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INSIDE THIS ISSUE CORPORATE GOVERNANCE AND ISLAMIC FINANCE THE INSTITUTION OF HISBA AND SHARI’A ASSURANCE THREE BOOK REVIEWS A Personality Interview with AMER BUKVIC

CEO of Bank Bosna International

An Exclusive Interview with DATUK DR. MOHD DAUD BAKAR

Executive Chairman, Amanie Group of Companies


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EDITORIAL

Note from the

EDITOR-IN-CHIEF This issue of ISFIRE becomes the first issue featuring a Shari’a scholar – Datuk Dr. Mohd Daud Bakar – on its cover. We have previously included a Personality Interview of another great Shari’a scholar – Sheikh Nedham Yaqubi – but Dr. Daud Bakar gets the distinction of being the first Shari’a scholar on the cover page of ISFIRE. This is indeed a part of our celebration of Shari’a entrepreneurship, a phenomenon led by example by Dr. Daud Bakar. The Personality of the Issue is Amer Bukvic, CEO of Bank Bosna International. He shares his views – light and heavy – in a very straight forward way. He is a good leader with great vision, who founded Sarajevo Business Forum, in addition to serving as CEO of the stand-alone Islamic bank in Bosnia Herzegovina. I am sure that our readers will like his interview. There are articles by the likes of Hussain Kureshi, Asif Zaman, Dr. Hylmun Izhar, in addition to our regular features like Diary of a Mad Philosopher, St. Barbarossa’s Memoirs and Pause for Thought. Technical Notes on Standardisation of Notation in Islamic Economics, Banking and Finance is also back after missing appearance in the last issue. Diary of a Mad Philosopher should be of interest to those who are following the hot story in Islamic finance, i.e., Dana Gas Sukuk, which has technically defaulted on its US$700 million worth of issuance that was fast approaching the redemption date in October 2017. Perhaps the best contribution of the issue is inclusion of three book reviews. We have reviewed three very interesting books: Reflections on Happiness and Positivity (by Sheikh Mohammed Bin Rashid Al Maktoum), Emirates Airline Sukuk (by Dr. Mohd Daud Bakar) and Understanding Islamic Financial Services (by Karim Ullah and Wafi Karaghouli). Those of our readers who love reading must consider adding these titles to their private and institutional libraries. Enjoy reading!

Professor Humayon Dar, PhD (Cantab) Editor-in-Chief


ISSN 2049 - 1905

CONTENTS

ISLAMIC FINANCE REVIEW | WWW.ISFIRE.NET

COVER STORY 10 Datuk Dr. Mohd Daud Bakar

Executive Chairman, Amanie Group of Companies

VOLUME 7 - ISSUE 3 | JUNE 2017

BRIEF NOTES

22 Diary of a Mad Philosopher

ISFIRE NOTE

26 Does Being Altruistic Make an Individual Better off?

Hylmun Izhar

PAUSE FOR THOUGHT 32 Defining and Quantifying Islamic Economy

TALKING POINTS Does Being Altruistic Make An Individual Better Off 34 The institution of Hisba and Shari’a assurance

Asif Zaman Islamic Finance, Strategy and International Business Cardiff School of Management Cardiff Metropolitan University

PERSONALITY 38 Amer Bukvic

CEO of Bosna Bank International (BBI) Hylmun Izhar

?

ISFIRE INSIGHT

42 Corporate Governance and Islamic finance

Hussain Kureshi

26 ISFIRE REVIEW

56 Overview 57 Reflections on Happiness and Positivity 58 An Insightful Journey Into Emirates Airline Sukuk

ISFIRE MEMOIRS

50 St. Barbarossa’s Memoirs

TECHNICAL NOTE

52 Standardisation of notation in islamic economics, banking and finance

61 Understanding Islamic Financial Services Theory and Practice

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CONTENTS Editor-in-Chief

Professor Humayon Dar PhD, Cambridge University

Editor

Dr. Sofiza Azmi

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CEO, Edbiz Consulting

International Editorial Board Professor Nafis Alam Sunway Universiy, Malaysia

CORPORATE

GOVERNANCE AND ISLAMIC FINANCE

Professor Mehmet Asutay Durham University

Professor Dr. Mehmet Bulut Istanbul Sabahattin Zaim University, Turkey

Dato’ Dr. Asyraf Wajdi Dusuki Deputy Minister, Prime Minister’s Department Malaysia

Professor Joseph Falzon University of Malta

Dr. Mian Farooq Haq State Bank of Pakistan

Professor Kabir Hassan University of New Orleans

Datuk Noripah Kamso Islamic Finance Expert

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Dr. Asmadi Mohamed Naim Universiti Utara Malaysia

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COVER STORY

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ISLAMIC FINANCE REVIEW | JUNE 2017


ISLAMIC FINANCE REVIEW | WWW.ISFIRE.NET

COVER STORY

Datuk Dr.

MOHD DAUD BAKAR Executive Chairman, Amanie Group of Companies

WHEN YOU ARE SELF-EMPLOYED AND WHAT MORE

WHEN YOU ARE THE EMPLOYER, YOUR MIND-SET NEEDS TO CHANGE. WELL, BUILDING A HOUSE AND A TA SKYSCRAPER IS NOT THE SAME,

RIGHT?

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COVER STORY

ISLAMIC FINANCE REVIEW | JUNE 2017

This issue of ISFIRE carries the first-ever cover story we have run over a Shari’a scholar. Datuk Dr. Mohd Daud Bakar is a Shari’a scholar of international repute who has distinction of being one of the most influential Shari’a entrepreneurs of present times. We trust that our readers will not only find this exclusive interview of great interest but also of immense help in understanding Islamic banking and finance and the role of Shari’a advisory within it.

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lease tell us about Amanie Group and how it came into being.

In 2005, I decided to pursue my dream of forming my own Shari’a advisory company. I left the International Islamic University of Malaysia, where I had served since my graduation. When I left the University, I was the Deputy Vice Chancellor. So, yes, it was a difficult choice to make. But I reminded myself that courage changes our world for the better... not fear. I was convinced – though I was equally nervous and worried – to leave the University, which provided me with fixed income and safety net for the last 15 years. But for my potential to further expand, I knew I needed to step out of my comfort zone. Truth be told that I had started dreaming of setting up my own Shari’a advisory company since early 2004. When the time was right – normally this is due to both push and pull factors - I decided to resign and set up Amanie Advisors the same day I left the university campus. Well, the early bird catches the worm, right? To be precise, my endeavour into the world of entrepreneurship began on 1st April 2005. There was no lapse whatsoever between my career as a government employee and as an entrepreneur, as everything was well planned to jump from a big ship to a small ship in the middle of a rough ocean. For me, the journey had just begun. But I knew in my heart that thinking and dreaming big is a must. Though fairy tales don’t come true, dreams do.

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The first set up was in Kuala Lumpur and two years later, I ventured into the Dubai International Financial Centre (DIFC). Alas, timing was not on my side because Lehman Brothers had just collapsed, literally about two weeks after I got the incorporation certificate from DIFC. Everything was on hold but not for long. The market responded positively in 2010. I persevered in those two difficult years. I learnt the meaning of entrepreneurship the hard way. I would like to believe that I have graduated with flying colours. But now I know why entrepreneurship is known as the School of Hard Knocks. Motivated by the great demand for Islamic finance advisory, I then established Amanie Advisors in many other cities of the world to spread our Shari’a advisory capabilities. While some offices have performed well, others succumbed to failure. Any regrets? I don’t think I should wallow in self pity, as I have signed up for the entrepreneurship contract for life. I need to always invest in passion equity (plus money equity). Show me a person with outstanding success, and I’ll show you a person who’s driven by his passion. After a few years in this area, I noticed that there is a well connected nexus between Islamic finance and other services, such as training, media, big data analytics and fund management, as well as real economic transactions. This motivated me to set up a few other companies in many respective fields, doing something else, away from Shari’a advisory services. Again, I embraced the practice of stepping beyond my comfort zone. That was how Amanie Group was born into this world.


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atuk Dr. Mohd Daud Bakar is much bigger than Amanie. Please tell us about Dr. Mohd Daud Bakar, the Shari’a scholar. Our readers will in particular like to know about your family background, education, and academic and professional career.

I am a Shari’a scholar by training and profession. At the age of 13, I enrolled or rather I was enrolled into an Arabic school in my hometown in Kedah (Northern state of Malaysia, which is known as the paddy bowl of Malaysia). It was done by ‘force’ (against my own wishes) and I enrolled out of respect for my parents, who were adamant about me going to an Arabic and Islamic school. I felt left out, as all my friends were rushing to join the mainstream secondary schools. Surely, at that time, being young, I had the urge to join the bandwagon. But thinking back about it, I think my parents were right all along. Following the herd will of course get you somewhere, but will it get you where you want to be? That’s the million-dollar question. Anyway, I belong to a low income family. We barely had any surplus cash for more than 2 to 3 days. I worked hard in school and I also worked hard outside school to earn some side income to help my family of 5 siblings. The bad and good news is that I am the eldest of the five. But truly, responsibilities are best learned at a young age. When I was awarded the scholarship to pursue Shari’a studies at Kuwait University, everything changed for the better. I now had the opportunity to study Shari’a in a more structured manner and in good quality Arabic. More interestingly, I was also able to send some money back home to alleviate my family’s financial status. Now, they could survive with one month cash reserve. Not bad at all. Remember always, where there’s a will, there’s a way. I was later awarded the Malaysian scholarship to pursue my PhD at the University of St. Andrews, United Kingdom, and I chose an area of Islamic legal theory for my thesis. Honestly, I think I am more an Islamic legal theorist than a Shari’a advisor to Islamic financial institutions. I have published many articles on Islamic legal theory thus far. Upon returning home from my PhD, I enrolled into a Bachelor’s degree programme in law on part time basis. After a stint of 6 years, I completed the study. Well, it was one challenging journey, to say the least. I nearly exceeded the allowable maximum duration but nonetheless, I crossed the finish line. However, that said, I reckon I am the only Malaysian Shari’a scholar who has a degree in both Shari’a and conventional law. This dual legal knowledge has helped me tremendously in shaping my thinking process in dealing with financial and commercial matters. Being able to see both sides of the coin has allowed me to be more lucid in my thinking.

COVER STORY

My career as a Shari’a advisor started in 1994, immediately after coming back from my PhD. During the formative period of Islamic finance in Malaysia, I struggled to equip myself on my own the hard way, but it was worthwhile. No pain, no gain. I learnt from scratch and I developed my own brand, so to speak. I was later invited to join an international Shari’a board for the first time in 1996. By then, I sat on many Sharia’ boards, in all continents across the globe. I have also been active in endorsing sukuk, and if we include Malaysian-based sukuk, I am perhaps one of the most active amongst the modern scholars.

Y

ou introduced the term “Shari’a entrepreneur.” What does it stand for? As a Shari’a entrepreneur, how different are you from other Shari’a scholars? I like this term very much. I coined it for the first time when I was interviewed by the media after receiving a special award from His Majesty, the King of Malaysia in 2014, in conjunction with the national celebration of Prophet Muhammad’s birthday. I explained to them then that a Shari’a entrepreneur is a person who is able and willing to take risks to spread Shari’a knowledge in all private enterprises. For that, he must be prepared to be self-employed and also to be the employer of his own staff and employees. All entrepreneurs need the support of others or rather a team to transform their ideas and business plans into action. I started with 5 people and now, I have 50 employees working under the Amanie Group in various companies and jurisdictions. I have also diversified my business. A few years ago, I formed a partnership to launch the first (private) Malaysian company in big data analytics. My recent and latest move was to acquire the oldest Malaysian business magazine. I am now technically the Editor-in-Chief. I am now looking to expand seriously into the media and education space. When you are self-employed and what more when you are the employer, your mind-set needs to change. Well, building a house and a tall skyscraper is not the same, right? In the same vein, you need to think and act fast. Every minute counts. Any wastage – financial or otherwise – has no place in my set up. What is more interesting is that my thinking process as a Shari’a advisor has been transformed for the better. I have now acquired a Shari’a mind with a new set of configurations, which is different from a normal Shari’a advisor’s thinking process. In what sense? Now, my Shari’a understanding of products is more business-oriented and more often than not, my mind is quicker to find the Shari’a solutions, instead of lingering around problems and excuses. As they say, excuses are a mind-deadening disease.

