strategic+leadership+islamic+finance Von Pock (2006) Strategic Management in Islamic Finance, DUV Publishers, Pg75 D. Baltaji (2010) HSBC Plans its first Shariah ETFS this Year Retrieved from: http://www.bloomberg.com/news/2010-10-06/hsbc-plans-its-firstpersian-gulf-shariah-etfs-islamic-finance.html C. Klass (2009) All about the customer, Islamic Finance Asia, Retrieved from: http://www.islamicfinanceasia.com/article.asp?nm_id=18904 U.S Marshall (2010) International Marketing, Country Decisions and Strategies, Retrieved from: http://www.consumerpsychologist.com/international_marketing.html Internal Marketing (2011) Definition by Wickpedia, Retrieved from: http://en.wikipedia.org/wiki/Internal_marketing Z. Akhtar Aziz, (2006) Focus on Human Capital Development in Malaysia, BIS Review, Retrieved from: http://docs.google.com/ viewer?a=v&q=cache:QNpjzL5F-68J:www.bis.org/review/r061220b.pdf+strategic+leadership+islamic+finance Al Shawi, Irani & Baldwin: (2003) Benchmarking Information Technology, An International Journal of BenchmarkingIqbal M, Islamic and Conventional Banking in the 90’s (2000): A comparative study: Loughborough University Press Warde I, Islamic Finance in The Global Economy (2000): Edinburgh University Press

2012 April Global Islamic Finance

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Market Review

Multi Billion Dollar Sukuk on the Cards for Private Sector Source: GlobalIslamicFinanceMagazine.com

Growing trade in Islamic bonds in the Gulf region this year could be driven further by increased private sector interest in Sukuk on the back of strong activity by banks, the 51st ACI Financial Markets World Congress will be told in Dubai.

With Islamic financial institutions currently holding Shariah-compliant assets worth an estimated US$1 trillion, he said the global Sukuk market was valued at US$180 billion. “Regional banks have been especially active in tapping the Sukuk market in recent months,” said Stadtmiller, who will be among a team of experts analysing the intricacies of Sukuk trading at the ACI Financial Markets World Congress, taking place from the 23rd to the 24th of March under the patronage of H.H. Sheikh Hamdan bin Rashid Al Maktoum, Deputy Ruler of Dubai and Minister of Finance. “Another interesting development in the Sukuk market was Majid al Futtaim Group’s US$400 million Sukuk sale in February. MAF’s Sukuk issuance may open the market to other purely privately owned regional companies.” Stadtmiller said the growth in Sukuk sales in the Gulf region in recent months stems from high demand for the currently limited supply of Islamic bonds, while many financial institutions with good liquidity are looking to put money into new investment channels. “Malaysia is the oldest and largest market for Sukuk, but the GCC (Gulf Cooperation Council) Sukuk market has grown considerably in recent years,” he said. “By selling Sukuk, issuers can reach a wider audience of investors, including Islamic institutions that are required to invest in assets that do not pay interest.” Stadtmiller said the ACI Financial Markets World Congress, at the Dubai International Convention and Exhibition Centre, is creating an important platform to focus on the “large and growing business” of Islamic finance. 70 Global Islamic Finance

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Nick Stadtmiller, Head of Fixed Income Research at EmiratesNBD, said over US$6 billion of Sukuk have been sold by GCC entities so far in 2012, compared to a net issuance value of US$7.3bn in 2011, with the UAE’s Majid Al Futtaim Group paving the way for more private sector involvement in Islamic finance through a recent Sukuk sale.

During the ACI Congress, Stadtmiller will take part in a panel discussion on Sukuk trading with Rupesh Hindocha, Head of Credit Trading MEA at Standard Chartered Bank, Yaser Abushaban, Director of Asset Management at Emirates Investment Bank and Chavan Bhogaita, Head of Markets Strategy, National Bank of Abu Dhabi.

Many Islamic institutions, particularly in the Middle East and Southeast Asia, have ample liquidity and are looking to deploy money into new investments

“Estimates put the total amount of Shariahcompliant assets at Islamic financial institutions at US$1 trillion and the global Sukuk market at US$180 billion,” he said. “The ACI World Congress offers an opportunity for investors from around the world to learn about the instruments and players in this important segment of the global financial market. “Many Islamic institutions, particularly in the Middle East and Southeast Asia, have ample liquidity and are looking to deploy money into new investments. Sukuk are a relatively new product, and currently supply of Sukuk is small compared to the potential demand for these assets. “The supply-demand imbalance in the Sukuk market means that issuers can place Sukuk among a wide investor base and attract competitive pricing on sales. The investor base for Sukuk is more concentrated in the Middle East and Southeast Asia. Sukuk offer regional issuers an avenue to diversify their sources of funding away from Europe and into new geographies.”

The event will begin on Friday the 23rd, when Brad Bourland, Chief Economist and Head Prop Investments of Jadwa Investments, Farah Foustok, CEO, ING Investment Management and Said Hirsh, Middle East Economist of Capital Economics, will take part in what is expected to be a lively debate on the state of the financial markets industry in the wake of the Arab Spring. The 51st ACI Financial Markets World Congress is hosted by the UAE Financial Markets Association, which was established in December 2011 and is an affiliation of the Association Cambiste Internationale (ACI), the global umbrella body of the national financial markets associations around the world. Founded in Paris in 1955, the ACI has more than 20,000 members in 80 countries, making it the largest international association in the wholesale financial markets industry. “Dubai is a place that cannot be ignored in today’s finance industry,” said Manfred Wiebogen, ACI President. “Reflecting on the changed environment in today’s financial markets, it is very significant that the ACI has come to the GCC region for the first time. We look forward to making a valued contribution to this rising hub between the East (Asia) and the West (Europe and US).” The ACI Financial Markets World Congress is supported by the UAE Central Bank, Official Banking Partner EmiratesNBD, Gold Sponsor UBS, Silver Sponsor National Bank of Fujairah, Strategic Partner Dubai International Financial Centre (DIFC) and Official Media Partner, Bloomberg. Other sponsors include 360t, 4CAST, ACI Indonesia, ADS Securities, BNP Paribas, Citi, Commerz Bank, Copp Clarke, DDCAP Ltd, Deal Hub, Deutsche Bank, DJ FX Trader, Gain GTX, ICA, ICAP, INTL FCStone, J.P. Morgan, Master Capital Group, MICEX-RTS Group, Saxo Bank, SEB, Standard Bank, Thomson Reuters and Wall Street. gif

