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Islamic finance

The world opens to Islamic finance Islamic finance is taking on a bigger role on the world stage as banks look to tap into its potential and governments consider alternative financial models in the wake of the global economic crisis. Jim Banks meets Mohd Daud Bakar of the International Institute of Islamic Finance to discuss where Western capitalism and Islamic finance will meet and, more importantly, diverge.

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Islamic finance

The last three years have brought the shortcomings of Western banking models into the harsh light of day, prompting many to ask whether other approaches to finance can offer the world any lessons in managing risk and, above all, improving the integrity of the world’s financial markets. As the economic power of the Middle East and Muslim countries elsewhere increases, Islamic finance has caught the attention of banks and governments across the world as a model worthy of consideration. Shari’ah-compliant financial instruments in some ways echo Western structures, but must be judged by religious scholars to be in accordance with the tenets of Islam. The most notable difference is that the payment of interest, so fundamental to Western financial practices, is forbidden. Yet sukuks, for example, can be compared with bonds in their structure and use. The growth of Islamic finance is driven partly by Western banks and governments, but to a great extent domestically by Islamic states. In Saudi Arabia, for example, the retail market is up to 80% Shari’ah-compliant, and Islamic finance is penetrating further into the corporate sector. Opening up a new financial sector also creates new employment and attracts new sources of capital. ‘Another reason is that we have seen how the conventional financial systems have performed and failed in the West,’ says Mohd Daud Bakar, president and CEO of the International Institute of Islamic Finance and Islamic finance specialist for CIMA. ‘This gives a boost to an alternative financial system to be pushed further and appeal to the global community at large. ‘Couple this with the “faith” factor for the 1.6 billion Muslims around the globe, who want to comply with the learned way of doing things, and you have a new source of financial economy and power in the world.’

Banking on integrity Western and global banks such as HSBC Amanah, Standard Chartered and Deutsche Bank are increasingly active in the Middle East and Far East, carving out a significant slice of the Islamic Finance market. A big

draw is the resilience during the global financial crisis of Shari’ah-compliant instruments, which have maintained their integrity when some of their Western equivalents have crumbled. ‘Because they were guided by Shari’ah principles, the scholars prohibited investments in toxic assets or “non-real” assets such as credit default swaps or transfer of risk, so they were not directly exposed to the crisis. They were, however, overexposed to “real” asset classes through excessive funding and financing, but these were not as toxic as in the West,’ says Bakar. In Islamic finance, any investment proposal approved by the management of the bank is passed to Shari’ah scholars, who analyse it from the core principles of Islam and will reject anything deemed to be part of a “non-real” economic sector. Their issue of a fatwa, or judgement, on an


Islamic banks in Muslim countries are locally focused, though there is growing encouragement for them to become global. In the West, the challenge is not for banks to accommodate the Shari’ahcompliant elements of Islamic finance, but for governments to create legal and tax-friendly frameworks. ‘You have to adapt to the issues of withholding tax, dividend on equity and VAT,’ says Bakar. ‘We need more comprehensive amendment to the relevant taxations laws to put Islamic finance on a level playing field. ‘Hedge funds are sensitive to Islamic finance because it has been deemed as negative in the past. Islamic finance is more about equity, mutual funds, trusts and property funds. The emphasis is on equity not debt, and not on something speculative like a hedge fund where you might have to sell an asset before you own it.’

‘Islamic finance is more about equity, mutual funds, trusts and property funds. The emphasis is on equity not debt, and not on something speculative like a hedge fund where you might have to sell an asset before you own it.’ investment is crucial. To receive a fatwa, investments must be backed by an asset, such as a building or land, by services or by a venture in which the money clearly goes to a specific project. ‘These are what we refer to as the “real” economy or minimum asset-based transactions,’ explains Bakar. ‘Tangible and intangible investments are considered acceptable provided that you can trace your money to the ultimate investment vehicle. ‘In the West it does not necessarily work like this. If you buy a bond issued by Fannie Mae or Freddie Mac out of the securitisation of mortgages, the investor is not able to see the link between their bond and the underlying asset. The missing link of the investment instrument and the underlying asset is obvious in the West.’ Global banks have a prime opportunity to become prominent in Islamic finance.