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COVER STORY

L

ately, you have published one book after another. Do you really have 25 hours a day or there is another secret to your prolific writing?

For me, writing a book is both stimulating and healing. It can take away from you the parasites of laziness and time wasting. Once you are set to write and finish writing a particular book in a certain time frame, everything is automatically set to make this possible.

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On average, I take about 6 months to publish one book but I do work on many manuscripts concurrently. A 25-hour performer must not just focus on only one thing at a time. That’s not productive. Not at all. I began writing my second book, “I Have 25 Hours a Day: The Smart Way to Create More Time” while I was still writing my first book, “Shariah Minds in Islamic Finance”. The same goes for my third book, “Emirates Airline Sukuk”. I like to use a strategy I call the ‘preloading strategy’, which means to work on more than one task at one go to give more time, thus 25 hours a day.


ISLAMIC FINANCE REVIEW | WWW.ISFIRE.NET

In writing, as in many other areas of life, you need to be passionate about what you are going to do, irrespective of whether it is a job or even a hobby. Work hard to acquire “passion equity”. This type of equity will definitely give you a good Return on Equity (ROE) and a good Internal Rate of Return (IRR). I am currently working on 5 other manuscripts, encompassing many interesting topics, and one of them will be a fiction on Islamic finance. This will be my first attempt in this genre to humanising Islamic finance.

COVER STORY

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he world is fast becoming orientated towards the use of social media. What role can social media play in creating awareness around Islamic banking and finance? Social media is the trend at the moment. We wouldn’t know what lies ahead in the next 5 to 10 years. As we speak, Islamic banking and finance has no other option but to leverage on this technology diligently. Truthfully, for many years, I myself was sceptical about social media. I was urged by my colleagues to befriend social media and for almost one year now, I have been using social media extensively for business. It helps a lot in knowledge transfer, as well as making new friends and traversing new frontiers. I have also noticed that if you would like to remain relevant and trendy to the young population, you need to embrace social media. There is no point for Islamic finance to be excellent in their value propositions and products, but at the same time, not so many people are aware of it. It’s akin to having a magnificent gem up high in the sky, but the beauty is hidden amongst the shadow of the clouds. But fear not. Used wisely, social media can create a borderless world in the real sense!

S

heikh, can you please elaborate if there is any juristic difference between the Shari’a approach taken by Malaysian regulators and the ones elsewhere in the world? Malaysian regulators have travelled a long way to come to the stage where they are now. They have seen many practices – good and bad, and ups and downs. Now, they are in the mood of upscaling the culture of compliance par excellence. Shari’a compliance can’t be taken for granted anymore. This has given birth to the Islamic Financial Services Act 2013. But the overall balance between business development and Shari’a compliance has been well maintained. This is great for the industry to become both “holier” and “richer”. While prescribing high quality compliance, as well as value intent, development of new products in various aspects has been exponential. Some other jurisdictions tend to follow the Malaysian steps, though they are in the infancy of their journey. We need to be mindful that the Islamic banking assets are negligible. Worst still, some of them tend to be ultra strict, which impedes the real development of Islamic banking assets. Islamic banking and finance has been the victim of ultra strict compliance to Shari’a and sometimes, it is stricter than what the AAOIFI Shari’a standards have been articulating.

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We need to understand that Islamic finance is the sub-product of a country’s economy. If the gross domestic product (GDP) of a country is performing well, Islamic finance will naturally tag along. It will be a rare phenomenon to see Islamic finance going north, while the economy is going south. That being said, the economic performance of Indonesia in the last few years has been great.

W

hat challenges do you perceive in the wake of the growing role and influence of FinTech?

I need to be honest on this aspect. FinTech was never and will never be a challenge to us. If you understand FinTech well (in the same manner you understand MedicTech, EduTech, etc.), you will notice that technology can do wonders in all aspects of life. What are my credentials on this aspect? I have actually developed a FinTech initiative and I call it “MyFinB”, namely “My Financial Buddy” or if you like, “My Financial Bureau”. When we offered this service for the first time to one of our banking clients, everyone was sceptical, if not cynical of it. It

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took us hours and days to convince how FinTech can increase productivity, and cut cost and time. After a few experimental exercises to establish proof of concept, we can see the big smile on many faces. Now, we are in the roll-out process for the whole banking operations, God willing. It’s true, you reap what you sow. We can’t underestimate the power of technology. That’s a huge mistake. It goes without saying that simultaneously, we can’t overestimate our own capabilities in areas where robotic technology is smarter and faster. Definitely, credit scoring, profiling of customers and non-performing financing, risk management, assessing business plan proposals and narratives, persuasive marketing strategies based on artificial


ISLAMIC FINANCE REVIEW | WWW.ISFIRE.NET

intelligence data generation, etc., would fall under an area where the robotic mind is way above our human capabilities, in terms of speed, accuracy and permutations. Yes, believe in our own strengths, yet it’s also wise to acknowledge our own weaknesses. Acknowledging our own weaknesses can show us the better path.

COVER STORY

Yes, as a group of companies, Amanie definitely has some future plans. But if you were to ask me what they are, I would be clueless. I have some rough ideas and dreams, but as I progress further, all of these will fall into place. Nevertheless, I definitely know that there is light at the end of the tunnel.

ow, a few words about Amanie’s future business plans. How does your vision of IBF treat FinTech?

I am also striving to push further into big data analytics, not only in FinTech but also in EduTech, LegalTech, as well as ShariahTech. I have also discovered some missing links in the whole Islamic finance ecosystem, which could be low-hanging fruits from the business perspective. Again, this depends on some investments in IT and technology.

This may sound contradictory but interestingly, I don’t believe in long term planning. As a matter of fact, I have never developed any business plan, except one for the sake of getting a license from one jurisdiction.

At the end of the day, I would like Amanie to be known as a Shari’a-based company in all aspects of life: advisory, training, media, fund management, etc., but everything is embedded with technology.

N

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COVER STORY

Y

our neighbouring Indonesia is fast embracing IBF. What possible effect can this have on the further development of IBF in Malaysia? Indonesia has many competitive advantages over Malaysia and many other countries in the region. They are blessed with a huge land mass and a big population. Their natural resources are in abundance. If Indonesia’s financial system were to scale up, this will make the whole market ‘perfect’ and ‘optimised’.

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If this happens, Indonesia will be a leading economy, not only in Asia Pacific but also globally. We need to understand that Islamic finance is the sub-product of a country’s economy. If the gross domestic product (GDP) of a country is performing well, Islamic finance will naturally tag along. It will be a rare phenomenon to see Islamic finance going north, while the economy is going south. That being said, the economic performance of Indonesia in the last few years has been great.


ISLAMIC FINANCE REVIEW | WWW.ISFIRE.NET

By now, Indonesia has seen the whole process of Islamic finance. They are in a position to leverage on both the knowledge (and experience) and their resources to lead Islamic finance into a new territory. Yes, exciting times ahead for the industry! In the near future, I foresee that Malaysia has to ‘compete’ with Indonesia, in terms of talent, domiciliation of foreign Islamic funds, business ventures, etc. It will be wise for anyone who takes a positive view about Indonesia to plant their feet in this Republic. It pays to look at something beyond the obvious; not only as it is, but as well as what it could be.

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ou travel extensively. Which Muslimmajority country has really impressed you and why?

My immediate answer is the United Arab Emirates. In fact, my family and I were living in Dubai for two years, but we had to leave Dubai for education purposes, as my children decided to study in Australia. My first overseas office was in Dubai in 2008 and thus far, it is the largest office outside Kuala Lumpur. The UAE has been designed and developed to attract people to come, work and live in the country. Everyone is treated equally and the government services are excellent, as in the UAE, both the government and private sector apply the same service quality standards. You won’t feel and can’t tell the difference between a government and a private service counter. For those with families, the UAE also provides living space. All the public amenities and traction centres are built across the country and are still under massive development. What is most striking is the sense of security. This is a good asset that everyone wants. At DIFC, where business is the main focus, everything has been made easy, from the registration, support, visa, business connectivity, not to mention good branding. I think that the UAE, all in all, has set a very high benchmark for many other Muslim-majority-based countries to emulate. The UAE is quick in becoming the role model of a vibrant new environment for living and working; leisure and business, for visitors and transit passengers alike.

P

lease share with the readers a typical day of Datuk Dr. Mohd. Daud Bakar. How it starts and what are a must on the to-do list on a daily basis?

Of all the questions, this is my favourite. I like to relate my life and work style to everyone. Morning walk is a must in my diary. I walk for health and to prepare my mind for the whole day. A healthy body leads to a healthy mind, right? Once I am done with my morning walk, I am prepared to start my day from meetings to networking to seminar presentation. I like to use my premium time (as I call it) of the day to look into difficult issues (and difficult people). Replying to emails is not that difficult, such that I’m able to use my not-so-productive time to reply to all emails other than emails about fatwa, and Shari’a views and drafting. Everyone has their own productive and not-so-productive time. Identify your right time for the right job, and strike while the iron is hot. I also like to adopt an interceptionist strategy to save time. Before I go into a long meeting or board onto a flight, I will email all the necessary issues, and questions and proposals, so that when I am done with the meeting or when I land in another city of the world, most, if not all the outstanding work

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COVER STORY

have been taken care of by someone. To put it differently, you let people work while you are in the meeting or on a flight (or in deep sleep). I have shared all my tips in my book, “I Have 25 Hours a Day: The Smart Way to Create More Time (2016)”. If you are ultra sensitive to your time, you can outperform others by doing more work and tasks in a limited time. You can’t avoid a long list of expectations (in the same manner you can’t avoid competition). But you can beat everything and everyone by becoming smarter and faster. Life is not the art of avoiding but is the art of adapting and improving.

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hat would be your message to the global Islamic financial services community, particularly the youth?

I don’t have a sophisticated advice. For me, the simpler the better. My advice is very much human and of common sense. Islamic finance is a newcomer to this world. We need to do a lot of engagements with many stakeholders within our community and beyond. Don’t be fooled by the term ‘Islamic finance’ and thinking that people are easily attracted to this term. If people don’t know or what more are confused about Islamic finance, then they won’t ever come to ask for the Islamic finance menu. They might either say something bad about Islamic finance or avoid listening to the Islamic finance narrative from afar. It’s scotoma all over again. Without the right information, the eyes see what they want to see and the mind concludes what it wants to conclude. Disengagement is the easiest thing to do. But the easiest thing to do is not necessarily the right thing to do. On the contrary, engagement is much harder. Nevertheless, everyone must do his part. Surely, you would know your area of expertise, so that you could put on record the right narration on Islamic finance, for the purpose of effective engagement.

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I have to be honest. Regulators and Shari’a scholars can’t remain forever on their pedestals. They need to do their part of engaging with the stakeholders. The shareholders must also be active, hence pushing the boundaries of Islamic finance. Sometimes, the inspiration and “good” pressure by the shareholders (on the management and the Shari’a advisors) can make impossible things possible. This is the magic of the shareholders. As for the youths, you are blessed with so many literatures and role models before you and amongst you. You can just pick up any good literature for your intellectual and insightful development, and follow any good role model to excel in your career in Islamic finance. My point is that; make your learning curve shorter and more impactful. There is no need to go through the whole journey that we – the veterans and silver hair generation – have gone through. We have paved the way, bushwhacking through the jungle of challenges and adversities. All that the youths have to do is to follow the path and later, even trail-blaze their own paths. If you need a motivational book, get my latest book, Emirates Airline Sukuk. This book amongst others narrates the success story of Emirates Airline, which came into operation 10 years after Islamic finance, and has been outperforming other airlines across the world. It took them a lot of courage, innovation and strategic thinking to be the best airline operator in 2016. Where does our Islamic banking and finance stand on the global stage? I hope this book is both stimulating and motivating for the youth (as well as for the old guard). Perhaps the older generation of the Islamic finance industry must do a bit more to handhold our younger generation. The sooner we do that the better. Otherwise, we will be faced with a knowledge gap, which is detrimental to our industry. Any volunteers? Count me in!


ISLAMIC FINANCE REVIEW | WWW.ISFIRE.NET

COVER STORY

Introduction: Islamic Bankers Association (IBA) is a new international industry representative body for practitioners of Islamic banking and finance. It is officially incorporated in United Kingdom, with its registered office in London. The IBA membership is open to individuals and corporates, and aims to become the largest industry representative body for Islamic banking and finance in the world.