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A New Shariah Finance Method: Green Tech Bonds Source: GlobalIslamicFinanceMagazine.com

All three challenges are being tackled by the development of a type of bond called Green Suduk Climate Bonds. The Climate Bonds Initiative, The Gulf Bond and Sukuk Association and the Clean Energy Business Council of the Middle East and North Africa have recently launched a Green Sukuk Working Group, which will use market expertise to promote the issuance of Sukuk for the financing of climate change investments and projects, such as renewable energy projects. The Working Group is also inviting participation from other organisations interested in the potential of green Sukuk financing. Sukuk are financial certificates, or the Islamic equivalent of bonds, which are structured to comply with Shariah Islamic law, which prohibits the charging or paying of interest. To give an idea of the potential, Standard & Poor estimates that 20 percent of banking 72 Global Islamic Finance

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Nick Silver of the Climate Bonds Initiative has identified an urgent need for it in order to “mobilise finance for both renewable energy and climate adaptation projects in both the Middle East and in other developing Muslim countries such as Bangladesh and Pakistan”.

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Hundreds of billions of pounds’ worth of investment in green technology is required around the world in order to implement a low-carbon future. However, many projects are currently unattractive propositions for investors due to their longterm nature. Furthermore, under Shariah law the lending of money for gain is forbidden, and consequently even with a surplus of cash in the Muslim world many green energy projects are still unable to attract funding in Islamic nations, such as Saudi Arabia.

he said. “This group will help investors more easily identify Shariah-compliant, clean energy investment opportunities.”

Interest in both Shariah-compliant and ethical investing is on the rise. Green Sukuk can support this trend by expanding the range of available financial instruments

customers in the Persian Gulf and Asia would now choose an Islamic financial product over a conventional one with a similar riskreturn profile. Due to the lending of money in Islamic culture having a moral dimension, rather than just a financial one, the ethical aspects of green financing is predicted to be treated as highly significant. Aaron Bielenberg of the Clean Energy Business Council, a non-profit, non-governmental association established in Masdar City, Abu Dhabi, said that projects in the region are desperate for finance. “There is a significant and growing number of projects […] that are ideally suited to Sukuk investors,”

That there is capital seeking investment is confirmed by Farmida Bi, a partner at Norton Rose, an international law firm in London: “Banks need more high-grade paper (Sukuk) to place their money in, but there is hardly any” he says. “There is a lot of pent up demand (for Sukuk),” agrees Mohammed Dawood, head of capital markets at HSBC Amanah, the bank’s Islamic arm. Michael Grifferty of the Gulf Bond and Sukuk Association says this means the time is right for the launch: “Interest in both Shariah-compliant and ethical investing is on the rise. Green Sukuk can support this trend by expanding the range of available financial instruments. They also support national development strategies by offering longer term finance for essential infrastructure.” Issuance of Islamic bonds (Sukuk) had a record year in 2011. This year looks set to be even better. In January, the biggestever Sukuk from Saudi Arabia, and the first government-backed Sukuk was struck: a SAR15 billion (US$4 billion) 10 year deal for the General Authority for Civil Aviation, led by HSBC Saudi Arabia. gif

Market Review

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Dubai Islamic Investments in Sukuk Source: GlobalIslamicFinanceMagazine.com

The unprecedented Islamic financial Dubai Investments may look to raise up to 1 billion dirhams (US$272.3 million) in 2012 through the sale of Sukuk, or Islamic bond, to finance the expansion of its manufacturing units and repay debt.

Dubai Investments is in discussions with two banks for the potential Sukuk issue and a decision would be taken by the end of the year, Kalban added. He declined to name the lenders. “We have three options [...] first is the loan from the Italian bank. If that does not work, we will go for the Sukuk and the final option is other commercial lending,” said Kalban. “We need about 750 million dirhams [...] what we are hoping to raise is about one billion dirhams” said Kalban. Dubai Investments, which has interests in several sectors including property and manufacturing, swung to fourth quarter loss last year as their manufacturing business was hit by political unrest in Libya and Syria. Part of the funds raised from the Sukuk would be used for the expansion of Emirates Float Glass factory, the conglomerate’s glass manufacturing unit. The company has invested 1.5 billion dirhams on its four glass factories so far and plans to invest an additional 800 million dirhams from 2013-2014. These units and their subsidiaries are expected to achieve sales

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The company, in which emirate’s sovereign wealth fund Investment Corporation of Dubai (ICD) owns an 11.5 percent stake, is already in talks with an Italian lender for a $200 million loan, with a Sukuk issuance only due for consideration if the loan deal does not go through, Chief Executive Khalid bin Kalban told reporters on Wednesday .

