Governor’s Speech at the Official Launch of Affin Islamic Bank Berhad

Islamic finance has become one of the most dynamic growth areas in international finance. While Islamic finance has become an increasingly important form of financial intermediation in several countries, more recently, we have seen the international dimension gain significance. The Malaysian Islamic financial system is now well positioned to become internationally integrated with the international Islamic financial system. The progress and development of the Islamic financial services sector in Malaysia is evidenced by:


  • the rapid expansion in new and innovative Islamic financial products and services;
  • the enhanced competitive environment in which Islamic finance has developed;
  • the progressive development of the prudential, regulatory and supervisory framework for Islamic financial institutions;
  • the active issuance of both corporate and sovereign Islamic financial instruments;
  • the progressive liberalisation for foreign participation; and
  • the strengthened financial and non-financial institutional infrastructure, including the development of the domestic money and capital markets, and the establishment of institutions to promote human resource development in Islamic finance to ensure the pool of talent that is necessary to sustain the long term growth of the industry.


Our domestic Islamic financial system is one of the most developed, with its diversity of players and financial products and services in Islamic banking, takaful and the Islamic capital market.


Today, we are witnessing the establishment of another dedicated Islamic banking subsidiary that will contribute towards further strengthening the Islamic financial institutional infrastructure in Malaysia – the launch of Affin Islamic Bank Berhad as an Islamic banking subsidiary of Affin Bank Berhad.


With the domestic Islamic financial infrastructure in place, the emphasis is now to become more internationally integrated with the international Islamic financial system, thus increasing our economic and financial linkages with other parts of the world. Our efforts are to position Malaysia as an international Islamic financial centre and thus facilitate this international integration process. In this regard, the establishment of an Islamic subsidiary also increases the opportunity for entering into strategic partnerships with foreign interests, thereby increasing the potential for greater interface with more extensive markets beyond our domestic borders.


On the domestic front, while tremendous progress has been achieved, much more needs to be done. The Islamic financial industry needs to allocate more resources toward investment in research and development to create more innovative products. Consumer awareness and consumer education also needs to be enhanced to support the growth of the Islamic financial industry. In a financial environment that is transitioning towards greater deregulation and towards more market-based rules, it is important that the Islamic financial institutions inculcate a high level of confidence among consumers not only on the Shariah-compliance aspects of the Islamic financial products offered, but also on their business operations.


Concerted efforts by the industry to develop standardized documentation and features of Islamic financial contracts would enhance the level of public understanding of the different types and concepts of Islamic financial products. Islamic financial institutions also need to provide consumers with the information that accurately represents the unique features, risks and returns associated with the Islamic products and services. Enhanced financial literacy on Islamic financial products will facilitate the process for consumers to make well-informed and effective decisions on their financial transactions, with a clear understanding and appreciation of the unique characteristics and features of Islamic finance and its real economic value.


Indeed, the strengthening of the range of Islamic products and services needs to be accompanied by an improved market understanding of the Islamic financial products. This requires well trained staff who are equipped with the required skills and knowledge in Islamic finance that are able to provide quality advice to the customers. Correct terminologies need to be used with an ability to highlight the distinguishing features of the products and services. This is particularly important in a dual financial environment where both conventional and Islamic financial system are operating in parallel.


The regulatory framework governing market practices by the Islamic financial institutions can also be strengthened further to ensure its continued soundness. This will involve the implementation of the prudential standards that have been issued by the Islamic Financial Services Board, the IFSB. Greater transparency through the observance of minimum disclosure requirements needs to be adopted by the industry. Good business practices need to be embedded in all aspects of Islamic financial operations, not only as part of good governance and corporate social responsibility, but also as part of brand building. Market efficiency in conducting Islamic business activities can also be enhanced further to ensure its sustained competitiveness as an intermediation process.


As we are advancing into the third phase of the Financial Sector Master Plan, where the environment will become increasingly more liberalised and dynamic, we now have to look beyond the 2010 strategies. A key feature of the new environment is increased competition. The benefit of this trend will be to the consumers and businesses in terms of better prices, better range of products and services that are of a higher quality. This in turn would contribute to the overall performance of the economy. To be at the leading edge of competition, continuous efforts have to be intensified to enhance business efficiency and innovation. In this regard, the Islamic subsidiaries, with their increased autonomy in business operations, would be better positioned to determine their own business strategies and to realise the vast growth potential in the Islamic financial industry. On this note, it is my pleasure to congratulate the Affin Group on the occasion of the official launch of Affin Islamic Bank Berhad. I wish Affin Islamic Bank Berhad every success in maximising the potential opportunities and contributing to achieving its objectives.

source : bnm gov

The Muslim banking world faces the challenge of expanding internationally while remaining true to Islamic principles

By Nasser M. Suleiman


Corporate governance in banking has been analysed almost exclusively in the context of conventional banking markets. For example, there has recently been some discussion of the role ‘market discipline’ exerted by bank shareholders and depositors in constraining the risk taking behaviour of bank management. At the same time, there is growing interest in, and analysis of, banks as stockholders in companies themselves playing a central role in corporate governance, especially in Germany and other countries with universal banking structures of the traditional type.