Membership categories include: Corporate Membership: For all Islamic banks and the institutions offering Islamic financial services – IIFS (Annual Fee: £3,500) Associate Corporate Membership: For all businesses that offer their services to Islamic banks and IIFS (Annual Fee: £5,000) Individual Membership: For all the employees of Islamic banks and IIFS, with work experience of a period of five years or more (Annual Fee: £100) Young Professional Membership: For all the employees of Islamic banks and IIFS, with work experience of a period of less than five years (Annual Fee: £50) Associate Individual Membership: For any professional whose application is endorsed by at least one existing member of IBA (Annual Fee: £100) Islamic Bankers Association is a non-profit organisation, registered in England and Wales as a company limited by guarantee, and does not offer any financial products and as such is not regulated by Financial Conduct Authority.

If interested in becoming a member, please get in touch with Khuram Shehzad on:

+44 (0) 20 3617 1089 or kshehzad@edbizconsulting.com

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BRIEF NOTES

HILOSOPHER

DIARY OF A

It is no more than a cranky joke that on a hot day when someone faces a creditor demanding to pay back the due debt, he refuses to do so on the pretext that he borrowed money in winter and hence his obligation to return it has lapsed in summer. The issuers of Dana Gas Sukuk must be sentenced to 100 lashes each for uttering non-sense in the holy month of Ramadan1. The case is so baffling that it reminds one of a man who raised a child as his own son for several years before proclaiming him to be an illegitimate child conceived by his wife. Or, funnier enough, the Dana Gas guys are like a man who slept with a woman for four years apparently after marrying her and left her on the pretext that their nikah was faulty in the first instance any way. Such a person should be tried for committing adultery. Shouldn’t he? Why am I getting so mad? The story goes like this.

1

22

On June 13, Dana Gas, a Sharjah-based regional independent natural gas producer, unilaterally announced that its US$700 million worth of outstanding sukuk had turned Shari’arepugnant, following the change in the UAE law. The said sukuk is based on a mudaraba structure. According to the Islamic law, a mudaraba contract does not allow for capital and rate guarantee. Dana Gas, however, highlighted three Shari’a-related problems with the transaction: 1. The redemption price of the sukuk is pre-fixed; 2. Profit payment is guaranteed regardless of the company’s performance; and 3. Distributions are based on interest and not profit-based calculations.

The first press release by Dana Gas was issued during the month of Ramadan on June 13, 2017.


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BRIEF NOTES

Dana Gas’s claim that its sukuk is not Shari’a-compliant under the UAE law is ridiculous, as there is no sukuk law promulgated in the UAE, unlike in other countries, notably Malaysia. Dana Gas has apparently sought advice from a law firm that knows nothing, or little, about Shari’a. This is why they have come up with an absurd view as summarized above in the three point. According to the Offer Circular, the redemption price of the sukuk is not fixed, unqualified. Profit payment is not guaranteed as such. In fact, Dana Gas has a right to pay the investors more than a minimum prescribed in accordance with a profit distribution ratio. Similarly, distributions are not based on interest, rather they are benchmarked with LIBOR, which is not the same as the return being interest-based. But apparently, their lawyers have no, or limited, experience of reading Islamic financial transaction documents.

The Dana Gas guys are like a man who slept with a woman for four years apparently after marrying her and left her on the pretext that their nikah was faulty in the first instance any way. This is not for the first time that such a claim has been made by an institution involved in Islamic finance. The Investment Dar (TID) asserted in an English court that its wakala-based arrangement with Blom Development Bank was not Shari’acompliant, and hence it should not be enforced. The English court obviously adjudged the case against TID. It is unfortunate that Dana Gas has preferred its own interest over the global Islamic financial services industry that faces a huge potential reputational risk in the wake of this case. There is nothing wrong to be self-interested, but it leaves many a people lift their eyebrows if it is in the spirit of pursuit of selfinterest with guile. There are numerous examples of what I call as comedy of errors and strategy of jokers. Once I was attending a session on Shari’a-compliant funds at a conference in Kuala Lumpur. Obviously, a guy from an asset management company my then employer was advising on Shari’a matters complained that all the delay in product development and issuance was caused by Shari’a advisors. This sufficed to infuriate me, as I knew that it was their own legal and compliance team and not us, the Shari’a advisors, who delayed the transaction. Of course, I didn’t care much that the guy was my client and that we stood a chance of losing recurring business from them. I just had to speak for the Shari’a advisors.

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BRIEF NOTES

We should expect the same from Dar Al Sharia, the Shari’a advisors on the transaction, to come forward and make an unambiguous statement on the Shari’a compliancy of the transaction. Failing to do so will damage confidence of the investors in Islamic finance in general and sukuk in particular.

pressure. So, it is high time for the government of the UAE to start taking Shari’a matters more seriously. The already approved Higher Shari’a Authority should now be constituted and made more effective for reducing uncertainty on the Shari’a matters related with Islamic banking and finance.

I get mad when I saw someone switching from an Islamic banking career to a job with a conventional bank in a hard core conventional banking role. I know that in some cases it has never been a choice of the individual but rather a compromised option but still it looks obscene to see someone selling pork bellies after spending a couple of years preaching the ill-effects of pork consumption. It is just like seeing someone hitting a person for eating openly during the day in Ramadan, and the next day seeing the same person halfnaked on a beach with a 90% naked women.

Final point. Madness should be dealt with madness. Dana Gas’s announcement is no more than madness. If readers find the arguments presented here as incoherent, incomprehensible and less intelligent, they must know that this is deliberate. The intent here is to intimidate rather than reconcile. It is also to register protest against Dana Gas, which has certainly attempted to hurt the global Islamic capital markets. It has also adversely affected the claim of Dubai to become the global hub for Islamic economy, including Islamic finance.

Sometimes mad people come up with sane views, and in my case it is a norm rather than an exception. After reading the Offer Circular and the accompanying transaction documents, one cannot but accept that the above mentioned three problems with the sukuk are completely baseless. The redemption price of the sukuk is not necessarily pre-fixed. The announcement by Dana Gas of not paying the periodic return from the date of June 13 till the redemption date is technically a default, in which case the redemption price becomes fixed, as per the terms and conditions of the sukuk offering. So, Dana Gas has actually fixed the price now after defaulting. This is my view despite the fact that Dana Gas has received protection from courts in Sharjah, British Virgin Island and England, barring its sukuk holders from taking actions against the company’s securities until Dana Gas receives a clear court judgement declaring its sukuk to be unlawful and unenforceable. Whatever be the quality of Shari’a advice given to Dana Gas, the fact remains that the sukuk issuer appears to have used uncertainty over Shari’a compliance to combat its financial

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ISFIRE NOTE

ISLAMIC FINANCE REVIEW | JUNE 2017

Does Being Altruistic Make An Individual Better Off ? Hylmun Izhar

There is an understanding in economics that individuals are assumed to be rational. Being rational is important in order to achieve efficiency. This principle applies to all individuals, regardless the social status, religion and age. Rationality has always been associated with being self-interested, and self-interest is always thought to have a close relationship with being materialistic. Is it really the case? This is one of the central questions Dr. Hylmun Izhar addresses in this ISFIRE Note.

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ISFIRE NOTE

There is a close association between rationality and selfinterest. Many economists perceive the motives based on something other than self-interest to be peripheral to the main thrust of human endeavour. In his work, Sidgwick (1901, quoted in McPherson and Haussman, 1996) attempts to derive utilitarianism from intuition concerning the nature of rationality. But in the end he concludes that “the method of egoism” – that is, self-interested conduct – is just rational. Similarly, Frank (2000) writes “I will use the terms ‘rational behaviour’ and ‘self-interested behaviour’ to refer to the same thing”. There is, nevertheless, far from universal agreement on what this really means. Two important definitions of rationality are the so-called present aim and self-interest standards (Frank:2000).1 A person is rational under the present aim standard if he is efficient in the pursuit of whatever aims he happens to hold at the moment of action. Under this standard, to assess whether his aims themselves make any sense or not do not really matter. If someone has a preference for selfdestructive behaviour, for example, the only requirement for rationality under the present-aim standard is that he pursues that behaviour in the most efficient available way. Under selfinterest standard, by contrast, it is assumed at the outset that people’s motives are congruent with their material interests. Motives such as altruism, commitment to principle, a desire for justice, and the like are simply not considered under the self-interest standard.

RATIONALITY IN ECONOMIC THEORY Economic theory is based on the fundamental assumption of rationality of economic agents, whether individuals, institutions or business organisations. Advanced microeconomic analyses transit from simple rationality to more complex forms of rationality based on bounded rationality and beyond. Rationality ultimately is exhibited in the choice of actions, and is not just limited to mental deliberations. Choice is rational when it is determined by a rational set of beliefs and preferences, which is defined within utility theory. 1

Furthermore, McPherson and Hausman (2000) point out a mistaken interpretation of the standard theory of rationality as a theory of self-interest. The reason is because according to utility theory, it is rational to choose whatever one prefers. Rational choices are determined by one’s own interests rather than by anyone else’s, and therefore rational choices are self-interested. Stemming from this reason, McPherson and Hausman argue that when it is interpreted as a theory of actual choices, utility theory, on this account, reveals that altruistic and moral behaviour are actually self-interested. In other word, the theory of rationality, as a matter of fact, places no constraints on what a rational individual may prefer, and therefore permits moral preferences and moral choices. To be self-interested is to have preferences directed toward one’s own good, not simply to act on one’s own preferences. What distinguishes people who are self-interested from those who are altruistic is what they prefer, and utility theory says nothing about what the content of rational preferences ought to be. Similarly, accepting utility theory as a correct description of people’s actual choices and preferences leaves open the question of to what extent individuals are self-interested. So it appears that there is no conflict between morality and the standard view of rationality.

For details, also see Derek Parfit, Reasons and Persons, Oxford: Clarendon, 1984.

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ISFIRE NOTE

ALTRUISM IN ECONOMICS Altruistic behaviour is essentially an outcome of values that include voluntary giving, voluntary service, and voluntary organisation as three main pillars of altruistic behaviour (Payton, 1988). In general sense, Miller (1988) states that the altruist (individual with altruistic behaviour) is someone who is affected by the level of welfare enjoyed by others and is moved to act on their behalf. One common characteristics from a range of definitions mentioned above is that altruistic

behaviours encompass all behaviours that benefit another. One formal definition proposed by two psychologists, Macaulay and Berkowitz (1970), is “behaviour carried out to benefit another without anticipation of rewards from external sources”. In order to give an understanding of how an altruistic behaviour can be incorporated into economic model, we present the following case study between Zubayr and Ahmed.

FIGURE 1: The Indifference Map for Zubayr, an Altruistic Person

Zubayr’s Income Increasing Satisfaction

I1

Suppose, for example, the case of Zubayr, who cares not only about his own income level but also about Ahmed’s. Such preferences can be represented in the form of an indifference map defined over their respective income level, and will look something like the one shown in the Figure 1. Note that Zubayr’s indifference curves are negatively sloped, which

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I2

I3

Ahmed’s Income

means that he is willing to tolerate a reduction in his own income in return for a sufficiently large increase in Ahmed’s. Note also that his indifference curves exhibit diminishing MRS, which means that the more income Zubayr has, the more he is willing to give up in order seeing Ahmed has more.


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ISFIRE NOTE

options? He can retain all his income, in which case he stays at A. Or he can give some of it to Ahmed, in which case he will have £1 less than £43,000 for every £1 he gives him. His budget constraint here is thus the locus labelled B in Figure 2, which has a slope -1.

The question that Zubayr confronts is whether he would be better off if he gave some of his income to Ahmed. In order to answer this question, we first need to display the relevant budget constraint confronting Zubayr. Suppose his initial income level is £43,000/yr and that Ahmed’s is £10,000, as denoted by the point labelled A in Figure 2. What are Zubayr’s

FIGURE 2: The Optimal Income Transfer from an Altruistic Person

Zubayr’s Income 43,000

A

C

31,000

D 10,000

27,000

If Zubayr keeps all his income, he ends up on the indifference curve labelled I1 in Figure 2. But because his MRS exceeds the slope of his budget constraint at A, it is clear that he can do better. The fact that MRS>1 at A tells us that he is willing to give up more than a pound of his own income to see Ahmed has an extra pound. But the slope of his budget constraint tells us that it costs him only a dollar to give Ahmed an extra dollar. He is therefore better off if he gives some of his income to Ahmed. The optimal transfer is represented by tangency point labelled C in Figure 2. The best he can do is to give £12,000 of his income to Ahmed.