Dubai Investments is in discussions with two banks for the potential Sukuk issue and a decision would be taken by the end of the year’’

worth 620 million dirhams this year, up from sales of 400 million dirhams in 2011, Dubai Investments said in a statement. The company expects the business to make sales of one billion dirhams from 2013-2014. In October, Dubai Investments said it had secured 700 million dirhams (US$190.6 million) of a 1.2 billion dirham loan required in order to expand its operations. Shares of Dubai Investments ended 1.3 percent higher on the Dubai stock exchange on, The stock has advanced 50 percent this year. Meanwhile, the investment arm of Dubai’s International Financial Centre is in talks with banks to raise a loan worth as much as US$1 billion to help it meet the June maturity of a $1.25 billion Islamic bond, three

sources said. DIFC Investments’ (DIFCI) Sukuk obligation has been highlighted by analysts as one of the most challenging re-financings in the Gulf Arab region this year, given the size of the maturity and the firm’s limited cash position.Talks to secure finance are still at an early stage, according to the sources, who said the final loan amount is expected to be between US$900 million and $1 billion. Local banks are expected to provide most of the funding, while international names with an existing relationship with the borrower could also be involved in the final bank group, one of the sources said, speaking on condition of anonymity. “It’s something tailored more to the local market as the company has got a good asset base and a lot of land around it which the local banks can get on board with,” a Londonbased banker said. No immediate comment was available from DIFC Investments. DIFCI hired US investment bank Moelis & Co. to advise it on options for the Sukuk maturity, sources said last month. DIFCI, whose assets range from aerospace to retail, had US$119 million of cash on its balance sheet at the end of 2011, according to a rating announcement from Standard & Poor’s published at the beginning of February. The agency added that DIFCI would need to raise at least US$900 million to meet the liability, although the potential for financial support from the government of Dubai if it was unable to do so was “very high.” The five-year Sukuk, which matures on June 13, was initially sold by CIMB, Deutsche Bank, Dubai Islamic Bank, Emirates NBD, Goldman Sachs and Mashreq. gif

2012 April Global Islamic Finance

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Interview

JOURNALIST TASNIM NAZEER Shortlisted for Asian Woman of Achievement Award 2012

Global Islamic Finance Magazine Journalist, Tasnim Nazeer has been shortlisted amongst millions of women in the UK for the Asian Woman of Achievement Award in Media 2012. In addition to writing for GIF, Tasnim writes for a variety of print and online publications including CNN International, The Huffington Post, The Muslim News and many more on the topics of Islamic Finance, Business, Islam and World News. As a Journalist for GIF she writes, proofreads and edits for the print and online editions and has written numerous reports for the publication including The Ultimate Islamic Finance Review 2011 and many more.

Tasnim Nazeer

Born and bred in the United Kingdom her passion for Journalism aroused at an early age and she went onto study a BA Honours Journalism at the University of the Arts London. 74 Global Islamic Finance

April 2012

There are many influential Muslim women in the global Islamic finance industry including Malaysia’s Governer Zeti Akhtar Aziz, Islamic finance Shariah Advisor Dr Rabiah Adawiah and many more that are becoming notable figures within the industry.

as she was nominated for Young Journalist of the Year 2011 for her in depth articles in Global Islamic Finance Magazine and on CNN on the French Ban on the Burka and other articles across the breadth of publications that she has written for.

Business professionals, entrepreneurs and journalists are becoming notable figures within the Islamic finance and banking sector contributing to the promotion of the Shariah compliant industry in a positive way.

She has also been informed that she is shortlisted for the 2012 Muslim News Awards for Excellence in Media. She has been voted as one of the Top 40 Inspirational Muslim Women in the World by American Muslim Magazine ‘MB Muslima’ and is currently writing a book on Islamic finance.

By highlighting the various benefits of Islamic finance in the mainstream media there is more scope for further progression of the industry and this is exactly what Tasnim Nazeer and other fellow industry professionals aim to achieve. Tasnim’s work has not only received positive acclaim from the AWA but she was also noted for her work from the Muslim Writers Awards

The Islamic finance and banking industry is a growing sector and with inspirational figures being given the opportunity to be highlighted it can further prosper. gif

2012 April Global Islamic Finance

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Event Review

2nd Annual World Islamic Finance Conference: Issues Exist, but Development Grows Author: Yassine Chaachaa, Global Islamic Finance Magazine Team, United Kingdom

On 27th March 2012, a number of Islamic finance leaders and experts came together in London for the 2nd Annual World Islamic Finance Conference. Their task was to tackle issues facing the Islamic finance industry and economic framework. Debate focused mainly on methods of enhancing cross-border liquidity between non-Muslim nations, but also on the broader point of the general state of today’s Islamic finance industry. Although Islamic finance still represents just a small fraction of the global finance market, the industry saw double-digit rates of growth in 2011. This sector appears to be a good deal more resilient than conventional banks are to a generally negative economic environment. By some estimates, the total assets held by Islamic financial institutions globally are set to reach USD1.85 trillion by 2013. The 2nd World Annual Islamic Finance Conference covered a wide range of different topics. In his keynote speech, entitled “Islamic Finance and Corporate Social Responsibility”, Badlisyah Abdul Ghani, head of the Islamic

Banking Division of CIMB Group, stressed that Islamic finance and corporate social responsibility are closely linked. Ghani provided a fresh perspective on the social responsibility of Islamic banks and financial markets. Interestingly, Lord Mohamed Sheikh, chairman of the Conservative Muslim Forum, spoke on the same topic insisting that the Islamic finance principles can boost financial stability and ethics within Islamic banks and financial institutions. Lord Sheikh’s speech was entitled: “The potential for Islamic finance principles to enhance financial stability and ethics”. Halthan Abdou, director of the ITS Group, tackled the Islamic finance industry from a different perspective. In his keynote speech, “Transforming to Electronic Finance and Commerce”, Abdou advocated that utilising the latest technology architecture, (SOA) software solutions, can help the business user to define and maintain financial products, accounting flows, marketing and cross-selling rules within the industry.