By contrast, little is written on governance structures in Islamic banking, despite the rapid growth of Islamic banks since the mid 1970s and their increasing presence on world financial markets. There are now over 180 financial institutions world-wide which adhere to Islamic banking and financing principles. These banks operate in 45 countries encompassing most of the Muslim world, along with Europe, North America and various offshore locations. Islamic financing increasingly is a market segment of interest of Western banks, and the latest addition to the list of Islamic banks in October 1996 in the Citi Islamic Investment Bank, Bahrain a wholly owned subsidiary of Citicorp.

Islamic banking represents a radical departure from conventional banking, and from the viewpoint of corporate governance, it embodies a number of interesting features since equity participation, risk and profit-and-loss sharing arrangements from the basis of Islamic financing. Because of the bank on interest (riba), an Islamic bank cannot charge any fixed return in advance, but rather participates in the yield resulting from the use of funds. The depositors also share in the profits according to predetermined ratio, and are rewarded with profit returns for assuming risk. Unlike a conventional bank which is basically a borrower and lender of funds, an Islamic bank is essentially a partner with its depositors, on the one side, and also a partner with entrepreneurs, on the other side, when employing depositors’ funds in productive direct investment.

These financial arrangements imply quite different stockholder relationships, and by corollary governance structures, from the conventional model since depositors have a direct financial stake in the bank’s investment and equity participations. In addition, the Islamic bank is subject to an additional layer of governance since the suitability of its investment and financing must be in strict conformity with Islamic law and the expectations of the Muslim community. For this purpose, Islamic banks employ an individual sharia Advisor and/or Board.

My examination of corporate governance in Islamic banking begins with the comparing governance structures in the Islamic bank and will continues with the principles of Islamic banking. This study compares the Islamic banking, financial model and its implications for governance structures. The study intends to give a small picture on the principles of Islamic banking.

The Islamic bank

Governance structures are quite different from these under Islamic banking because the institution must obey a different set of rules – those of the Holy Qur’an – and meet the expectations of Muslim community by providing Islamically-acceptable financing modes. These profit-and-loss sharing methods, in turn, imply different relationships than under interest-based borrowing and lending.

Figure 1 sets out the key stockholders in an Islamic bank. There are two major difference from the conventional framework. First, and foremost, an Islamic organisation must serve God. It must develop a distinctive corporate culture, the main purpose of which is to create a collective morality and spirituality which, when combined with the production of goods and services, sustains the growth and advancement of the Islamic way of life. To quote janachi (1995):

‘Islamic banks have a major responsibility to shoulder ….all the staff of such banks and customers dealing with them must be reformed Islamically and act within the framework of an Islamic formula, so that any person approaching an Islamic bank should be given the impression that he is entering a sacred place to perform a religious ritual, that is the use and employment of capital for what is acceptable and satisfactory to God.’ (p.42).

There are equivalent obligations upon employees:

‘The staff in an Islamic bank should, throughout their lives, be conducting in the Islamic way, whether at work or at leisure.’ (p.28).

Further, obligations also extend to the Islamic community:

‘Muslims who truly believe in their religion have a duty to prove, through their efforts in backing and supporting Islamic banks and financial institutions, that the Islamic economic system is an integral part of Islam and is indeed for all times … through making legitimate and Halal profits.’ (p.29).

Second, interest-free banking is based on the Islamic legal concepts of shirkah (partnership) and mudaraba (profit-sharing). An Islamic bank is conceived as financial intermediary mobilising savings from the public on a mudaraba basis and advancing capital to entrepreneurs on the same basis. A two-tiered profit-and-loss sharing arrangement operates under the following rules:

The bank receives funds from the public on the basis of unrestricted mudaraba. There are no restrictions imposed on the bank concerning the kind of activity, duration, and location of the enterprise, but the funds cannot be applied to activities which are forbidden by Islam

The bank has the right to aggregate and pool the profit from different investments, and share the net profit (after deducting administrative costs, capital depreciation and Islamic tax) with depositors according to a specified formula. In the event of losses, the depositors lose a proportional share or the entire amount of their funds. The return to the financier has to be strictly maintained as a share of profits.

The bank applies the restricted from of mudaraba when funds are provided to entrepreneurs. The bank has the right to determine the kind of activities, the duration, and location of the projects and monitor the investments. However, these restrictions may not be formulated in a way which harms the performance of the entrepreneur, and the bank cannot interfere with the management of the investment. Loan covenants and other such constraints usual in conventional commercial bank lending are allowed.

The bank cannot require any guarantee such as security and collateral from the entrepreneur in order to insure its capital against the possibility of an eventual loss.

The liability of the financier is limited to the capital provided. On the other hand, the liability of the entrepreneur is also restricted, but in this case solely to labour and effort employed. Nevertheless, if negligence or mismanagement can be proven, the entrepreneur may be liable for the financial loss and be obliged to remunerate financier accordingly.

The entrepreneur shares the profit with bank according to previously agreed division. Until the investment yields a profit, the bank is able to pay a salary to the entrepreneur based on the ruling market salary.

Many of the same restrictions apply to musharaka financing, except that in this instance the losses are borne proportionately to the capital amounts contributed. Thus under these two Islamic modes of financing, the project is managed by the client and not by the bank, even though the bank shares the risk. Certain major decisions such as changes in the existing lines of business and the disposition of profits may be subject to the bank’s consent. The bank, as a partner, has the right to full access to the books and records, and can exercise monitoring and follow-up supervision. Nevertheless, the directors and management of the company retain independence in conducing the affairs of the company.