I1 B

I2

Ahmed’s Income

However, the conclusion would have been different if Zubayr had started not at A but at D in Figure 2. Then his budget constraint would have been only that portion of the locus B that lies below D. Hence, he does not have the option of making negative gifts to Ahmed. And since his MRS at D is less than 1, he will do best to give no money to Ahmed at all. (Such outcome is called corner solutions). How can an altruistic person maximise his utility? This question will be answered in the following model.

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FIGURE 3: A Utility Maximising Altruist

Gamal’s Utility Ug

1500 Ug = Mg(90-MG)

500

50

Mg

80 90

Mh 100

50 Ug = 1500 Ug = 500

50 30

80 90

Mg


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Gamal’s utility function is given by UG=MGMH, where MG is Gamal’s wealth level and MH is Hamid’s. Initially, Gamal has 90 units of wealth and Hamid has 10. If Gamal is a utility maximiser, should he transfer some of his wealth to Hamid, and if so, how much? The following figure depicts Gamal’s initial indifference curve and the indifference curve when each has 50 units of wealth. It also draws Gamal’s budget constraint in the MGMH plane. Suppose, Gamal and Hamid have a total of 100 units of wealth. This means that if Gamal’s wealth is MG, then Hamid’s is 90-MG. Gamal’s utility function may thus be written as UG=MG(90-MH), which is plotted in the top graph of Figure 3. Note that Gamal’s utility attains a maximum of 1500 when MG=50. At the initial allocation of wealth, Gamal’s utility is only 500. So if Gamal is a utility maximizer, he should transfer 40 units of his wealth to Hamid. The blue line in the bottom graph is Gamal’s budget constraint in the MGMH plane. Note that the UG=1500 indifference curve is tangent to this budget constraint when MG=MH=50.

ISFIRE NOTE

the bottom graph is Gamal’s budget constraint in the MGMH plane. Note that the UG=1500 indifference curve is tangent to that budget constraint at MG=50. Being altruistic, as theoretically proven, has been proven to be an instrumental means to enhance an economic agent’s wellbeing. In a microeconomic perspective, it, not only enhances the consumption capacity of individuals, but also their productive capacity. Furthermore, it is found that sharing a certain portion of wealth to other individuals can; in fact, increase the level of utility of individuals. Hence, being altruistic is also rational.

The top graph shows that Gamal’s utility is maximized by keeping only 50 units of wealth for himself. The blue line in

BIBLIOGRAPHY Frank, Robert H. 2000. Microeconomics and Behaviour. McGraw Hill. Macaulay, Jacqueline R., and Leonard Berkowitz. 1970. Altruism and Helping Behavior. New York: Academic Press. McPherson, Michael S and Hausman, Daniel M. 1996. Economic Analysis & Moral Philosophy. Cambridge University Press. Miller, David. 1988. “Altruism and the Welfare State”. In J. Donald Moon (eds.). Responsibility, Rights & Welfare: The Theory of The Welfare State. London: Westview Press. Payton, Robert L. 1988. Philantropy: Voluntary Action for the Public Good. New York: McMillan.

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TECHNICAL PAUSE FOR THOUGHT NOTE

ISLAMIC FINANCE REVIEW | JUNE 2017

DEFINING

AND QUANTIFYING

ISLAMIC ECONOMY

The narrow definition of the Islamic economy would estimate its global size to be US$3 trillion. According to the OIC-level definition, the size of the global Islamic economy is estimated to be between over US$9 trillion (in terms of combined nominal GDP of the OIC countries) to less than US$13 trillion (in terms of the GDP adjusted in terms of the purchasing power parity or PPP). 32

Although the idea of developing a new discipline in the name of Islamic economics was given by some Muslim economists from the Indian sub-continent about 50-70 years, it has been only of late that the need for quantifying Islamic economy has been felt. The organisations like Dubai Islamic Economy Development Centre (DIEDC) have started focusing on Islamic economy as a kind of halal economy that may also include Islamic banking and finance. There are different ways in which an Islamic economy may be defined. A narrow definition would include halal industries (food, pharmaceutical and beauty products), modest fashion market, halal and faith-based tourism, and the Islamic financial services.


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On an individual level, economy of a country with predominantly Muslim population may be deemed as an Islamic economy. Conversely, an Islamic economy may encompass Shari’a compliant production of all permissible (halal) goods and services on a local, national or on a global level. Following the former, the aggregated gross domestic product (GDP) of all the countries comprising the Organisation of Islamic Cooperation (OIC) will represent the global Islamic economy. Following the latter, while only a sub-set of the GDP of the OIC countries will qualify to be included in the Islamic economy, it will also include Shari’a-compliant goods and services produced outside the OIC countries, whether by Muslims or non-Muslims. The narrow definition of the Islamic economy would estimate its global size to be US$3 trillion. According to the OIC-level definition, the size of the global Islamic economy is estimated to be between over US$9 trillion (in terms of combined nominal GDP of the OIC countries) to less than US$13 trillion (in terms of the GDP adjusted in terms of the purchasing power parity or PPP). The global Muslim population is estimated to be 2 billion, which is around 25% of the total world population. The largest Muslim economy in the world happens to be Indonesia (with about US$1 trillion GDP and about 230 Muslims living therein).

PAUSE FOR TECHNICAL NOTE THOUGHT

All the above make up of an interesting story. Islamic economy is almost comparable with the US economy (US$18 trillion GDP in terms of PPP). The comparison is quite intriguing: The USA has 50 states; while the OIC comprises 57 countries (including the likes of Nigeria, Lebanon and Malaysia, which are multiethnic and multi-faith countries). The total population of the OIC countries is 1.6 billion, while the number of people living in the USA is about 322 million. While the US economy is integrated; the Islamic economy is highly decentralised and dispersed. Its real strength is in its demography, which defines its potential. Per capital GDP in the USA is around US$55,850, while the respective average figure for the whole of the OIC block is US$8,125, a difference of US$7, 725. The Islamic economy would have a size of US$90 trillion if the per capita GDP in the Muslim world was as much as in the USA. This makes the Islamic economy very interesting for political consideration, as the OIC economy can aim to become the largest economy in the world. If Muslims put their house in order, they can become the most powerful economic force on the planet. But are they up to it? Given the widening political differences amongst the Arab countries, and in the wake of the recent marginalisation of Qatar in the GCC, this economic potential and the political power emanating from it could be seen no more than a dream.

While the US economy is integrated; the Islamic economy is highly decentralised and dispersed. Its real strength is in its demography, which defines its potential.

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TALKING ISFIRE POINTS NOTE

The Institution of And

HISBA Shari’a Assurance

Regulation

Asif Zaman Islamic Finance, Strategy and International Business Cardiff School of Management Cardiff Metropolitan University (Wales, UK)

Hisba

The financial over-regulation that took place in the aftermath of the 2007-2011 financial crisis is currently regarded as an economic growth barrier, where investors and borrowers are stuck in a deadlock. However, within this over-regulated environment, during the past four years, several well-known financial institutions in the UK have been in somewhat financial mayhem, from rigging the Forex and LIBOR to helping customers avoid tax, not to mention all those failing banks that were bailed out with taxpayers’ money. This leads to the question: is regulation performing its required role and can deregulation, with more emphasis on control of practice, be the solution?

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Shari’a

Answers to these questions can be explored in alternative financial models, such as Islamic Banking and Finance (IBF). Despite the general consensus that IBF is a form of regulation, the fact that it is a market-led phenomenon proves otherwise. Transacting parties can freely enter into Shari’a compliant contracts. Hence, IBF can be considered a form of deregulation. Islamic financial markets have historically been subject to minimum regulation, allowing market players to enter into contracts to maximise their respective interests. In Islamic history, the only key governing body has been the institution of Hisba (the ombudsman’s office). Its role since the 7th century has been to ensure that the business was conducted by Islamic economic principles (Shari’a).


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A Muhtasib (ombudsman) often relied on the Hisba (accountability manuals), a set of pragmatic regulations allowing the Muhtasib to discipline markets in line with specific instructions and guiding principles. The institution of Hisba would ensure smooth functioning of the market, without necessarily intervening to control supply or prices. Its primary function was to provide healthy competition and avoidance of unethical activities and practices. It must be clarified that the role of Muhtasib was general, covering all the trades and crafts. According to Hill (1984), artisans and builders were normally responsible to the Muhtasib for the standards of their work. The Muhtasib also inspected public eating-houses. For example, the Muhtasib had the authority to do on-the-spot checks and order pots and pans to be re-tinned or replaced. This role was similar to what modern times food authorities must do to ensure hygiene. The role of the Muhtasib even extended to check on all doctors, surgeons and apothecaries (Stone, 1977). Further Zerban et al. (2012) note, in the late 10th century the responsibilities of the Muhtasib of Cairo also included the regulation of market scales (weights) and money. These roles can be regarded as similar to the functions of the modern times Office of Fair Trade (OFT) and Financial Ombudsman. The institution of Hisba and certain modern regulatory authorities (e.g., OFT and Financial Ombudsman) share features that primarily aim to uphold fairness in the marketplace rather than one size fits all regulations. Thus, Muhtasib had a supervisory role rather than that of a regulator. There was an assumed lack of connectivity of markets in ancient times; it was natural to have the Muhtasib appointed at local level (i.e., every city had an appointed Muhtasib). This helped prevent contagion impact; for example, malpractices or deviations from standard practices were rectified at local

ISFIRE TALKING NOTE POINTS

level, which prevented one market from transmitting problems to other (neighbouring or distant) markets. In ancient times, the institution of Hisba had a broad scope, encompassing; policing, acting as a magistrate and performance of religious rituals (‘ibadat), which eliminated the need for a separate financial control authority. Given the extensive jurisprudence diversity coming from the different Shari’a boards, as well as cultural and social differences, Islamic Banking and Finance (IBF) requires an external monitoring agency to ensure the financial wellbeing of customers and transacting parties. In this respect, IBF industry takes a more pragmatic and a holistic approach compared to its conventional counterpart. In addition to facing regulations from national regulatory bodies, Islamic financial institutions also voluntarily attempt to consider adopting standards, guiding principles, recommendations, advice and findings of research studies conducted by a number of organisations. In this respect, the roles of the following are acknowledged and valued by the Islamic Banking and Finance industry: Accounting and Autiting Organisation for Islamic Financial Institutions (AAOIFI); Islamic Finance Services Board (IFSB); International Islamic Financial Market (IIFM); Islamic International Rating Agency (IIRA); General Council for Islamic Banks and Financial Institutions (CIBAFI); The International Islamic Liquidity Management (IILM);

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TALKING ISFIRE POINTS NOTE

Islamic Research and Training Institute (IRTI); International Shariah Research Academy for Islamic Finance (ISRA); and Islamic Development Bank (IDB). Out of the above, IIRA can potentially be developed into an internationally accepted supervisory and monitoring body for the institutions that offer Islamic financial products and services. To date, it has provided rating services, focusing primarily on risk identification and reporting. In the past, it attempted to rate the quality of Shari’a assurance but failed because there was no Shari’a regulatory requirement for procuring rating. Given the recent developments where AAOIFI has issued a new standard necessitating external Shari’a audit for Islamic financial institutions, it is perhaps the right time for IIRA to consider re-introduction of Shari’a rating services. Furthermore, there is a need to introduce Shari’a assurance and control as a function in the roles and responsibilities of the financial ombudsmen, in the countries where such institutions already exist. In other countries, where a significant share of the financial market is made up of IBF, a Shari’a Ombudsman must be institutionalised. For example, a Banking Mohtasib1 has existed in Pakistan since 2005. However, there is no reference to Shari’a or Islamic banking separately in operations, processes and procedures as adopted by the Office of Banking Mohtasib. This institution, however, could assume a role of paramount importance for Shari’a assurance and authenticity of Islamic financial products. In the presence of the likes of AAOIFI, IFSB and IIFM, which serve as the standard setting bodies, IIRA must assume the role of a Muhtasib to disseminate information on the quality of Shari’a processes and procedures and the associated risks. An Islamic banking Muhtasib on a national level should be a proactive secretariat that must ensure that Islamic banking and finance is practised in letter and spirit in a given jurisdiction. It must be emphasised that it should not be a regulator rather it should specialise in supervision and monitoring of Shari’a assurance and control functions. Such a body will certainly be better equipped than the regular Banking Supervision Departments within central banks or other banking regulators. In conclusion, the application of Muhtasib through a reputable Islamic finance body such as, Islamic International Rating Agency (IIRA) will help in managing Islamic finance, not through regulation but a monitor of practice.