Also covered during the first day of the conference were: Hedging Risk, Corporate Governance, Sukuk, and Islamic Debt Capital Markets. On the same day, the CEO Roundtable featured presentations by: • • • • •

Badlisyah Abdul Ghani, from CIMB Group, Mike Clark, from the UK arm of Qatar Islamic Bank Richard Thomas, from Gatehouse Bank;, Omar Shaikh, from the UK Islamic Finance Council, and Dr. Humayon Dar, from Edbiz Consulting.

The second day of the conference saw participants discuss a whole new range of topics, including; • • •

Thailand: An Islamic Bank in a Non-Muslim Country, Progressive Markets - Germany, Islamic Finance and Financial Sector Development,

Event Review • • • •

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Trade Finance, Project Finance, Takaful and Re-takaful, and Public Education in Islamic Finance.

important for Islamic banks to be engaged in local communities. Indeed, the issue of marketing in Islamic finance still hinders the industry to a great extent.”

Dheerasak Suwannayos, president of the Islamic Bank of Thailand, claimed “Seventy percent of our customers are non-Muslims, while thirty percent are Muslims. Among the customers we tend to target are prayer-mat manufacturers, jewellery manufacturers, and bakers. However, these customers are limited by their lack of working capital”. Other issues stressed by the president included marketing, competition, and the institutions` targets for growth within the market.

The conference ended with a Question and Answer session in the annual Open Fatwa. The session was impeded somewhat by the lack of Islamic finance professionals present; it’s worth noting that most of the professionals in the Islamic finance industry do not have sufficient finance-based knowledge, and are not Shariah scholars. However, the session did feature some remarkable industry experts, including:

Throughout, the talk focused specifically on developing approaches and strategies to deal with these issues in a non-Muslim nation. However, the application of these developed approaches is still relatively unknown within the wider industry - not to mention that most Islamic banks have difficulty competing with conventional lenders on price and market share. “Islamic banks in Thailand should target both Muslim and non-Muslim communities,” said Suwannayos. On the other hand, Ruth Martin, an executive board member at UKIFS, concluded with a pertinent note on public education on Islamic finance. She focused on methods of conveying to the public the benefits of interest-free lending. At the basis of the industry, she stressed, lies the problem of changing public perceptions around Islamic finance and Islam. She also noted that within non-Muslim countries, flexibility is crucially important for the organisation and growth of Islamic institutions. Needless to say, Martin

• • • • placed a firm emphasis on the proper use of potential approaches used to target European Muslims. She claimed that getting the distribution channels right is the biggest priority for Islamic financial institutions, coming before any exercise of distribution. Speaking on the same topic, Professor Humayon Edbiz, CEO of Edbiz Consulting, added: “For the Islamic banks to succeed, they need to relate their organisational objectives to the needs of the Muslim community in the UK”. The implication is that Islamic banks must properly identify the needs of the UK Muslim community in order to succeed in heavy engagement. Farhad Reyazat, Editor-in-Chief at Global Islamic Finance Magazine, says: “The conference helped us to understand why it is

•

Omar Shaikh, from the UK Islamic Finance Council, Shaykh Haytham Tamim, from the Utrujj Foundation, Bilal Khan, from IFEC, Mian Nazir, from Dar Al Sharia Dubai Islamic Bank, and Dr Aly Khorshid, from Academy UK.

The industry’s growth potential lies largely in the ability of these leaders and presidents of Islamic financial institutions to start applying more developed approaches, within the context of strong and aggressive growth strategies. Garnering greater competition for the Islamic finance industry is not just an option, but a must, for fully-fledged Islamic banks. More importantly, the creation of an innovative and effective structure is a crucial factor behind the success of the whole industry. The 2nd Annual World Islamic Finance Conference covered a number of highly relevant and important points, whose application should be duly considered by all leaders within the Islamic finance and banking industry. gif

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Book

Business News

Review

An Introduction to Islamic Finance: Theory and Practice by Zamir Iqbal, Abbas Mirakhor John Wiley & Sons, 2nd edition/ £28.98

Islamic finance has experienced remarkable growth over the last three decades and the global demand for financial products and services that comply with economic and financial principles of Islam is increasing day by day. For newcomers to this burgeoning market, An Introduction to Islamic Finance: Theory and Practice offers an excellent overview of the principal concepts from two leading scholars in Islamic finance. This book explains the fundamental principles and functions of an economic, banking and financial system based on principles derived from the basic sources of Islam. Rules constituting the institutional scaffolding of such a system— property rights principles, sanctity of contracts and the requirement of faithfulness to terms and conditions of contracts, trust and trustworthiness, risk sharing, and prohibition of interest–rate based debt contracts among others—are discussed with relation to the economic behavior of individuals, society and state. Dr. Zamir Iqbal, affiliated with the World Bank, and Dr. Abbas Mirakhor, former Dean of Executive Directors at the International Monetary Fund (IMF) and, presently First Holder of INCEIF Chair of Islamic Finance in Kuala Lumpur, bring their theoretical knowledge and experience of economics, finance, banking, and capital markets to provide valuable insights to the fast growing Islamic financial services industry. In the wake of the recent financial crisis, An Introduction to Islamic Finance offers a comprehensive and practical guide for anyone seriously interested in understanding the Islamic finance alternative and the enormous potential it holds. ISBN-10: 0470828080 ISBN-13: 978-0470828083

Islamic Finance: Principles and Practice, by Hans Visser MM, 1st edition/ £18.95 Hans Visser presents a fascinating study of both the foundations of Islamic finance and its recent developments. This highly topical book explores the products and practices of Islamic finance, specifically targeting the tensions that may arise between the ideology and the practices. The author describes the forms Islamic finance has taken, analyzes the problems that it faces, and confronts the practice of Islamic finance with the principles it is based upon. He presents a dispassionate discussion of the problems facing Islamic forms of finance, including the question of how to reconcile activities such as liquidity management, monetary policy and government finance with Islamic principles. Islamic finance is an especially momentous phenomenon, and this book will prove an essential read for students with an interest in money and banking, and particularly Islamic finance. It will also be highly influential for bankers and staff in financial institutions, as well as financial journalists, politicians and civil servants dealing with the financial industry. 78 Global Islamic Finance