These conditions give the finance many of the characteristics of non-voting equity capital. From the viewpoint of the entrepreneur, there are no fixed annual payments needed to service the debt as under interest financing, while the financing does not increase the firm’s risk in the way that other borrowings do through increased leverage. Conversely, from the bank’s viewpoint, the returns come from profits – much like dividends – and the bank cannot take action to foreclose on the debt should profits no eventuate.

Governance structures

These structures are depicted in Figure 2 which sketches the conceptual framework of corporate governance for Islamic bank. Central to such a framework is the Sharia Supervisory Board (SSB) and the internal controls which support it. The SSB is vital for two reasons. First, those who deal with an Islamic bank require assurance that it is transacting with Islamic law. Should the SSB report that the management of the bank has violated the sharia, it would quickly lose the confidence of the majority of its investors and clients. Second, some Islamic scholars argue that strict adherence to Islamic religious principles will act as a counter to the incentive problems outlined above. The argument is that the Islamic moral code will prevent Muslims from behaving in ways which are ethically unsound, so minimising the transaction costs arising from incentive issues. In effect, Islamic religious ideology acts as its own incentive mechanism to reduce the inefficiency that arises from asymmetric information and moral hazard.

Such matters are obviously basic to the successful operation of Islamic modes of finance, and they are assessed in the next section when I examine Principles of Islamic Banking.

Principles of Islamic banking

An Islamic bank is based on the Islamic faith and must stay within the limits of Islamic Law or the sharia in all of its actions and deeds. The original meaning of the Arabic word sharia was ‘the way to the source of life’ and it is now used to refer to legal system in keeping with the code of behaviour called for by the Holly Qur’an (Koran). Four rules govern investment behaviour:

the absence of interest-based (riba) transactions;

the avoidance of economic activities involving speculation (ghirar);

the introduction of an Islamic tax, zakat;

the discouragement of the production of goods and services which contradict the value pattern of Islamic (haram)

In the following part I explain these four elements give Islamic banking its distinctive religious identity.


Perhaps the most far reaching of these is the prohibition of interest (riba). The payment of riba and the taking as occurs in a conventional banking system is explicitly prohibited by the Holy Qur’an, and thus investors must be compensated by other means. Technically, riba refers to the addition in the amount of the principal of a loan according to the time for which it is loaned and the amount of the loan. While earlier there was a debate as to whether riba relates to interest or usury, there now appears to be consensus of opinion among Islamic scholars that the term extends to all forms of interest.

In banning riba, Islamic seeks to establish a society based upon fairness and justice (Qur’an 2.239). A loan provides the lender with a fixed return irrespective of the outcome of the borrower’s venture. It is much fairer to have a sharing of the profits and losses. Fairness in this context has two dimensions: the supplier of capital possesses a right to reward, but this reward should be commensurate with the risk and effort involved and thus be governed by the return on the individual project for which funds are supplied.

Hence, what is forbidden in Islamic is a predetermined return. The sharing of profit is legitimate and that practice has provided the foundation for Islamic banking.


Another feature condemned by Islamic is economic transactions involving elements of speculation, ghirar. Buying goods or shares at low and selling them for higher price in the future is considered to be illicit. Similarly an immediate sale in order to a void a loss in the future is condemned. The reason is that speculators generate their private gains at the expense of society at large.


A mechanism for the redistribution of income and wealth is inherent is Islam, so that every Muslim is guaranteed a fair standard of living, nisab. An Islamic tax, Zakat (a term derived from the Arabic zaka, meaning “pure”) is the most important instrument for the redistribution of wealth. This tax is a compulsory levy, one of the five basic tenets of Islam and the generally accepted amount of the zakat is one fortieth (2.5 per cent) of Muslim’s annual income in cash or kind from all forms of assessed wealth exceeding nisab.

Every Islamic bank has to establish a zakat fund for collecting the tax and distributing it exclusively to the poor directly or through other religious institutions. This tax is imposed on the initial capital of the bank, on the reserves, and on the profits as described in the Handbook of Islamic Banking.


A strict code of ‘ethical investment’ operates. Hence it is forbidden for Islamic banks to finance activities or items forbidden in Islam, haram, such as trade of alcoholic beverage and pork meat.

Furthermore, as the fulfilment or materials needs assures a religious freedom for Muslims, Islamic banks are required to give priority to the production of essential goods which satisfy the needs of the majority of the Muslim community, while the production and marketing of luxury activities, israf wa traf is considered as unacceptable from a religious viewpoint.

In order to ensure that the practices and activities of Islamic banks do not contradict the Islamic ethical standards, Islamic banks are expected to establish a Sharia Supervisory Board, consisting of Muslim jurisprudence, who act as advisers to the banks.

Profit-sharing agreements

Although the restriction against the use of interest might seem to be a binding constraint upon expansion, Islamic banks and financial institutions have in fact grown rapidly. Table 1 sets out the number of banks, paid up capital, total deposits and total assets of these Islamic banks, classified by region. It shows that the total assets of these reporting banks amounted to US $155 billion in 1994, with employment in excess of 220,000 (data supplied by the International Association of Islamic Banks).