1

36

In Pakistan, the term is spelled as Mohtasib rather than Muhtasib.

ISLAMIC FINANCE REVIEW | JUNE 2017

IIRA’s understanding of the IBF procedures, challenges and customer needs, will provide customer service quality and assurance, outperforming conventional banks based at an institutional level. This would also help to remove the current negative views associated with Islamic jurisprudence enforcement (Hisba) that have been seen in some places in the UK (Sharia zone ghettos) that is seen as a form of antisocial behaviour within a non-Muslim jurisdiction which is not representative of the inherent inclusive nature of the religion of Islam and contributes alienation and stereotyping of anything associated with Islam and more importantly with the IBF industry. Finally, I hope this article will promote research and debate in the Islamic banking and governance domain, contributing to the importance in the development of the institution of Hisba (accountability). Effectively, this will promote trust, awareness and confidence in the Islamic banking and finance (IBF) industry, offering better opportunity cost and safe guards for the consumers as a viable alternative to the conventional banking and financial system.


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ISFIRE NOTE

3rd ISLAMIC RETAIL BANKING AWARDS IRBA aims to recognise and celebrate outstanding achievements and contributions of individuals and institutions within Islamic retail banking and ďŹ nance industry, globally and locally. Awards are selected from the nominations across the industry in more than 35 categories. The previous Islamic Retail Banking Awards were held in the vibrant and cosmopolitan city of Dubai, attended by industry leaders from over 20 countries worldwide. This prestigious award programme honors individuals and institutions who have demonstrated great commitment and made signiďŹ cant contribution to the development, growth and success of Islamic retail banking.

NOMINATIONS FOR THE 2017 AWARDS WILL

OPEN IN JULY

For further information, please email

irba@cambridge-ifa.net 37


ISFIRE PERSONALITY REPORT

ISLAMIC ISLAMIC FINANCE FINANCE REVIEW REVIEW || JUNE JUNE 2017 2017

AMER BUKVIC CEO of Bosna Bank International (BBI)

Amer Bukvic, CEO of Bosna Bank International (BBI) received his bachelor’s degree from the International Islamic University in Kuala Lumpur (1996) and his Master’s degree from the International University of Japan (1998). He completed postgraduate executive education with London Business School (2004) and Said Business School at the University of Oxford (2014). During the initial stages of his career he worked as a research coordinator for the Overseas Strategic Consulting – USAID Project in Bosnia and Herzegovina (B&H). He later joined IDB Group as a Young Professional before taking on the role of Deputy CEO of BBI in 2004 and position of CEO in 2006. During his tenure as CEO BBI has become the fastest growing bank in B&H, positioning itself among the top ten performing banks in the Federation of B&H. Under his management BBI assets increased fivefold. Mr. Bukvic co-founded the Sarajevo Business Forum (SBF), the largest International investment conference. He is the vice-chairman of an Islamic Bank in Albania, vice-chairman of BBI Real Estate Company B&H, as well as board member of International University of Sarajevo and Mediterranean University, Montenegro, he also sits on advisory board of Bled School of Business, Slovenia and Center for Islamic Finance at the University of Bolton, UK. Mr. Bukvic participated as a keynote speaker at some of the most prestigious international conferences on banking, finance and international business. As an invited speaker he delivered presentations at the Crans Montana Forum, US Balkans Business Summit, Sarajevo Business Forum, Istanbul Finance Summit, Islamic Finance Conference organized by European Financial Management and Marketing Association, and many others.

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ISFIRE REPORT PERSONALITY

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ISFIRE PERSONALITY REPORT

ISLAMIC FINANCE REVIEW | JUNE 2017

He received numerous prestigious international awards including: “Jewels of Muslim World Award 2015” – presented by OIC TODAY Magazine Malaysia, „Best Banking CEO B&H 2014” - Global Banking & Finance Review United Kingdom, “The Best Entrepreneur and Leader in 2014” - Prince Abdulaziz bin Abdullah International Prize for Entrepreneurs Kingdom of Saudi Arabia, and “Best manager in Banking sector of B&H 2013” – Perdana Leadership Foundation Malaysia, and Charter of International League of Humanists “Aurelio Peccei”. In the latest ISLAMICA 500 publication Mr. Bukvic was listed among 500 of the world’s most prominent and influential personalities in the Islamic world and economy. He continues to actively pursue excellence in Islamic banking and finance, with the intent of contributing to Bosnia’s and the SEE region’s economic development with new, innovative strategies.

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What was your earliest ambition? From an early age, I have seen myself in many different roles— from engineer to diplomat. During my entire childhood I lived in an international environment and expatriate community, so my strongest ambition was to be international expat. That also led to a passion for discovering new things. That is how I would describe my earliest ambition with the utmost clarity.

What do you enjoy the most? I most enjoy discovering new countries and cultures. What is typical for me is that I always do the opposite of what the majority around me chooses to do. When I was young, my friends dreamed about going to the West, but my dream was to the East. When I finished my studies in Japan, my friends from university aspired to join large international corporations, but I went back to Bosnia. However, doing a PhD in China was my unfulfilled dream.

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Which movie is your all time favourite? [if you watch movies] When I find time, I like to watch historical documentaries about ancient societies and civilizations. I think we can learn a lot from the development and downfall of old empires and people who lived before us. History is indeed the teacher of life.

Who has been your greatest mentor? I was privileged to have both my father and grandfather to be very charismatic people that have mentored many, including myself. Also, during my university studies, I had a great mentor who later happened to become famous statesman. His name is Dr Ahmet Davutoğlu, former Prime Minister of Turkey. He had big influence on me.

Where are you the happiest? You are a very unconventional type of a CEO, running an Islamic bank and founding and organizing an international event like Sarajevo Business Forum. Do you really enjoy this type of work or is it something that came you way and you have no option but to do it? Sarajevo Business Forum was largely designed by me, but of course I took valuable advice from many people wiser than me. It is my desire to contribute to the place that I call my home, and I am proud to be a founder of such a unique event that connects investors, businesses and governments from all over of the world. Did I have a choice? Of course I did, but today I am immensely happy to see that Sarajevo Business Forum is the passion of the whole BBI community that seeks to contribute to the organization of investment conference of enormous significance to the development of the region. South-East Europe has a lot to offer, and Sarajevo Business Forum is a platform that led to many successful investments in the region.

If you have luxury of spare time, what do you do to enjoy life outside work? I travel with my family. Every single moment we have, we explore the world. I have visited more than 60 countries in last 10 years. When we are at home, I enjoy spending time with my family. Since all members of my family are very active, we are constantly on the move.

I’m happiest in the Far East. The spirituality and culture that has been cultivated in this area is fascinating. I lived and studied in Malaysia and Japan for a significant part of my youth. These cultures, with their traditional values and respect that is developed towards every human being, left a strong impression on my personality.

If your 15 years old sees you today what would he say? You have changed.

In a few sentences describe your 65 years old. That would be rather difficult, bearing in mind my unpredictable nature. In accordance with my best abilities, I also hope that at 65 I will be of help to other people.

Any disappointment in life? There could be many if life and human nature are misunderstood.

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ISFIRE INSIGHT

ISLAMIC FINANCE REVIEW | JUNE 2017

CORPORATE

GOVERNANCE AND ISLAMIC FINANCE

Corporate governance (CG) is a topic which may not necessarily make headlines. It is not terribly jazzy either, like sukuk for example, but it probably is the most important subject in the modern corporate business context. One must be curious as to who controls the resources of a company. A lot has been under discussions about what a company may do, what its performance is like, what are its prospects, returns, credit rating and so on, but the topic of CG is likely to affect the reader more than anything else. The content of this article assumes a basic knowledge of concepts of corporate governance. It does not cover the basic tenets, corporate structures or models of corporate governance. For that, we recommend the reader take the trouble to read a lot of material that is amply available online. Some of the aspects of CG has previously been covered in the past issues of ISFIRE. The author – Hussain Kureshi, co-author of Contracts and Deals in Islamic Finance – is blunt and straight forward. As an original thinker he is not in the habit of rehashing old ideas, and flooding his articles with references. He reflects on concepts given what is happening today in the world of companies.

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HUSSAIN

KURESHI WHERE DO WE DRAW THE LINE OF ACCOUNTABILITY? Modern corporations are complex beasts. They are owned by one or several entities and managed by others. From the perspective of a simple-minded Muslim, any legal corporate or governance structure that separates an owner of a company from the legal responsibility of the company’s actions may very well be unlawful. Conforming to this viewpoint, one may wonder if the traditional “shirka” was a legal entity in its own right. Nevertheless, in the modern world a private limited firm, a public unlisted firm and a pubic listed firm all are legal entities in themselves capable of employing resources, transacting and above all breaking laws and influencing the process of law-making.


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ISFIRE INSIGHT

Such firms are not “run” by their “owners” but by managers who have a “fiduciary duty” to their “owners” to act in the interests of the “owners”. So when something goes wrong, it is hard to blame anyone, employees or owners. Now coming to the question of owners, a private limited firm has a handful of “owners”, people who contribute capital to start a company. A public unlisted firm has many more owners; other companies are so big, with so many shareholders that it is hard to identify any one single owner. Perhaps the most amazing example is that of Apple, which has recently recorded the largest market capitalization of any firm in modern history – US$700 billion. One of its largest shareholders, Berkshire Hathaway owns US$7.7 billion worth of stocks. Let us say if tomorrow Apple cheats on its battery safety tests and the phone explodes in a flight, who is to blame: Employees at Apple, the CEO of Apple, shareholders of Apple, and if the shareholders are to blame, which shareholder?

In reality accountability is compromised depending on the severity of the actions involved, the severity of the damages incurred, and the influence of the principal parties involved. Has any bank CEO been arrested for the absolute fraud conducted in the mis-packaging of Mortgage Backed Securities? Was the CEO of Moody’s arrested for not looking closely at the quality of mortgages that were being packaged into various bonds? So the fundamental question remains unanswered. Where do we draw the line of accountability?

Has any bank CEO been arrested for the absolute fraud conducted in the mis-packaging of Mortgage Backed Securities? Was the CEO of Moody’s arrested for not looking closely at the quality of mortgages that were being packaged into various bonds?

Is a rabb al-maal accountable for the actions of a mudarib? In contracts of agency, is a principal completely absolved from the actions of an agent? If a teacher at a school slaps a student, is the teacher taken to court or the school also involved?

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ISFIRE INSIGHT

ISLAMIC FINANCE REVIEW | JUNE 2017

WHO ARE THE STAKEHOLDERS? AN EMPLOYEE’S PERSPECTIVE There is a lot of material out there that gives information on share prices and various indicators of company performance. This is of value to owners of a company, i.e., shareholders. But how much information is available? How many media channels focus on the interests of employees? For instance, a company may be showing record earnings, but may also be laying off workers in one country and relocating jobs to destinations with cheap labour. Companies may announce a large bonus pool, but fail to announce that 70% of the bonuses were handed out to 5% of the employees, creating gross imbalances in the distribution of bonuses. It is also interesting to question some of the well-established practices, procedures and principles. For example, in the traditional cost-benefit analysis, labour is seen as a cost in the production process. Can this view be challenged? The following example may explain how tradition may be questioned. Let us assume that a company makes a profit of US$100 BEFORE WAGES AND SALARIES. How is this profit going to be shared by the HUMAN COMPONENT of the company, i.e., the employees that have all played a role in generating the profit, the managers, the directors and the shareholders. If wages of low skilled employees, salaries of clerks, supervisors, and managers are aggregated to US$20, then in a sense 20% of profits are being shared with the lower management and other employees. If another US$30 is shared between senior managers, the smart suits who make the decisions, and the directors of the company, then their share is 30% of the profit of the company. The remainder US$50 is awarded as dividends to shareholders. It is worth asking the question if this a “fair distribution” of rewards. Who will determine what is fair? There may not be any answers to these questions but it is certainly worth asking.