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IIslamic Finance For Dummies By Dr. Faleel Jamaldeen A detailed look at the fast–growing field of Islamic banking and finance The global Islamic finance market is now worth about $700 billion worldwide. Islamic Finance For Dummies helps experienced investors and new entrants into Islamic finance quickly get up to speed on this growing financial sector. Here, you′ll find clear and easy–to–understand information on how you can incorporate Islamic finance products into your investment portfolio. You′ll quickly and easily: become acquainted with the theory, practice, and limitations of Islamic banking; understand how to develop products for the Islamic financial industry; grasp the objectives and sources of Islamic law and the basic guidelines for business contacts; learn about Islamic fund management and insurance; and much more. Coverage of the role Islamic finance can play in the development of the financial system and of economies. Addresses the risks and rewards in Islamic banking the future prospects and opportunities of the Islamic finance industry Coming in September 2012

Global Growth, Opportunities and Challenges in the Sukuk Market by Sohail Jaffer Euromoney Trading Inc, 1st edition/ £148.75 This innovative new book is essential to understand how the world economy and therefore population whether through governments or corporations can benefit from Islamic bonds. It investigates and reviews the key market changes and developments in the sukuk market. This book goes further than any of the general books on sukuk that are available. It looks at how the sukuk market has evolved and where it is now, but most importantly it looks at regulation of the industry, defaulting sukuk and the implications. This valuable reference tool supplements general sukuk books and is essential for those involved with sukuk and who are looking to learn about how it has changed and what it means for them. The book covers: an overview of Sukuk and latest trends; the various roles of Sukuk in the economy; Sukuk Structuring and Distribution; Sukuk listing on international stock exchanges; Rating and accounting of Sukuk; the future of Sukuk. Sohail Jaffer, editor of many best-selling titles published by Euromoney Books, has invited leading seasoned practitioners to contribute their knowledge and experience. You will find the overall book a useful mine of information to guide you through the Islamic capital markets’ intricacies ISBN-10: 1843747596 ISBN-13: 978-1843747598

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Event

Event Calendar April

May

June

The World Takaful Conference 16 & 17 April 2012, Dubai, United Arab Emirates Organised by Mega Events

International Conference on Management 5 & 6 May 2012 Kuala Lumpur, Malaysia Organised by IEDRC

14th Malaysian Finance Association Conference 2012 2 & 3 June 2012, Penang, Malaysia Organized by Graduate School of Business

7th Asian Takaful Conference 9th & 10th May 2012, Marina Mandarin Hotel, Singapore Organised by Asia Insurance Review

Oman Islamic Banking and Finance Conference 4 & 5 June 2012, Muscat, Oman, Organised by OITE

Izdehar SME 13 & 15 May 2012, Jeddah, Saudi Arabia Organized by Informa Saudi Arabia

The World Takaful Conference 11th & 12th June 2012, Kuala Lumpur, Malaysia, Organized by Mega Events

The 9th Islamic Financial Services Board Summit 15th & 17th May 2012, Istanbul Turkey Organised by Islamic Financial Services Board

Asia and Middle East Investment Summit 7th June 2012, Singapore, Organised by Mega Events

Middle East Islamic Finance & Investment Conference 18th April 2012, Dubai, United Arab Emirates Organised by Mega Events Balanced Scorecard Forum 21 & 26 April 2012, Dubai, United Arab Emirates Organized by IIR Conferences Arab Future Cities Summit 2012 23-24th April 2012, Doha, Qatar Organized by Expotrade World Investment Forum 20th & 23th April 2012, Doha, Qatar Organised by UNCTAD

International Conference on Innovation, Management and technology Research 21st May 2012, Malacca, Malaysia The IEEE Malaysia Computer Chapter

Project Qatar 2012 30 April & 03 May Doha, Qatar Organized by IFP Qatar

International Conference on Islamic Economics and Business (ICIEB 2012) 29th June & 1st July 2012, Melaka, Malaysia Organized by Universiti Teknologi Mara

Finance for Non-Finance Professionals 14 &16 May 2012 Dubai, United Arab Emirates Organized by Infocus International

August

September

October

Emerging Trends in Finance and accounting

1st Middle East Life & Family Takaful Summit 17th & 18th September 2012, Dubai, United Arab Emirates Organised by Asia Insurance Review

IFN 2012 Issuers & investors Asia Forum 1st &2nd October 2012, Kuala Lumpur, Malaysia, Organised by REDmoney Events

3 th & 4th August 2012, India, Organized by SDMIMD

IFN 2012 Issuers & Investors Europe Forum 30th & 31st October 2012, London, United Kingdom Organised by REDmoney Events

For more information and full events details, please visit www.globalislamicfinancemagazine.com/events 80 Global Islamic Finance

April 2012

BUSINESS MEDIA GROUP

GLOBAL EXPERT IN CORPORATE BRANDING

We are a bespoke finance and banking branding practice, able to offer expert practical advice on building brands which will appeal to both Muslim and non- Muslim consumers globally. We have years of experience in promoting Islamic banks, institutions, and developers from organising of events and road shows to advanced branding strategy. Business Media Group (BMG) will assign you your own corporate brand management team, who will work tirelessly to make sure that you receive the best possible results on your investment. Our specialisation includes marketing & branding services for: • • • • • • •

Bourses and Stock Exchanges Financial Centres Takaful and Retakaful companies Sukuk Issuers Islamic Banks Islamic Universities Asset Management Firms

Download detailed brochure at www.businessmediagroup.co.uk Scan with QR Application

Glossary Business Directory

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Business Directory Banks European Islamic Investment Bank

Arab Banking Corporation

Bank of London and Middle East

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

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

Contact person/ department: Michelle Arnold Address: Sherborne House 119 Cannon Street London, EC4N 5AT United Kingdom Telephone: +44 20 7618 0000 Fax: +44 20 7618 0001 E-mail: Michelle.Arnold@blme.com Website: www.blme.com

Description: EIIB seeks to service a market for Sharia’a compliant investment banking services in Europe, the Middle East and Asia that it believes has been under-exploited by conventional and Islamic banks, and by non-banking institutions. EIIB intends to become a major participant in the market for Islamic securities, treasury and investment products, which is currently experiencing rapid growth.