If the paying and receiving of interest is prohibited, how do Islamic banks operater It is necessary to distinguish between the expressions ‘rate of interest’ and ‘rate of return’. Whereas Islam clearly forbids the former, it not only permits, but rather encourages, trade. In the interest-free system sought by adherents to Muslim principles, people are able to earn a return on their money only by subjecting themselves to the risk involved in profit sharing. As the use of interest rates in financial transactions is prevented, Islamic banks are expected to undertake operations only on the basis of Profit and Loss Sharing (PLS) arrangements or other acceptable modes of financing. Mudaraba and musharaka are the two profit-sharing arrangements preferred under Islamic law.


A mudaraba can be defined as contract between at least two parties whereby one party, the financier (sahib al-mal), entrusts funds to another party, the entrepreneur (mudarib), to undertake an activity or venture. This type of contract is in contrast with musharaka. In arrangements based on musharaks there is also profit-sharing, but all parties have the right to participate in managerial decisions. In mudaraba, the financier is not allowed a role in management of the enterprise. Consequently, mudaraba represents a PLS contract where the return to lenders is a specified share in the profit/loss outcome of the project in which they have a stake, but no voice.

In interest lending, the loan is not contingent on the profit or loss outcome, and is usually secured, so that the debtor has to repay the borrowed capital plus the fixed interest amount regardless of the resulting yield of the capital.

Under mudaraba, the yield is not guaranteed in profit-sharing and financial losses are borne completely by the lender. The entrepreneur as such losses only the time and effort invested in the enterprise. This distribution effectively treats human capital with equally financial capital.


Under musharaka, the entrepreneur adds some of his own to that supplied by the investors, so exposing himself to the risk of capital loss. Profits and losses are shared according to pre-fixed proportions, but these proportions need not coincide with the ratio of financing input. The bank sometimes participates in the execution of the projects in which it has subscribed, perhaps by providing managerial expertise. Figure 3 illustrates the elements.

Mudaraba and musharaka constitute, at least in principle if not always in practice, the twin pillars of Islamic banking.

The two methods conform fully with Islamic principles, in that under both arrangements lenders share in the profits and losses of the enterprises for which funds are provided and shirkah (partnership) is involved. The musharaka principle in invoked in the equity structure of Islamic banks and is similar to the modern concepts of partnership and joint stock ownership.

Two-tiered mudabara

For banking operations, the mudaraba concept has been extended to include three parties: the depositors as financiers, the bank as an intermediary, and the entrepreneur who requires funds. The bank acts as an entrepreneur when it receives funds from depositors, and as financier when it provides the funds to entrepreneurs. In other words, the bank operates a two-tier mudaraba system in which it acts both as the mudarib on the saving side of the equation and as the rubbul-mal (owner of capital) on the investment portfolio side. Insofar as the depositors are concerned, an Islamic bank acts as a mudarib which manages the funds of the depositors to generate profits subject to the rules of mudaraba. The bank may in turn use the depositors’ funds on a mudaraba basis in addition to other lawful (but less preferable) modes of financing, including mark up or deferred sales, lease purchase and beneficence loans. The funding and investment avenues are now listed.

Sources of funds

Besides their own capital and equity, Islamic banks rely on two main sources of funds, a) transaction deposits, which are risk free but yield no return and, b) investment deposits, which carry the risks of capital loss for the promise of variable. In all, there are four main types of accounts:

Current accounts

Current accounts are based on the principle of al-wadiah, whereby the depositors are guaranteed repayment of their funds. At the same time, the depositor does not receive remuneration for depositing funds in a current account, because the guaranteed funds will not be used for PLS ventures. Rather, the funds accumulating in these accounts can only be used to balance the liquidity needs of the bank and for short-term transactions on the bank’s responsibility.

Savings accounts

Savings accounts also operate under the al-wadiah principle. Savings accounts differ from current deposits in that they earn the depositors income: depending upon financial results, the Islamic bank may decide to pay a premium, hiba, at its discretion, to the holders of savings accounts.

Investment accounts

An investment account operates under the mudaraba al-mutlaqa principle, in which the mudarib (active partner) must have absolute freedom in the management of the investment of the subscribed capital. The conditions of this account differ from those of the savings accounts by virtue of: a) a higher fixed minimum amount, b) a longer duration of deposits, and c) most importantly, the depositor may lose some of or all his funds in the event of the bank making losses.

Special investment accounts

Special investment accounts also operate under the mudaraba principle, and usually are directed towards larger investors and institutions. The difference between these accounts and the investment account is that the special investment account is related to a specified project, and the investor has the choice to invest directly in a preferred project carried out by the bank.

Uses of funds

The mudaraba and musharaka modes, referred to earlier, are supposedly the main conduits for the outflow of funds from banks. In practice, however, other important methods applied by Islamic banks include:

Murabaha (mark up). The most commonly used mode of financing seems to be the ‘mark-up’ device. in a murabaha transactions, the bank finances the purchase of a good or assets by buying it on behalf of its client and adding a mark-up before reselling it to the client on a ‘cost-plus’ basis profit contract. Figure 4 illustrates the sequence.

Bai’ muajjal (deferred payment). Islamic banks have also been resorting to purchase and resale of properties on a deferred payment basis. It is considered lawful in fiqh (jurisprudence) to charge a higher price for a good if payments are to be made at a later date. According to fiqh this does not amount to charging interest, since it is not a lending transaction but a trading one.