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ISFIRE INSIGHT

How should a company value the contribution of a truck driver over a computer programmer? If one listens to Nassim Taleb, one should not only reward a truck driver for driving a truck well, but also reward him, in part or full, for preventing the company from losses for doing a job well, by not banging the truck into a wall. According to Taleb, a bank teller should also be rewarded in part for not being a thief as he or she is handling a very sensitive task for the bank. The question is who represents the interests of the employees at the lower end of the corporate ladder in the board room. Senior executives have enough opportunities to brown nose directors to convince them that it is because of their unique decision making abilities that led to company profits. However, this may not always be the case, as they may simply have been at the right time at the right place. The author once worked for a global bank based out of the UK. It had divisions like Investment Banking, Corporate UK, Corporate Europe, Corporate Global, Global Credit Card, Retail UK, Retail Global, Emerging Markets, etc. A single transaction in Corporate UK, such as a loan to Vodafone, was larger than the entire Emerging Markets Business. He recalls sitting in conference calls where each Unit Head (UH) was tooting the achievements of their departments, whereas in reality many of the corporate or even country relationships had been in place prior to the joining of the current UH. It was simply a matter of luck and being able to take credit for other people’s work, a trade mark of modern corporate life it seems. In any regards, when profits were distributed, they were unevenly shared between senior managers and the lower staff. But when massive losses were accrued by bad decisions made by the UH, lays offs were prominent amongst the lower staff, and jobs were retained by senior employees. Is this a CG issue? It most definitely is and it remains TO DATE unaddressed by modern corporate governance structures except in Germany, where a complete board, (not merely one independent director) is made up of representatives appointed by the employees of the company. This also may be one reason why German companies are the last to outsource manufacturing jobs to cheap labour destinations in India and the Far East, unlike their American counterparts.

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ISFIRE INSIGHT

Sadly the importance given to the interests of employees in the Muslim world leaves much to be desired and there is a fine line between employment and exploitation.

Rights of employees are further compromised in situations where an employee may not be a citizen of the country in which he or she is working. A Polish employee working for a British bank in London may have little or no say in the decision making within the company. (However, a Polish shareholder has all the rights, ownership is beyond citizenship, employment is not). A Pakistani employee in a bank in Dubai has no representation on the board of the bank or company he or she is working for.

up the capital for its running. Thus, the government is the initial primary shareholder. Over the years such a government owns the company, and may sell off some or all of its shares to private investors in a process called privatization. In such companies, governments typically retain a certain percentage of shareholding to retain control as the company may be strategically important to sovereign interests. Thus, representatives of the government, typically bureaucrats, can be directors on a board.

Sadly the importance given to the interests of employees in the Muslim world leaves much to be desired and there is a fine line between employment and exploitation.

In other instances, a company may have a founding father (or mother), or family, like Steve Jobs was for Apple or the Fiat family was for the Fiat Company. When these companies went public, these individuals received large percentages of stockholding, which gave them sufficient control to run the company.

CG AND SHAREHOLDERS’ INTERESTS In the context of large companies, which are managed by a Board of Directors, the choice of directors plays an important role in determining the future of the company. Companies evolve through various processes. Some companies come into existence through legislation with the government putting

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In other instances, money managers, hedge funds, pension funds and other such entities accumulate large shareholdings in a company. Employees may hold a large percentage by owning stock through an employee pension fund. Other companies may own large chunks of shares in the company.


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Any company with as much as 5% of total outstanding shares can influence decision making within the company by placing directors on the board. These directors have by definition a fiduciary duty to protect the interests of all the shareholders of the company and not just those shareholders that nominated them in the first place. So the government bureaucrats may act in the interest of the government and not the company. For instance, in the case of a semi-government owned airline, shareholders may be more interested in taking the company public and listing its shares on international exchanges, and hiring professional management to improve revenues. The government bureaucrats, however, may resist the notion not in the interests of the company but in keeping with the interests of their employer, the government, which may view the airline as a strategic asset. Similarly, other directors may influence decisions of the company to benefit those shareholders that nominated them. For instance, an insurance company as a shareholder in a bank places a director on its board. The bank launches various products like car loans, home loans, marine loans, trade finance, etc., all of which require some form of insurance coverage. The concerned director nominates his (or her) company to be the panel insurance company for all loan related products. However, other insurance companies may have offered better premiums in the interest of the company’s customers. Here a situation of conflict of interest lies between the bank, the concerned director and the insurance company. The director can act in the interests of the insurance company that nominated him and hence compromise the interest of the bank or vice versa. We leave it to the reader to read between the lines. No structure of checks and balances can completely encounter the conflict of interest, as one can simply incentivize a regulator to see things their way. It is a matter of human integrity. If a tyre manufacturing company is a shareholder in Mercedes, can they not influence the decisions made on the board on picking a vendor? It would be childish to assume that these positions are not taken advantage of. Even competitors own shares in one another’s companies. After all, customers keep on switching between competitors. So if one does not make money in the shape of profits from one’s own operations, they can receive dividends by holding shares in their competitors’ businesses. If iPhone loses steam, Apple can simply buy shares in Samsung to make money off their sales. Either way Apple makes money. Modern corporate governance structures have created an economic environment where 1% of the worlds wealthiest companies and individuals control 90% of the world’s wealth. So what’s so Islamic about that?

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ISLAMIC FINANCE REVIEW | JUNE 2017

ISFIRE INSIGHT

FIGURE 1 Corporate Governance illustrated

ENTITY 1 5% shareholding

ENTITY 2 5 % s h a r e h o l d i n g

5 %

5 %

5 %

5 %

s h a r e h o l d i n g

s h a r e h o l d i n g

s h a r e h o l d i n g

s h a r e h o l d i n g

C O M P A N Y

C O M P A N Y

C O M P A N Y

C O M P A N Y

C O M P A N Y

A

B

C

D

E

The above Figure illustrates how Entity 1, which could be an individual with resources or a company (a collection of individuals with resources) can purchase 5% shares in Entity 2, a large company. Then Entity 2, buys 5% shares in Companies A,B,C,D and E respectively. In this manner, Entity 1 also owns (albeit a diluted percentage) shares in Companies A, B, C, D and E. This structure may be good for Entity 1, and good for shareholders of Entity 2 but it allows vast financial resources to be controlled by a handful of economic entities (be they individuals or companies) and also allows these handful of companies to coordinate efforts and control natural resources, human resources and vast reserves of financial resources.

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After all, when one owns 5% shares in another company, they ultimately own 5% of that companies assets, which include amongst other things their stock of financial reserves. Entity 1 with limited capital (the initial 5% holding of Entity 2) can control, influence, coordinate the economic efforts and resources of Entity 2, and Companies A, B, C, D and E in such a manner as to benefit from all their activities combined. The least of all Entity 1 can make all these companies buy shares in, or do business with, another company in which A is a primary shareholder. World domination is no longer the dream of Peewee and the Brain!


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LENDERS BECOME DIRECTORS Let us not forget that in certain countries, lenders that have large exposure to a particular company can also demand a seat on the board, as they must have interests in the company’s performance. Lenders need to get their money back. Everyone’s interests are secured except for those who work for the company. Shareholders have their interests secured, creditors have their interests secured and in fact get paid before equity holders in any case. Senior Management (the ones who are hybrids, earn a salary but also get stock options as part of their compensation packages are part employee and part owners) have their interests protected as well.

CONCLUDING REMARKS The Global Financial Crisis exposed how vulnerable we are to functioning of the financial system, and how influenced we are by the behaviour of large companies. CG provides us insight into how these companies are actually managed, how should they be managed and how powerful they actually are. One can reply that governments of well developed countries play an important role. When RBS was accumulating billions of dollars in toxic assets, the regulatory body at the time had one individual in charge of supervising the activities of one of (at the time) largest banks in Europe. If one reads Michael Lewis’s Liar’s Poker: Rising Through the Wreckage on Wall Street, The Big Short: Inside the Doomsday Machine, and Flash Boys, the corruption of the financial system becomes exposed in user friendly terms. If one thinks that American workers (probably the most empowered workers in the world) have any control over their fate, then they must read books like Exporting America or Offshoring of American Jobs and then think about their own future. The two-tier board structure which is the backbone of German companies is hardly popular in the US and is reducing popularity in Europe. Even France, which is “known to be a country where the government is afraid of its people,” is allowing its companies to opt for unitary boards. This means weaker representation for employees. Given that corporations now have more wealth than the GDP of many countries, and control more resources than households, CG structures are as important as issues of democracy, dictatorship and monarchy. It is not only an economic concern but a political one. If the

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reader wants to see further evidence of CG failures, they must look at wage stagnation levels in the US and in Europe for much of the past 15 to 20 years. After all, why would a shareholder readily encourage their nominee director to vote for higher wages? Modern CG structures allow a company or an individual to control resources way beyond the individuals’ capacity to own. This is a powerful tool which like all other tools can be used for good or bad. Petronas is the backbone of the Malaysian economy. With intelligent investments it can help insure that other companies in Malaysia are run efficiently and effectively, by becoming a shareholder of important companies. Alternatively, it can simply force a large bank to keep underwriting its bonds no matter how poorly the company is managed. However, the Muslim world, which has yet to fully embrace the corporate culture and institutions of the OECD world, needs to be wary of the risks and the challenges that come with adopting Western economic mores. Sadly, there is no positive track record to offer as a benchmark. In certain countries, a monarch owns not only the resources of the country but also all the locally owned companies that operate in his domain. A CG nightmare. Countries like Pakistan, where some of the largest companies are state owned going through a process of highly opaque privatization offers no relief. Therein they have what is known as a “saith” culture, where one billionaire owns the entire company, either directly or indirectly through “proxy” shareholders who may be no other than domestic servants. This, too, is a CG nightmare. Finally, employee representation on the board can also be enhanced by customer representation, especially in the area of financial services where companies actually do business not so much with their own money but primarily with the money of others. Has anyone heard of a customer representative board member in a bank, insurance company, asset management company, whether it is Islamic or not? New mudaraba fund rules require the placement of an independent director in Malaysian Islamic banks to oversee the management of the mudaraba fund. But then Islamic banks have been migrating funds from mudaraba fund accounts to commodity murabaha fixed deposit accounts, which makes this ruling a mere exercise in futility.

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ISFIRE MEMOIRS

ISLAMIC FINANCE REVIEW | JUNE 2017

ST. BARBAROSSA’S

MEMOIRS 50


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Experiencing the membership of a Shari’a board of a financial institution is nerve-wrecking at least for the first time. It eases out with the passage of time though. Furthermore, it is not an easy task to serve secretary of the Shari’a board in the presence of the heavyweights like Dr. Hussein Hamid Hassan, Dr. Abdul Sattar Abu Ghuddah, Dr. Mohamed Elgari, Dr. Ali Alquradaghi, and Dr. Daud Bakar. With the passage of time, you become just a little bit familiar with the proceedings, and perhaps become a bit more certain to the reactions of your fellow Shari’a scholars to new products and ideas. You also start enjoying the lighter side of the scholars’ personalities. Here are some of the examples of the light moments of Shari’a scholars. Sheikh Ali Mohyuddin Alquradaghi normally attempts to fast on Mondays and Thursdays throughout the year. I am not sure whether it was a Monday or Thursday when we held a Shari’a board meeting at Doha, in I believe in 2006. Before lunch, Sheikh Alquaradaghi told us that he would have something to do at his department at the University of Qatar, and that he would re-join us after lunch. Someone told me that Sheikh was fasting and this was why he presented an excuse to go away during the lunch. We wanted him to lunch with us though (despite his fasting), so we requested Sheikh Hussain to ask Sheikh Alquradaghi to do so. “Ali, you must eat with your guests today and delay your engagement at the University, “ said Sheikh Hussein. “Jazak Allah ya Sheikh,” smiled Sheikh Alquradaghi agreeing to have lunch with us. It is interesting to refer to the flexibility Islam provides to its followers in matters related with non-compulsory rituals (‘ibadaat). Anyone fasting voluntarily outside Ramadan is allowed to eat if insisted by a friend or compelled by circumstances without getting penalised or getting less reward. “Jazak Allah ya Sheikh” by Sheikh Alquradaghi was enjoyed by everyone. I also observed that Sheikh Alquradaghi would not miss any opportunity to offer general advice (naseeha) to the HNWIs and UHNWIs. Once we were invited by Bakar Bin Ladin