Description: Arab Banking Corporation, popularly known as ABC, is an international Universal bank headquartered in Manama, Kingdom of Bahrain. Our network spreads over 21 countries in the MENA and GCC, Europe, the Americas and Asia. ABC is a leading regional bank in Trade Finance & Forfaiting, Treasury, Project & Structured Finance, Syndications, Corporate & Institutional Banking as well as Islamic Banking. We also provide Retail Banking services in the MENA region

Description: Bank of London and The Middle East plc (BLME) is a fully Sharia’a compliant wholesale bank in the heart of the City of London. BLME is managed by a quality team bringing together a combination of highly experienced international financiers and leading experts in Islamic finance. The majority of our Corporate Banking client base is located mainly in the UK, US and Europe.

ABN AMRO Bank N.V.

Dubai Islamic Bank PSJ

Al Baraka Islamic Investment Bank

(ABN AMRO Bank N.V. is an authorised agent of The Royal Bank of Scotland plc.) Contact person: Abbas Yousafzai - Head of Islamic Banking Address: Khalid Bin Waleed Road, PO Box 2567, Dubai, UAE Telephone: +971 4 506 2260 Fax: +971 4 506 2028 E-mail: Abbas.Yousafzai@rbs.com Website: www.rbsbank.ae

Address: P.O.Box 1080 Dubai United Arab Emirates Telephone: + 9714 2953000 Fax: +971 4 295 411 E-mail: contactus@alislami.co.ae Website: www.alislami.ae/en/

Al Baraka Tower , P.O. Box 1882 Manama , Bahrain Telephone: + 973 250 363 Fax: + 973 274 364 E-mail: baraka@batelco.com.bh Website: www.albaraka.com

Description: RBS within its Retail Banking Unit offers its clients competitive Islamic Banking Solutions. They have one of the largest options for Islamic Wealth Management Products and are also a distributor of the Takaful Product developed by Aman (Dubai Islamic Insurance & Re-Insurance Company). They are presently engaged in launching a full Retail Banking proposition with a Shariah Based Credit Card and Liability Accounts in 2010.

Description: Dubai Islamic Bank has the unique distinction of being the world’s first fully-fledged Islamic bank, a pioneering institution that has combined the best of traditional Islamic values with the technology and innovation that characterise the best of modern banking. Since its formation in 1975, Dubai Islamic Bank has established itself as the undisputed leader in its field, setting the standards for others to follow as the trend towards Islamic banking gathers momentum in the Arab world and internationally.

Description: Al Baraka Banking Group offers retail, corporate and investment banking and treasury services strictly in accordance with the principles of the Shari’a. The authorized capital of ABG is US$1.5 billion, while the total equity amounts to about US$1.52 billion. The Group has a wide geographical presence in the form of banking Units and representative offices in twelve countries, which in turn provide their services through 300 branches.

Accountancy firms Abbas Accounting

Baker Tilly MKM

HLB HAMT Chartered Accountants

Address: ABBAS ACCOUNTING P.O.Box : 78142 Dubai, U.A.E Telephone: +971 4 2820300 Fax: +971 4 2820322 E-mail: info@abbasaccounting.com Website: www.abbasaccounting.com

Address: Epico “Safar” Building Liwa Street Abu Dhabi United Arab Emirates Telephone: +97 1506226719 Fax: +971 26226088 E-mail: sumchart@eim.ae Website: www.bakertillymkm.com

Address: 106, Al Nayali Building Abuhail Road, P.O. Box: 32665 Dubai - United Arab Emirates Telephone: +97142627147 Fax: +971 4 2627148 E-mail: dubai@hlbhamt.com Website: www.hlbhamt.com/

Description: sad Abbas & Co is an audit and accounting consultancy firm in Dubai, United Arab Emirates. Services rendered by the firm include statutory, external and internal audit, accounting and financial management consultancy, accounting and finance outsourcing, project evaluation, feasibility studies and allied services. The firm is led by a team of qualified and widely experienced professionals dedicated to practice of the profession in the highest standards and committed to providing the best services to the clients.

Morison Menon

BDO International

Address: 204 Tower- A, Gulf Towers, Oud Metha, P. O. Box 55535, Dubai, UAE Telephone: +971 4 33 66 990 Fax: +971 4 33 66 992 E-mail: dubai@morisonmenon.com Website: www.morisonmenon.com/

Address: BDO - London 55 Baker Street London W1U 7EU Telephone: +44 207 486 5888 Fax: +44 0207 487 3686 E-mail: j.polin@bdo.co.uk Website: www.bdo.uk.com/

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

82 Global Islamic Finance

Description: We offer a wide range of service including auditing, accounting, consultancy, financial-management, profit-enhancement, feasibility studies, company-secretarial, offshore-company registration, and trademark-registration. You will receive a prompt response to every question or request. We serve our clients as a partner in order to help them make the best possible decisions for their business.