Preparing the ground Developing Islamic finance skills in the West is one of the simpler challenges to overcome. Finance professionals in Western institutions can build on their knowledge of conventional banking systems, adapting it to accommodate Shari’ah principles. As a professional chartered accounting body, CIMA was the first to issue an Islamic finance certificate, targeting those already working in the conventional banking world. The qualification equips them with a basic level of knowledge, but the advanced diploma that CIMA and the International Institute of Islamic Finance are developing will add insight into the policies and structures that underpin Islamic banking and finance. Building skills in the West will support the efforts of global banks to enter the market and this could see Shari’ahcompliant finance become a major feature of international markets. Excellence in Leadership


Islamic finance

‘I would envisage that Islamic banks will come to many more parts of the world,’ notes Bakar. ‘Mergers and acquisitions will be a mass phenomenon in the coming years because, given the current capital regulations that Islamic banks have, I don’t think that they are competitive on a global scale. Secondly, the development of

healthy for the European market because the business originates from the Middle East, not Europe. ‘Until there are comprehensive amendments made to taxation matters, tackling all of these on the ground to achieve a level playing field for Islamic financial products, I

‘Because they were guided by Shari’ah principles, the scholars prohibited investments in toxic assets or “non-real” assets such as credit default swaps or transfer of risk, so they were not directly exposed to the crisis.’ Islamic finance in the West will slow down if they do not address the issue of taxation comprehensively, which was limited in the past to stamp duty and property gains tax. We have already seen this trend where business has been transferred from Europe to the Middle East. That phenomenon is not

can see a shift in terms of focus and product development, origination and employment from the West to other parts of the world which are more tax-neutral. Governments will need to manage the expectation of a new, young and fast-growing industry. It is a matter of getting the right synergy.’ ■

Mohd Daud Bakar Mohd Daud Bakar is the president and CEO of the Amanie Islamic Finance Learning Centre, the International Institute of Islamic Finance and Amanie Business Solutions. Prior to this he was the deputy vice-chancellor at the International Islamic University Malaysia. He obtained his PhD from the University of St Andrews in the UK in 1993. In 2002 he went on to complete his external Bachelor of Jurisprudence at the University of Malaya. Bakar is the chairman of the Central Shari’ah Advisory Council of the Central Bank of Malaysia and a member of the Shari’ah Advisory Council of Securities Commission of Malaysia. He was also responsible for contributing to the CIMA Certificate in Islamic Finance.

CIMA Islamic finance qualifications Certificate in Islamic Finance

What does it cover?

The CIMA Certificate in Islamic Finance develops skills in Shari’ah compliance and knowledge of the complexities of the contracts that underpin this compliance. Students will also develop confidence in using the terminology and applying the knowledge that sets Islamic finance apart from conventional finance.

There are four modules; each is covered by a detailed self-study guide that will prepare you for the final assessments: • Islamic commercial law • Banking and Takaful – products and services • Islamic capital markets and instruments • Accounting for Islamic financial institutions.

Who’s it for? The certificate is valuable for newcomers to Islamic finance as well as finance professionals seeking to broaden their understanding of wider aspects of Islamic finance while gaining accreditation. It is designed to give professionals two significant advantages: • the professional recognition of a CIMA international qualification • demonstrable expertise in the complex, fast-growing world of Islamic finance. Excellence in Leadership

Professional diploma in Islamic finance structuring and strategy CIMA recognises that there is a demand for a higher level qualification that meets the needs of professionals working in a strategic or managerial capacity in the industry. With this in mind CIMA is currently completing development of the Professional Diploma in Islamic Finance Structuring and Strategy (PDipIFSS), launching early 2011, to

complement the material covered in the Certificate in Islamic Finance. The aim of the PDipIFSS is to allow students to demonstrate their ability to take the knowledge and understanding they have already gained and apply this to the complex situations that arise in the industry. The CIMA Certificate in Islamic Finance is supported by HSBC Amanah. To find out more or to discuss corporate rates: Tel.: +44(0)20 8849 2251 Email:

The world opens to Islamic finance  
The world opens to Islamic finance  

An article discussing the growth of Islamic finance around the world.