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to spend an almost whole day with him in Riyadh. Sheikh Alquradaghi continued to offer him naseeha in his own gentle and subtle way. I could see how quickly Bakar Bin Ladin became a fan of Sheikh Alquradaghi. Sheikh Alquradaghi would always say that these rich people could benefit Islamic finance significantly if they decided to do their businesses in compliance with Shari’a. I would agree! The trip to Riyadh on invitation of Bakar Bin Laden was interesting on many counts. He was supposed to host us in Jeddah but had to change the plan, owing to hospitalisation of King Fahad in Riyadh. We were therefore requested if we could visit Bakar Bin Ladin in Riyadh. We were transported in a private jet from Jeddah to Riyadh. After spending the whole day with him, he offered to drop us in his private jet. Sheikh Hussain was bound to fly to Dubai, Sheikh Abdul Sattar to Bahrain, Sheikh Alquradaghi was going back to Doha. As I was flying back to London and my flights were already booked, I left other scholars behind, who must have enjoyed a “shared taxi type” flight to multiple distinctions. Another best memory of mine is having dinner with Tun Mahathir Mohamad and his wife, along with late Moin Qureshi (who also served briefly as a caretaker prime minister of Pakistan). It was a private dinner organised by Rayo Withanage, my chairman at the BMB Group, in a villa at Ritz Carlton Bahrain. After the dinner while we sat in a relaxed mood, Moin Qureshi asked Tun Mahathir how the latter tackled the political threat by the Islamists in Malaysia. I remembered Tun replied without a delay of a second, “We just decided to become a bit more religious.” This is a powerful message that must be taken seriously by the governments and political bodies in the Muslim world. In order to increase their political appeal amongst masses, governments and political bodies must use Islamic banking and finance as a strategic marketing tool. Showing commitment to Islam in a modern way, which Islamic banking is all about, must help politically.

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TECHNICAL NOTE

ISLAMIC FINANCE REVIEW | JUNE 2017

STANDARDISATION OF NOTATION IN

ISLAMIC ECONOMICS, BANKING AND FINANCE

In the August 2016 issue of ISFIRE, we starter with a one-pager to introduce standardisation of natation in Islamic economics, bnking and finance (IEBF). We issued Note 1 on murabaha in August 2016 (“ISFIRE Note 1 on Murabaha”), followed by Note 2 on salam (“ISFIRE Note 2 on Salam”) in October 2016, Note 3 on mudaraba (“ISFIRE Note 3 on Mudaraba”) in December 2016, and Note 4 on Ijara (“ISFIRE Note 4 on Ijara”) in February 2017. In this issue we are reproducing the previous 4 notes along with our Note 5 on musharaka (“ISFIRE Note 5 on Musharaka”). We believe that standardisation of notation will help develop consistent pedagogical tools to be used for education and training in IEBF. We aim to hold a special workshop on Standardisation of Notation in IEBF in 2018 to finalise all these standards and more in a more formal way. In this respect a Board on Standardisation of Notation in Islamic Economics, Banking and Finance is under formation. The interested individuals are invited to submit their expressions of interests to Professor Humayon Dar by emailing on hdar@isfire.net.

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TECHNICAL NOTE

Note 1: Murabaha

Note 2: Salam

1. (A.X.B; PMUR, ∏MUR, T) represents a classical murabaha arrangement between A (seller) and B (buyer) to buy/ sell a commodity X for the murabaha price PMUR and murabaha profit of ∏MUR for T as the date of payment of price.

1. (A.X.B; PSAL|T0 , T) represents a classical salam contract between A (seller) and B (buyer) to buy/sell a commodity X for the salam price PSAL|T0 to be paid upfront by B at time T0, allowing the seller to deliver the commodity during time period T or on a specific date at the end of T.

2. (A.X[1].B; PMUR, ∏MUR, T) represents a commodity murabaha arrangement between A (financier) and B (financee) arranged by a single commodity broker 1; whereby PMUR is the murabaha price, ∏MUR is the murabaha profit, and T is the duration of the financing period (in years, months, or days, etc.).

2. ([A.X.B; PSAL1|T0], [B.X.C; PSAL2|T1], T) represents a salamparallel-salam arrangement, involving three independent parties, A, B and C, whereby A sells a commodity X to B for a salam price, PSAL1|To, paid by B upfront at T0, to receive the delivery during time period T or on a specific date at the end of T. The salam-parallel-salam arrangement also involves B selling the commodity X to another independent party C that pays salam price, PSAL2|T1, to B at the time of entering into the salam contract, i.e., at T1 T0 ≠ T1, to deliver the commodity X during time period T or on a specific date at the end of T.

3. (A.X[1.2]X.B; PMUR, ∏MUR, T) represents a commodity murabaha with two commodity brokers, 1 and 2. 4. (A.X[1].B; PMUR, ∏MUR, T, D(.), R(.)) represents a commodity murabaha arrangement between A (financier) and B (financee) arranged by a single commodity broker 1; whereby PMUR is the murabaha price, ∏MUR is the murabaha profit, and T is the duration of the financing period (in years, months, or days, etc.); D(.) and R(.) represent default and rebate clauses, respectively, such that:

Default Penalty = a X i; and

Rebate amount = b X j

whereby X i = amount outstanding at the time of default; X j = amount outstanding at the time of early settlement date; and 0 ≤ a ≤ 1 and 0 ≤ b ≤ 1.

5. (A.X[1].B; PMUR, ∏MUR, PMUR IK, T / N, PEX) represents a commodity murabaha based Islamic mezzanine financing arrangement between A (financier) and B (financee) arranged by a single commodity broker 1; whereby PMUR is the murabaha price, ∏MUR is the murabaha profit, PMUR IK is the payment in kind (one-off balloon payment at the end of the financing period) and T is the duration of the financing period (in years, months, or days, etc.); N is the number of shares that B promises to sell to A in the event of default for an agreed price PEX .

3. (A.X.B.X.C; PSAL1|Ti , PSAL2|Tj , T) represents a threepartite salam-parallel-salam contract, whereby A sells a commodity X to B for a salam price, PSAL1|Ti , paid by B upfront at Ti , and B sells on the commodity X to C for a salam price, PSAL2|Tj , whether Ti = Tj or Ti ≠ Tj; the deliveries take place during time period T or on a specific date at the end of T. This is a null and void contract that does not fulfil the requirement of independence of the two salam transactions.

Note 3: Mudaraba 1. (A.K.B; ∏, ; -∏, 1; T) is a simple mudaraba contract between a Party A (capital provider) and a Party B (the managing party) in such a way that A receives percentage of the profit, ∏, if any. K is the capital contribution (money) by A; while T is the mudaraba time period. In case of loss, i.e., -∏, A shall have to bear it with = 1. 2. (A.K.B; ∏0 , ; ∏1, 0; -∏, 1; T) is a mudaraba contract that stipulates that the capital providing party (Party A) will

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ISLAMIC FINANCE REVIEW | JUNE 2017

TECHNICAL NOTE

receive percentage of the profit if the realised profit is up to a threshold level of profit, ∏0; any profit over and above this threshold, i.e., ∏1, will be retained by the managing party, i.e., the share of A will be zero (0). However, in case of loss, -∏, A shall have to bear it with = 1. 3. If a mudaraba contract is notated with (A.K.B; , T), it shall always be deemed as a short version of (A.K.B; ∏, ; -∏, 1; T).

4. If an ijara contracts is notated with (A, X, B; R, T), it shall be deemed as an ijara that requires a lump-sum amount of rental either at the start of the lease period or at the end of it. 5. An ijara contract notated with (A, X, B; R0, T) shall imply that the rental amount is required to be paid in lumpsum at the start of the lease period; and an ijara contract notated with (A, X, B; Rt, T) shall imply that the rental amount is required to be paid in lump-sum at a specific time in future, which may include the end of the lease period.

Note 4: Ijara 1. (A, X, B; R = r1+r2+…+r t, T) represents a simple ijara contract between A (lessor) who leases an asset X to another person B (lessee) for a total rental value of R to be paid in instalments of r1, r2, …, r t, for a period of T. 2. (A, X, B; R = r1+r2+…+r t, T; P1, P2) represents an ijara wa iqtina’ contract between A (lessor) who leases an asset X to B (lessee) for a total rental value of R to be paid in instalments of r1, r2, …, r t, for a period of T; with an understanding that B will have to buy the asset for a price, P1, should it happens to default on rental payment during the term of the lease, and if that (event of default) does not occur B will buy the asset X at the end of the lease period for a price, P2. 3. (A, Y, B; R = r1+r2+…+r t, T) represents an ijara mausufa fidzimma contract between A (lessor) who leases an asset Y (which has yet to come into existence) for a total rental value of R to be paid in instalments of r1, r2, …, r t, for a period of T (which may coincide with the time that Y must take to come into existence).

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Note 5: Musharaka 1. (A.K A .KB.B, ∏, ; -∏, bi; T) is a musharaka contract between a Party A and a Party B whereby both parties contribute capital, K A and KB, respectively, to a venture, in such a way that A receives percentage of the profit, ∏, if any, and B therefore receives (1- ) percentage of the profit, ∏. In case of loss, i.e., -∏, both parties shall bear loss in accordance with bi, whereby i = A or B; bA = K A /K and bB = KB/K, and K = K A + KB. T is the time period for musharaka; and and b may differ. 2. (A.K A .KB.B, ∏, bi; T) is a simple musharaka contract between a Party A and a Party B whereby both parties contribute capital, K A and KB, respectively, to a venture, in such a way that A receives bA percentage of the profit, ∏, whether positive or negative, and B receives bB percentage of the profit. In other words, b = . 3. If a musharaka contract is notated with (A.K A .KB.B; , b; T), it shall always be deemed as a short version of (A.K A . KB.B, ∏, ; -∏, bi; T).


ISFIRE REVIEW

ISLAMIC FINANCE REVIEW | JUNE 2017

BOOK REVIEWS We have three books to review in this issue of ISFIRE. Incidentally, two of the books are concerned with Dubai. The first book – Reflections on Happiness & Positivity – is written by one of the main architects of the success story of Dubai, namely Sheikh Mohammed Bin Rashid Al Maktoum, Ruler of Dubai. The second book is also about Dubai, albeit indirectly. Written by Dr. Mohd Daud Bakar, Emirates Airline Sukuk, attempts to compare one of the most successful airlines in the world with the rising phenomenon of Islamic finance. The third book is an academic one. Understanding Islamic Financial Services: Theory and Practice, by Karim Ullah and Wafi Al-Karaghouli, focuses on the “service” aspect of Islamic banking and finance.