April 2012

Description: BDO is an award-winning, UK Member Firm of BDO International, the world’s fifth largest accountancy network with more than 1,000 offices in over 100 countries, including affiliates. We specialise in helping businesses, whether start-ups or multinationals, to achieve their goals. Through our own professional expertise and by working directly with organisations, we’ve developed a robust understanding of the factors that govern business growth. Our objective is to use this to help our clients maximise their potential.

Description: We have a full range of accounts and audit services to meet your business needs. A professional firm with regional focus and having global representation, HLB Hamt, Chartered Public Accountants spectrum of services cover all aspects of doing business in the UAE and the GCC countries. While based in the UAE, we offer comprehensive services for doing business in the Middle East including all the Free Trade Zones, right from company formation.

Barber Harrison and Platt Address: 2 Rutland Park Sheffield S10 2PD Telephone: +44 114 266 7171 Fax: +44 114 2669846 E-mail: info@bhp.co.uk Website: www.bhp.co.uk Description: Barber Harrison & Platt is committed to building professional relationships founded on the personal responsibility of a partner for a client’s affairs. As a Top 60 firm and the largest independent firm of chartered accountants in South Yorkshire and Derbyshire our continued success owes much to our dynamic approach and ability to fulfil client demands. This requires the highest level of commitment and performance. Barber Harrison & Platt provide advice to plc’s, private companies, partnerships, sole traders, individuals and trusts. The close working relationship we enjoy with clients provides a deep insight into a far wider range of business situations and problems than are traditionally associated with accountancy.

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Law firms Norton Rose (Middle East) LLP Contact person/department: Neil D. Miller, Partner Address: 4th Floor, Gate Precinct Building 3, Dubai International Financial Centre, Dubai, UAE PO Box 103747 Telephone: +971 (0)4 369 6300 Fax: +971 (0)4 369 6350 Email: neil.d.miller@nortonrose.com Website: www.nortonrose.com Description: We offer a full business law service and work in teams that cut across national and jurisdictional boundaries. In everything we work on, we provide expert advice, innovation and a commercial outlook. Our practice areas cover banking and Islamic finance, construction, corporate finance, dispute resolution, PPP, project finance, real estate

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

Lawrence Graham LLP (LG) Contact person/ department: James Foster, head of LG’s Dubai office Address: PO Box 33090 8th Floor Convention Tower Zabeel Road Dubai, UAE Telephone: +971 4 329 2420 Fax: +971 4 329 2430 E-mail: dubaioffice@lg-legal.com Website: www.lg-legal.com Description: LG is a firm of business lawyers, advising clients around the world. The opening of the firm’s Dubai office at the end of 2007 and the Moscow office earlier this year cemented its global growth and focus on clients internationally.

King and Spalding

Clifford Chance Contact person/ department: Anna Ward Address: 10 Upper Bank Street Canary Wharf London E14 5JJ Telephone: +44 20 7006 1000 E-mail: info@cliffordchance.com Website: www.cliffordchance.com Description: Clifford Chance is one of the world’s leading law firms, helping clients achieve their goals by combining the highest global standards with local expertise. The firm has unrivalled scale and depth of legal resources across the three key markets of the Americas, Asia and Europe and focuses on the core areas of commercial activity. Clifford Chance lawyers advise internationally and domestically.

Trowers & Hamlins

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

Contact person/ department: Nicholas Edmondes Address: Sceptre Court 40 Tower Hill London EC3N 4DX Telephone: +44 20 7423 8000 Fax: +44 20 7423 8000 E-mail: nedmondes@trowers.com Website: www.trowers.com

Description: King & Spalding has provided the highest quality legal services to its clients for over a century. Today, with more than 800 lawyers and offices in Abu Dhabi, Atlanta, Austin, Charlotte, Dubai, Frankfurt, Houston, London, New York, Paris, Riyadh (affiliated office), San Francisco, Silicon Valley and Washington, D.C.

Description: We believe lawyers exist to serve their clients - not vice versa. We also believe that every task we undertake on your behalf is unique.We expect to be judged on results, on the added value we provide, the quality of our service, and our cost-effectiveness. These attributes have led to us being voted Law Firm of the Year 2007 by the Lawyer.

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

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

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

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

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

Malaysia International Islamic Financial Centre (MIFC) Address: MIFC Secretariat Bank Negara Malaysia Jalan Dato’ Onn 50480 Kuala Lumpur Malaysia Telephone: +603 2692 3481 Fax: +603 2692 6024 E-mail: mifc@bnm.gov.my Website: www.mifc.com/ Description: In August 2006, the Malaysia International Islamic Financial Centre (MIFC) initiative was launched to promote Malaysia as a major hub for international Islamic finance. The MIFC initiative comprises a community network of financial and market regulatory bodies, Government ministries and agencies, financial institutions, human capital development institutions and professional services companies that are participating in the field of Islamic finance. Malaysia has also the distinction of being the world’s first country to have a full-fledged Islamic financial system operating in parallel to the conventional banking system.

If you would like to list your company in Financial Directory, please send your order to marketing@gifmagazine.co.uk. Claim your 25% discount by giving the following discount code: X10G01. Please note that only limited space is available in the directory. 2012 April Global Islamic Finance

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

Commander Fund Asset Management Ltd Contact person/department: Mark Randall Address: 4 Creed Court 5 Ludgate Hill London EC4M 7AA Telephone: +44 (0) 20 7246 9940 Fax: +44 (0) 20 7246 9944 E-mail: mark.randall@commanderfund.co.uk Website: www.commanderfund.co.uk Commander fund is primarily a conventional based asset management and operations corporation. Yet, in recent years they have been working on pioneering the closes thing to a Sharia compliant Hedge fund. They are also promoting the Middle East and developing a strong client base and market presence there.