Bai’salam ( prepaid purchase). This method is really the opposite of the murabaha. There the bank gives the commodity first, and receives the money later. Here the bank pays the money first and receives the commodity later, and is normally used to finance agricultural products.

Istissanaa (manufacturing). This is a contract to acquire goods on behalf of a third party where the price is paid to the manufacturer in advance and the goods produced and delivered at a later date.

Ijara and ijara wa iqtina (leasing). Under this mode, the banks buy the equipment or machinery and lease it out to their clients who may opt to buy the items eventually, in which case the monthly payments will consist of two components, i.e. rental for the use of the equipment and instalment towards the purchases price.

Qard hasan (beneficence loans). This is the zero return type of loan that the Holly Qura’n urges Muslims to make available to those who need them. The borrower is obliged to repay only the principal amount of the loan, but is permitted to add a margin at his own discretion.

Islamic securities. Islamic financial institutions often maintain an international Islamic equity portfolio where the underlying assets comprise ordinary shares in well run businesses, the productive activities of which exclude those on the prohibited list (alcohol, pork, armaments) and financial service based on interest income.




1. Abdul Gafoor, A.L.M., 1995. Interest-free Commercial Banking. Groninigen, The Netherlands: Apptec Publications.2. Ahmed, Z., lqbal, M., and Khan, M. f., 1983. Money and Banking in Islam. Jaddah: international Centre for Research in Islamic Economics, King Abdual Aziz University.

3. Algaoud, L. M. and Lewis, M. k., 1997. Bahrain as an International Centre for Islamic Baking, Proceedings of international Conference on Accounting, Commerce & Finance. The Islamic Perspective, University of West Sydney, Macarthur.

4. Arrif M. (ed), 1982. monetary policy in an interest free Islamic economy: nature and scope in Ariff, M. (ed), Monetary and Fiscal Economic of Islam, Jaddah: International Centre for Research in Islamic Economics.

5. Handbook of Islamic Banking, 1977-86. Published in Arabic by the International Association of Islamic Banks, 6 Vols., Cairo.

6. Islamic finance : Turning the Prophet’s profits. Economist, 8/24/96, Vol. 340 Issue 7980, p58, 2p.

7. Janahi, A. L., 1995. Islamic Banking, Concept, Practice and Future, 2 nd edition. Manama: Bahrain Islamic Bank.

8. Khalaf, Roula: Banking the Islamic way. World Press Review, Jan. 95, Vol. 42 Issue 1, p35, 5/6p.

9. Khan, M S., 1986. Islamic interest-free banking: A Theoretical Analysis, IMF Staff Papers, Vol. 33, No. 1, pp. 1-25.

10. Kuran, T., 1986. The Economic System in Contemporary Islamic Thought: Interpretation and Assessment, International Journal. Middle East Study, No. 18, pp. 135 – 154.

11. Kuran, T., 1995. Islamic Economic and the Islamic Sub economy journal of Economic Perspectives, Vol. 9 No. 4, pp. 155-173.

12. Lewis, M. k., 196. Universal banking in Europe: The Old the new, International Symposium on Universal banking, Korean institute of Finance, Seoul, January.

13. Mannan, M. A., 1986. Islamic Economics: Theory Practice, Cambridge: Hodder and Stoughton.

14. Siddiqi, M. N., 1988. Banking without Interest, Leicester: The Islamic Foundation.

15. Ul-Haque, N. U. and Nirakhor, A., 1986. Optimal Profit-sharing Contracts and Investment in an interest-free Islamic Economy, IMF Working Paper, No. 12, Washington: international Monetary Fund.




This treatise, first published in 1990, is distributed by the Baharain Islamic Bank.

The concepts are examined in Siddiqi (1983) and Abdul Gafoor (1995).

The incentive problems are examined in Ul-Haque and Mirakhor, (1986).

The higher price shows in (HIB, 1982, vol., p.427).

The five basic tenets ( or pillars) are: (1) acceptance of shahada, (2) prayer or namaz, (3) zakat or alms, (4) fasting, and (5) hajj or pilgrimage to Mecca.

The Islam clearly forbids are examined in Khan, 1986, pp. 4-6.

source : al-bab




Islamic finance

by Ibrahim Warde

Islamic banking and financial institutions grew along with political Islam: it declined, they did not. In fact, Islamic finance is now a confident part of the new global world of venture capital, ethical investment and profit-and-loss sharing.

by Ibrahim Warde

The assets of Islamic financial institutions now top the $230bn mark. That is more than a 40-fold increase since 1982 (1). Most of the large Western financial institutions, following the example of Citibank, have their own Islamic subsidiaries or, at the very least, Islamic “windows” or products aimed at their Islamic clientele. As proof of how many companies are compatible with Islamic law – and not just from within the Muslim world – there is now even a Dow Jones Islamic market index.

This may seem strange. We often hear it said that Islam is incompatible with the new world order that emerged with the end of the cold war (2). How can practices rooted in the Middle Ages thrive in the age of technology-driven global finance? Or institutions that are suspicious of interest operate within a global, interest-based financial system? And how can Islamic finance, often considered a facet of political Islam, experience its most rapid growth just as that same political Islam is on the wane (3) ?