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ISFIRE REVIEW

REFLECTIONS ON

HAPPINESS AND POSITIVITY -By Sheikh Mohammed Bin Rashid Al Maktoum

Published by:

Explorer Publishing & Distribution, on behalf of the Executive Office of Sheikh Mohammed Bin Rashid Al Maktoum

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his book is a must read for those interested in understanding the role a dynamic leader can play in uplifting an organisation or a country. Sheikh Mohammed Bin Rashid Al Maktoum (“Sheikh Mohammed” afterwards) - May he be blessed with long and healthy life - is a visionary leader who followed on the footsteps of his father, Sheikh Rashid Bin Saeed Al Maktoum - may his soul rest in peace - to build one of the most talked- about cities in the world, i.e., Dubai. Sheikh Mohammed’s earlier book, My Vision, spells out main points of his world-view. Dubai, as a city state, and the UAE, as a federation, provide an excellent example of an economic development model. Dubai, in particular, has emerged as a success story that many other countries in the region and beyond will like to emulate. Sheikh Mohammed asserts that this success is not a fluke but, on the contrary, has emanated from the vision of his father, Sheikh Rashid who was a co-founder of the UAE under leadership of the late Sheikh Zayed Bin Sultan Al Nahyan (may his soul rest in eternal peace). The success of Dubai continues to owe to the detailed strategy and religious implementation of it by different stakeholders who have managed to move forward despite some adverse circumstances. The UAE is the first country in the world, which has appointed a full-time Minister of State for Happiness, Tolerance andy the Future, taking a view that maximising happiness must be a policy objective, along with economic growth and development. With the help of the increased computational power the IT revolution has made possible, quantification of happiness and its measuring on a frequent basis (e.g., annual). The publications like the World Happiness Report should be taken more seriously than the attention it has received so far. Despite the ownership of the happiness project by the government of the UAE, the country ranks 21 on the World

Year of Publication: 2017 ISBN: 978-1-78596-041-3 Happiness Ranking. It is, however, very likely that it will climb up very quickly in the years to come. The commitment of the rulers and the people of the UAE can lead the country to only one direction - more happiness and more prosperity. In this book, Sheikh Mohammed shares his views on positivity and happiness in the context of Dubai, the UAE, the region, and the Arab world in general. Drawing upon numerous personal examples and that from other people in the UAE, particularly Sheikh Zayed and Sheikh Rashid, he contends that positivity as a way of life must result in happiness of individuals and general well-being in the society. He argues that maximising happiness of people should be the ultimate objective of a country. The principle also applies to other smaller socio-economic units like family and organisations. Happier the individuals in an organisation, for example, more productive they will be and hence more successful will be the business. Happier households happen to be healthier, too. There is a direct link between positivity and happiness, asserts Sheikh Mohammed. A negative person can never be happy, and by way of corollary successful. The book should be of interest to those involved in Islamic banking and finance, as the UAE is an important market for Islamic financial services, and Sheikh Mohammed’s vision is to make Dubai as a hub for global Islamic economy. Dubai Islamic Bank, the oldest Islamic bank in the world, is also headquartered there. The government of Dubai and Al Maktoum family is a shareholder in this Islamic bank of paramount importance. Hence, the relevance of Sheikh Mohammed’s views to Islamic banking and finance. While reading this book, one may wonder if Islamic banking and finance can contribute to developing a positive world-view and whether its stakeholders - employees as well as customers - are happier than their counterparts in conventional banks.

We have decided to use Reflections on Happiness and Positivity as a recommended reading for the participants of our Cambridge Islamic Finance Leadership Programme (CambridgeIFLP). There are some excellent tips from a leader like Sheikh Mohammed for anyone who would like to play a lead role, whether in politics or business. WE believe that the participants of our Cambridge-IFLP will benefit immensely from the reading of the book and discussions around it. 57


ISFIRE REVIEW

ISLAMIC FINANCE REVIEW | JUNE 2017

An Insightful Journey Into

EMIRATES AIRLINE SUKUK PUSHING THE BOUNDARIES OF ISLAMIC FINANCE -By Dr. Mohd Daud Bakar

Short Title: EMIRATES AIRLINE SUKUK

Published by: AMANIE MEDIA

ISBN: 978-967-14818-0-6; 978-967-14818-1-3 (E-BOOK)

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lobally, there are three important sukuk issuers in the world, which have regularly issued sukuk. Emirates is one of them; the other two being Islamic Development Bank and Petronas.

The latest book by Datuk Dr. Mohd Daud Bakar entitled “An Insightful Journey into Emirates Airline Sukuk” (to be referred as “Emirates Airline Sukuk” in this review article) is an excellent primer on sukuk, in addition to being a detailed and comprehensive case study on the sukuk issued by Emirates Airline between 2005 and 2015. It is written in a style that attempts to make sukuk a darling of Islamic finance, in which Emirates Airline is presented as a bridegroom.

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Presenting the facts like the Emirates’ US$913 million sukuk that it issued in 2015 was actually used to finance purchase of its A380-800 aircrafts makes it a jazzy Islamic financial instrument. Although the book is all praise for sukuk and its role in Islamic finance, the author asks some daring questions in the course of his analyses throughout the book. The first half of the book is a kind of friendly reading. The second part starts asking some serious questions, e.g., how to make Islamic finance the popular choice of the world, both in Muslim and non-Muslim countries (p. 128). In the wake of the recent trouble with Dana Gas Sukuk, a number of stakeholders, i.e., lawyers, Shari’a scholars,


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ISFIRE REVIEW

Emirates Airline Sukuk is so far the best book on sukuk written by a contemporary Shari’a scholar.

EMIRATES AIRLINE AND SUKUK The book identifies Emirates Airline as the first airline in the world to issue an aviation sukuk. The total amount raised by Emirates Airline through sukuk over a period of 10 years is US$2.463 billion, 47.2% of the world’s aviation sukuk. It was not pioneer only in terms of being the first airline to issue a sukuk but also as regards the sophisticated structures that it used for various issuances. The author acknowledges that the various sukuk issued by Emirates Airline were perhaps the most innovative of all the underlying structures of the sukuk issued world-wide. From its first sukuk in 2005 to the latest one in 2015, all the structures were innovative indeed. The 2005 Emirates Airline Sukuk was based on musharaka. The 2013 Emirates Airline Sukuk was the first sukuk to use ATKMs1 as the underlying assets.

regulators, and students of Islamic banking and finance must get attracted to this book of immense importance. The book explains a number of concepts related with the issuance of sukuk. By the time a reader finishes the book, they must have understood the terms and concepts like book building, credit enhancement, and difference between cost of funding of sukuk and bonds, etc., in addition to developing an understanding of various types of sukuk. The non-technical readers may find the style of the book particularly useful, as it does not discuss various sukuk structures with the help of complicated diagrams. While doing so, the author ensures that the technical details are not left out. While all out in praise of sukuk and its potential in Islamic banking and finance, the author also acknowledges failings of Islamic finance, particularly with reference to the global financial crisis of 2008-10. The book admits that Islamic finance missed a great opportunity in the wake of the global financial crisis by not offering an alternative solution. While reading the book, one cnnot help thinking about a wonderful experience of reading “Naqsh-e-Hayat”, a biographical account of Maulana Hussain Ahmad Madani (1879-1957), which contains a comprehensive economic analysis of downfall of the Moghul dynasty in India. While Naqsh-e-Hayat is the best book written in Urdu by an ‘aalim on economic analysis of the downfall of a Muslim state,

1

The most innovative Emirates Airline Sukuk was actually the last one, issued in 2015. It involved sale and purchase of ATKMs (an airline industry measure of total capacity calculated as the total tonnage for carriage of passengers and freight multiplied by the distance flown). It also had an innovative credit enhancement structure whereby the UK Export Credit Agency (ECA) provided 100% guarantee to the investors. This sukuk is the main focus of Dr. Mohd Daud Bakar’s this book. According to the author, it is the most brilliant and a gold plated template for other aviation operators to emulate. The Emirates was followed by quite a few other players in the aviation industry, namely, Nomura (2010), GE Capital (2009), Malaysia Airlines (2013), Air Asia (2013), Geruda Indonesia (2015), Fly Dubai, and Etihad Airways. The book reports that total amount of the aviation sukuk exceeded US$6.7 billion, representing 2.3% of total sukuk outstanding. The author believes that it is the reputable issuers like Emirates Airline, which can invigorate Islamic capital markets globally. There is an implicit message that a reader may get from the book. That is, in the beginning it was not a strict need by Emirates Airline to issue a sukuk; but rather it was to open a new market for having access to liquidity. The 2005 issuance perhaps benefitted Islamic banks and financial institutions more than the benefits accrued to the issuer. The subsequent issues, however, provided excellent opportunities to Emirates to access funding from Islamic capital markets. This was the time when global capital markets were facing liquidity crunch (owing to the global financial crisis). Emirates Airline’s good reputation and goodwill in the Islamic financial services industry helped it in raising the required funds. In some cases, it proved cheaper for Emirates to raise funds through the issuance of sukuk as compared to the conventional bonds it issued during the same time period.

It should not be confused with the acronym of ATKM abbreviating All the King’s Men in the novel of the same name.

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MY PICK IN THE BOOK The book provides a plethora of information on sukuk, which should be educational in its own right. If I have to pick a small portion of the book for those who would like to have a quick instructions menu for the issuance of sukuk, they must read pages 51-56, where the author explains the full process of sukuk issuance and its execution in just 1,000 words.

IMPORTANT EXCLUSIONS, POSSIBLE CONTROVERSIES AND OTHER OBSERVATIONS An important exclusion in the book is personal reference to Sheikh Hussein Hamid Hassan, arguably the most innovative Shari’a scholar of the present times, whose genius was behind each and every sukuk structure Emirates Airline issued between 2005 and 2015.Without acknowledging his role, any case case study on Emirates Airline sukuk will remain incomplete. A shocking statement on page 144 injects a big dose of excitement into the reader’s brain. It states, “Islamic finance has no religion.” It then continues to claim that the real religion of Islamic finance is the bottom line of product offerings, that is profitability to the shareholders, and competitive costs and services to the customers, on top of being [Shari’a] compliant. This seems like a controversial statement, but as a matter of fact it sums up the ground reality of Islamic banking and finance. If that is indeed the case, then it may not be a bad idea at all to pay a serious thought to the author’s strong advocacy of branding (or re-branding) of Islamic finance, away from its Islamic identity to a wider universally-accepted value proposition. This will certainly be a controversial thing to do.

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ISLAMIC FINANCE REVIEW | JUNE 2017

Brilliantly written in most of the parts, the book at times becomes repetitive. For example, the author refers to the guarantee provided by the UK Export Credit Agency on multiple occasions. Similarly, reference to the fact that the 2015 sukuk proceeds were used to finance purchase of A380-800 planes is also repetitive. An informed reader may find it a bit inefficient use of the words. Almost half of the book (from the 6th chapter onwards) is more about Emirates Airline in particular, without any unique reference to its sukuk issuance programme. The second half of the book is essentially about what Islamic finance can learn from the Emirates Airlines. The comparison between Islamic finance and the Emirates Airline is indeed interesting and thought provoking. However, a keen reader reaching the page 218 all of a sudden realises that the story on the Emirates Airline sukuk had long time ago ended at around page 120. The remainder of the books turns out to be an inspirational account of the success of Emirates Arline and the factors contributing to it. One may ponder if it is adequate to compare an organisation/ corporation with an industry. The author attempts to answer this question rather less satisfactorily (at least in Chapter 7). There is no doubt that Emirates Airline is an inspiring story for any businesses wishing to excel. However, Emirates Airline and Islamic finance are two completely different business. The author is actually more shrewd than what a critical reader might think of him. He explains the relevance of Emirates Airline to the Islamic financial services in the last three chapters (8 and 9 and the wrap-up). This is indeed an intelligent way of keeping the reader engrossed and engaged.


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ISFIRE REVIEW

Understanding Islamic

FINANCIAL SERVICES THEORY AND PRACTICE -By Karim Ullah & Wafi Al-Karaghouli

Published by: KOGAN PAGE

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his is an excellent addition to the literature on Islamic economics, banking and finance. With an explicit focus on service rather than product architecture, this books offers a different perspective on the topic. Islamic financial service propositions are discussed at the product, systemic, network and ecosystemic levels. The book comprises nine chapters. Although a cursory look at the contents page may reveal that it is another book with an old focus on Islamic finance, but deeper look into the contents and reading reveal that this book focuses on service aspect of Islamic banking and finance at each and every step of product offerings. This is perhaps the first book in the field with such a focus.

Those who keep on emphasising the role of the real economy and its possible connection with Islamic banking and finance must read this book to get a fresh perspective on the future development of Islamic banking and finance.

ISBN: 978 0 7494 8051 6; 978 0 7494 8052 3 (E-BOOK)

The book is full of practical examples, case studies and real life stories of service designing tools for Islamic finance. Starting with the paradigm of Islamic finance (Chapter 1), the book quickly moves on to the service aspect of Islamic finance in Chapter 2. The importance of service of Islamic finance can be gauged by the fact that almost 70% of gross domestic products (GDP) of the world comprises services. Hence, for those who keep on emphasising the role of the real economy and its possible connection with Islamic banking and finance must read this book to get a fresh perspective on the future development of Islamic banking and finance. Chapter 3 discusses different models of Islamic financial services. In this respect, partnership-based models, salebased services, leasing related services, and the agency services are highlighted. Chapter 4 provides an overview of Islamic financial system. Service designing tools and their applications to Islamic financial service is discussed in Chapter 5. An adaptable service design model (ASD) is focus of Chapter 6. The practical side of designing Islamic financial service is presented in the next chapter. The last two chapters synthesise and conclude. It is a book on Islamic finance with a unique focus, and the readers who are interested in learning about new perspectives on Islamic banking and finance will find it useful.

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