Capitala Contact Person. Department : Patricia Assaad Address: Al Moroor Street PO Box 30398 Email: patricia.assaad@capitala.ae Telephone: +971 2 412 1111 Fax: +971 2 412 1222 Description: Capitala are the masterminds behind some of the most beautiful and nubile real estate development in the Middle East. They are focused on striking the balance between community cohesion and good business decision making. There main project Arzanah, is a US$6 billion development on Abu Dhabi island. Located in the Zayed Grand Mosque District

Educational Institutions The Markfield Institute of Higher Education

ICMA University of reading

Contact person/ department: Mr Asim Riaz Address: Markfield Institute of Higher Education, Ratby Lane Markfield Leicestershire LE67 9SY Telephone: 01530 244 922 Fax: 01530 243 102 E-mail: info@mihe.org.uk Website: www.mihe.org.uk Description: MIHE is a pioneering institution in the field of Islamic Banking and Finance education and research. MIHE works in conjunction with many other academic and professional institutions throughout the country. It currently offers PG Certificate, PG Diploma, MA and PhD programmes validated and awarded by Gloucestershire University. MIHE’s library is well established with excellent facilities, featuring superb collection of books and journals which are regularly updated. MIHE campus offers an idyllic and tranquil setting for study and learning, well suited to holding various residential courses, with all facilities like education, residential, spiritual and catering provided for.

Contact person/ department: Bereity Address:ICMA Centre Henley Business School University of Reading Whiteknights Reading RG6 6BA UK Telephone:* +44 (0) 118 378 8239 E-mail: v.altomare@icmacentre.ac.uk Website:http://www.icmacentre.ac.uk/ Description (up to 40 words):* The Business School’s ICMA Centre at the University of Reading has launched the UK’s first collaborative MSc in Investment Banking and Islamic Finance, to be taught jointly with INCEIF (International Centre for Education in Islamic Finance) in Kuala Lumpur. The MSc is the first in the UK to use Islamic material taught by Islamic specialists, and aims to capture the increasing demand for the subject with an academic base and practical views on issues such as Islamic finance, economics and law.

Chartered Institute of Management Accountants

Contact person/ department: Annette Heninger, Press Officer Address: CIMA 26 Chapter Street London SW1P 4NP United Kingdom Telephone: +44 (0) 20 8849 2251. Fax: E-mail:cert.if@cimaglobal.com Website: http://www1.cimaglobal.com Description (up to 40 words): CIMA (the Chartered Institute of Management Accountants) is the first chartered accountancy body to offer a global qualification in Islamic Finance. The aim of the course is to produce competent staff conversant in all areas of Islamic finance at both a theoretical and practical level. The course offers employers in the sector a product which should be very attractive for both their business and as part of their employee development.

Islamic Finance Glossary D Dalil

A scientific argument based on reason.

Daman

Guarantee, security. Taking responsibility. Also see Kafalah.

Daman Khatar Al-Tariq

Guarantee against the travel hazards. An arrangement of mutual assistance in which losses suffered by traders during journeys due to hazards were indemnified from jointly pooled funds.

Darura

Necessity, overriding necessity. Adopting a ruling, even one that may contravene a Shari’ah rule, when one is compelled by extreme necessity, usually life or death (Usually used for the “Doctrine of Necessity,” whereby something otherwise prohibited becomes temporarily permissible).

Da’wah

Claim, as in Takaful.

Dayn

Debt. A dayn comes into existence as the result of any contract or credit transaction.

Deen

It refers to a complete code of life prescribed in Islam.

Debt

Usually refers to an amount owed for funds borrowed. The debt may be owed to an organisation’s own reserves, individuals, banks, or other institutions. Generally, the debt is secured by a note, bond, mortgage, or other instrument that states repayment and interest provisions. The note, in turn, may be secured by a lien against property or other assets. Debts in different forms all imply intent to pay back the amount owed by a specific date as set out in the repayment terms.

Debt Service Reserve

Term used to refer to cash reserves set aside by a borrower, either by internal policy or lender covenant, to repay debt in the event that cash generated by operations is insufficient.

Default

A failure to discharge a duty. The term is most often used to describe the occurrence of an event that cuts short the rights or remedies of one of the parties to an agreement or legal dispute, for example, the failure of the mortgagor to pay a mortgage installment, or to comply with mortgage covenants.

Dinar

Currency in the form of gold coins that was used in the past. The term is still used in some Muslim countries, like Iraq.

84 Global Islamic Finance

April 2012

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Islamic Finance: A Golden Opportunity for Young Entrepreneurs

The Islamic finance and banking industry is growing at an unprecedented rate and is expected to see flourishing progression in 2012 and beyond. There are many opportunities for career growth and investments within the industry and many young entrepreneurs are tapping into the lucrative sector and finding ways to create wealth in a Shariah compliant manner. It can often be difficult for entrepreneurs to find the best avenues for investments and business creation within the Islamic finance and banking industry. However due to the rise of various Islamic commodities and its successful framework there are more opportunities opening up for the budding entrepreneur wishing to tap into the industry.

Islamic Banks vs. Non-Islamic Banks Ethical Dimensions

In this article, we will introduce to the main sources of Islamic finance principles that are the foundation for Islamic banking practices. It is essential, however, to outline the main beliefs upon which these principles are established. The classification of Islamic banking contracts like Musharaka, Mudaraba, Murabaha. The formation and the different structure of an Islamic financial institution and the challenge to corporate governance are of great importance to the conduct of Islamic banking. The need for regulation in the context of Islamic banking and the main risks associated with the different financial products will be discussed.

Benchmarking in Islamic Finance

This article is an initiative to analyse and justify benchmarking of interest rate (LIBOR) for Islamic finance and banking. To do so the author has tried to find the answer to the following questions: How interest based benchmarking affects Islamic finance as an industry? In what extant Islamic Shariah allows it to benchmark a rate based on interest (Riba)? What are the recent researches have been done to establish an alternative of Interest based benchmarking?

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