Modern Islamic finance began in the early 1970s at the intersection of two important developments in the Muslim world: the rise of pan-Islamism and the oil boom. The 1967 Six Day war marked the end of the secular pan-Arab Nasserite movement and the start of the regional dominance of Saudi Arabia under a pan-Islamic banner (4). With the start of the Organisation of the Islamic Countries movement (OIC) in 1970, the idea of updating traditional Islamic banking soon became part of the agenda. It was something that had preoccupied Islamic scholars, particularly in Pakistan, for a number of years.

Research institutes focusing on Islamic economics and finance began to spread throughout the Muslim world. In 1974 the OIC summit in Lahore voted, after oil prices quadrupled, to create the inter-governmental Islamic Development Bank (IDB). Based in Jedda, this became the cornerstone of a new banking system inspired by religious principles. In 1975 the Dubai Islamic Bank – the first modern, non-governmental Islamic bank – was opened. In 1979 Pakistan became the first country to embark on a full Islamisation of its banking sector; and Sudan and Iran followed suit in 1983.

The first paradigm of modern Islamic banking was established in those years. Islamic jurisprudents reinterpreted a rich legal but pre-capitalist tradition to suit the requirements of the modern era. There was a central problem: although commerce had always been central to the Islamic tradition (the Prophet Mohammad was himself a merchant), profits from pure finance were viewed with suspicion. The Koran says, for example, that despite their superficial resemblance, profits from commerce are fundamentally different from those generated by money-lending (sura 2, verse 275). More specifically, Islam prohibits riba. Though the term literally means “increase”, it has been variously interpreted: sometimes as usury (or excessive interest), more often as any kind of interest. The majority of Islamic scholars still equate riba with interest, even though major scholars – including the current head of Egypt’s Al-Azhar, one of Islam’s oldest and most prestigious centres of learning – have condoned the use of certain forms of interest.

Pricing time

Islamic scholars accepted that time must be priced, but objected to the fixed, pre-determined aspects of interest-based lending with its inherent risk of lender exploiting borrower (5). In the early days of Islam, the dominant form of finance consisted in a partnership between lender and borrower, based on the fair sharing of both profits and losses – a logic similar to today’s venture capital where financiers link their fate to the firms in which they invest. For instance, in medieval Arabia, wealthy merchants financing the caravan trade would share in the profits of a successful operation, but could also lose all or part of their investment if the merchandise was stolen, lost or sold for less than its cost.

A distinctive feature of Islamic banking was to be its focus on developmental and social goals. Profit-and-loss-sharing (PLS), or partnership finance, with its focus on cash-poor but promising entrepreneurs, held more economic potential than conventional, collateral-based lending, which favours established businesses. Islamic finance also promised to benefit local communities and draw into the banking system people who had shunned riba-based finance. In addition, banks were to contribute to, as well as manage, zakat funds (6) earmarked for a variety of charitable and social purposes.

The first Islamic banks were committed to partnership finance – mudaraba(commenda partnership) and musharaka (joint venture) – though most of their operations consisted of cost-plus operations such as murabaha, where the bank would purchase the goods needed by the borrower, then resell them to the borrower at a profit. Remuneration of deposits (current, saving or investment accounts) was based on a profit-and-loss sharing logic: investment accounts were remunerated based on the performance of specific investments by the bank; and holders of savings accounts shared in the bank’s overall profits.

After a few years Islamic finance began to look like no more than an exercise in semantics: Islamic banks were really no different from conventional banks, except in the euphemisms they used to disguise interest. Forays into profit-and-loss sharing were disappointing, and often abandoned. The image of Islamic banks was also tainted by the failure of Islamic Money Management Companies (IMMCs) in Egypt in 1988 and by scandals such as the BCCI (Bank of Credit and Commerce International) collapse in 1991. People dismissed Islamic finance as a passing fad associated with the oil boom.

In reality, it was on the cusp of a major boom. Deregulation and technological change had produced a major readjustment in international finance. And the Islamic world had been transformed by new political, economic and demographic circumstances (the impact of the Iranian revolution, the Gulf war, the collapse of the Soviet Union, the emergence of new Islamic states, a changing oil market, the rise of Asian tigers, a growing Islamic presence in the West, the emergence of new Islamic middle classes).

The traditional world of finance, dominated by commercial, interest-based banking, could raise potentially troublesome theological issues. But Islamic finance thrived in the new world, with its downgrading of interest income, financial innovation and blurring of distinctions between commercial banking and other areas of finance. The downgrading of interest (and the concomitant rise of fees as a major source of revenue for financial institutions) allowed Islamic bankers to sidestep the controversial riba issue. Deregulation fostered the creation of tailor-made Islamic products. Until the 1970s financial institutions could sell only a narrow range of financial products. With the lifting of constraints on products that could be devised to suit every need, religious or not, Islamic products could be created. For example, the process of slicing and splicing makes it possible to split the interest and principal components of a bond, and sell them separately.

Moralising finance

At the ideological level, the Islamist critique of statism converged with the emerging “Washington consensus”. The Islamic commitment to private property, free enterprise and the sanctity of contracts meshed with the emphasis on privatisation, deregulation and the rule of law. The reliance on zakat and other religiously-based redistribution schemes matched increased preference, since the Thatcher-Reagan years, for the downsizing of the welfare state. In many countries, Islam became a tool for entrepreneurs seeking to get around restrictive regulation, and the best excuse to disengage the state from the economy. Malaysia and Bahrain used Islam as a tool of financial modernisation – essentially as a way of countering the rentier inclinations of the private sector and the anti-competitive leanings of entrenched elites who benefited from the status quo. The Financial Times noted that Islamic institutions are now often at the forefront of innovation and dynamism.

Perhaps the main impetus behind the current boom in Islamic finance lies in the excesses of global finance (7). Just as current business excesses have spawned a preoccupation with ethics, the amorality of contemporary finance has generated an interest in “moralising” finance. And whereas Western or Judeo-Christian finance has become thoroughly secularised (the religious origin of many financial institutions has long receded from people’s minds), the idea of Islamic finance was bound, at a time of rising pietism (8), to strike a chord. Islam has a positive view of economic activities, while providing for a strict ethical framework; and Islamic finance offers a fruitful compromise between finance and ethics.

This explains the current tendency to focus on the spirit, or “moral economy”, of Islam. In contrast to the 1970s, when literal, legalistic and scholastic interpretations dominated, the ijtihad (interpretation) now underway focuses on making modern financial instruments compatible with Islamic principles. The modernist slant disavows the view that whatever did not exist in the early days of Islam is necessarily un-Islamic. Challenging common perceptions that Islam is rigid and fossilised, it emphasises those adaptive mechanisms – such as departures from tradition for reasons of local custom (’urf), public interest (maslaha) or necessity (darura) – that have allowed the religion to thrive on every continent for 14 centuries.

Whereas the early years of Islamic finance were dominated by oil-producing Arab states (primarily Saudi Arabia ), and to a lesser extent Egypt and Pakistan, the new paradigm reflects the diversity of the Islamic world. A wide range of Islamic products is now available in at least 75 countries. Even countries that have Islamised their entire financial systems have done so under different circumstances and in vastly different ways. In addition, much innovation and scholarship now originates within Muslim minorities outside the Islamic world.

Today the fastest growing segments of the industry are outside traditional banking products and in areas of finance that were either initially dismissed as unacceptable to Islam (such as insurance or takaful) or that barely existed in the 1970s (such as micro-lending and Islamic mutual funds). Funds invested in stocks acceptable to Islam (shunning unethical or highly-indebted firms, or engaged in gambling, alcohol sales and other prohibited activities) are increasingly popular, just like their “socially-responsible” secular counterparts. Islamic finance still faces a host of challenges (strategic, economic, regulatory, political, religious), but the current boom does not seem likely to abate.



(2) Samuel Huntington, The Clash of Civilizations and the Remaking of World Order, Simon and Schuster Touchstone, New York, 1997, p 211.

(3) See for example Olivier Roy, L’Echec de l’Islam politique, Seuil, Paris, 1992.

(4) Edward Mortimer, Faith and Power: The Politics of Islam, Faber & Faber, London, 1982, pp 177-220.

(5) Until recently, the Christian and Judaic traditions had comparable misgivings about interest. See Rodney Wilson, Economics, Ethics and Religion: Jewish, Christian and Muslim Economic Thought, New York University Press, 1997.

(6) Zakat, or almsgiving, is of the five pillars of Islam. The others are the profession of faith, daily prayers, fasting during Ramadan, and for those who can afford it, a pilgrimage to Mecca.

(7) Roula Khalaf, “Dynamism is held back by state control: As family dynasties stifle creativity in most of the industry, the Islamic sector is showing signs of the greatest vibrancy”, Financial Times, 11 April 2000.

(8) Yahya Sadowski “’Just’ a Religion: For the Tablighi Jama’at, Islam is not totalitarian,” The Brookings Review, summer 1996, vol 14 no.3, pp 34-35.

Amana Takaful Insurance profits grow by 396%

As more and more Sri Lankans look to the Takaful way of insurance, known as the most rewarding in the industry, its Sri Lankan flag-bearer Amana Takaful Insurance (ATI) revealed remarkable growth, for its financial year of 2006.

The net profit after tax shows an extensive rise of 396%, from Rs.2mn to Rs.11.5mn, while the total Gross Written Premium (GWP) has increased by a significant 57%. Total assets increased by 38%, and are at Rs.597mn, as at the end of the financial year. According to the financial statements Earnings per Share is recorded at Rs.0.92. ATI’s prolific year showed General Takaful achieving a growth of 53% and Family Takaful boasting a growth of 85%.

Recently completing 8 years of operation in Sri Lanka, Amana Takaful Insurance has made tremendous headway in the insurance industry, showing potential to lead the Takaful industry in the South Asian region. ATI’s growth in 2006 confirms and reflects the Global Takaful industry growth of 15-20%.

“The Company’s business operations are based on fairness and a commitment to sincerely serve all participants on a mutually beneficial platform,” said Mr. Ehsan Zaheed, CEO/ Director – ATI, when asked to comment on the Company’s performance during 2006. “We have, throughout the past year, strengthened and reinforced key activities such as, risk management, corporate governance and the overall organisational structure – geared to provide a total Takaful solution and a company wide focus to provide a service that exceeds the expectations of customers.” One of the key strategic priorities was the investment in enhancing people and their skills. The development of our people has helped motivate employees reach their individual goals by complimenting the overall corporate objectives, he added.

Marketing and branding has also played a key role in ATI’s recent achievement. The nature of Takaful commands the creation of an innovative model to take it to the market. According to ATI’s Asst. Marketing Manager Aashiq Aminuddin, ATI has been able to enlighten the market about the benefits of Takaful through proper education. This has reflected in the market acceptance and growth of sales.

“The concept of Takaful can be termed as the next phase or generation of insurance. Its evolution has brought about a product that is a truly win-win proposition for everyone involved. Not only does it take care of participants, the system of operation also gives back a return to them. This is something new and interesting for the market”, Aminuddin added.

ATI has led the way in many instances in the industry. It was the first to open out mobile phone insurance and also medical insurance for individuals, fulfilling a dire need of the masses. ATI is also has a strong hold in Aviation and Hull Insurance, which is mainly in the Maldives.

The Takaful concept of insurance has become widely popular locally as well as globally due to its practice of giving back a ‘surplus refund.’ When you take a life or general cover, your premiums are pooled into a fund which yields returns from prudent investments while every member’s needs are taken care of. In General Takaful once all claims are paid the remaining (underwriting profit) is proportionately paid back to members who have not claimed during the policy year as surplus refunds.

Amana Takaful Limited, in collaboration with Takaful Malaysia, one of the largest Takaful operators in the world, has from inception catered for both Family and General Takaful Insurance. Its success is mirrored in its phenomenal growth and the extent of customer loyalty it commands today.

The Company’s operations have expanded to include 15 locations island-wide including in the South and East of Sri Lanka, also extending overseas with the setting up of a fully fledged branch in the Maldives. Amana Takaful Insurance is currently backed by some of the best re-insurers in the Takaful Industry, including Takaful Re, Best Re, Malaysian Re, Asian Re and Lauban Re.

source : prleap

Turkey: Islamic Finance Transactions in Turkey

The term “Islamic finance” refers to a system of financing or financial activity that is consistent with Islamic rules and principles. The model outlined under the Islamic finance is generally based on two main pillars, namely the sharing of profit and loss; and the prohibition of charging interest. There are several modes of financing currently being used in Islamic finance practice, certain of which can be considered as similar to conventional banking products. However, the main rule dominating the financial instruments in Islamic finance is the prohibition of recovering interest, which gives rise to the essential mode of financing based on the deferred sale of a commodity, namely “Murabaha”.

Murabaha, which was originally a contract of sale in which a commodity is sold on profit, has been modified for application in the financial sector and has thereby become the single most popular technique of financing amongst Islamic banks all over the world. A Murabaha transaction is completed in two stages. In the first stage, the client requests the financial institution to undertake a Murabaha transaction and promises to buy the commodity specified by him if the bank acquires the same commodity. In the second stage, the client purchases the good acquired by the bank on a deferred payment basis and agrees to a payment schedule. In sum, the Murabaha transaction consists of two sales contracts, one through which the bank acquires the commodity, and the other through which it sells it to the client.

The Murabaha form of financing is widely used by Islamic banks to satisfy various kinds of financing requirements. It is used to provide financing in a variety of diverse sectors (e.g. in consumer finance, for the purchase of consumer durables such as cars and household appliances; in real estate, to provide housing finance; and in the production sector, to finance the purchase of machinery, equipment and raw material).

Islamic Financing and its Aspects in the Turkish Market


Turkey has been institutionally utilizing Islamic finance techniques since the late 1980s through financial institutions known as “Special Finance Houses” (Özel Finans Kurumu), which became the “Participation Banks” (Katılım Bankası) with the enactment of the Banking Act No. 5411 (“Banking Act”) on 1 November 2005. There are currently four participation banks operating in Turkey, whose activities are under the supervision of the Banking Regulation and Supervision Agency. Participation banks are authorized by the Banking Act to collect deposit funds from the public under the “profit-and-loss participation accounts” and the “special current accounts”. The profit-and-loss accounts can be considered as a version of the Islamic finance instrument known as the “Mudaraba”, where the bank utilizes the funds deposited by account holders and that are accumulated in a pool for specific business activities. Any profits earned are shared between the account holder and the bank, in proportion to an agreed ratio.

Participation banks mainly offer two types of financing. The first is Murabaha, under which the funds are made available to companies in need of capital. The other is financial leasing, with terms similar to those offered by other leasing companies.

Apart from the institutionalized Islamic finance activities described above, a large number of syndicated loans in the form of Murabaha were made available to major Turkish companies such as Turkcell, Petrol Ofisi and Vestel in recent years. Under these transactions, the companies mentioned were provided with syndicated loans in the Murabaha form made available by credit consortiums consisting of financial institutions from the Persian Gulf region, led by the major actors of the global financial market. Considering that rising oil prices cause considerable capital accumulation in the Gulf Region, the Murabaha syndications can be considered as serious financing alternatives for Turkish companies.

Experts discuss Islamic banking challenges

LOCAL and foreign participants from Islamic financial institutions and regulatory bodies are gathering in the sultanate to tackle new challenges in implementing safety standards for Islamic banking in the region.

Increasing collaboration and interaction among financial institutions and other relevant agencies is needed to further expand the rapid growth of Islamic banking, said Dr A G Karunasena, executive director of South East Asian Central Banks (SEACEN) Research and Training Centre yesterday.

Speaking at the opening ceremony of a course on regulation and supervision of Islamic banks, he said that the sharing of knowledge and experiences among practitioners is essential to meet the diverse needs of consumers and businesses.

“Innovations of various Islamic financial products and services are not only expanding but also becoming more complex and sophisticated, resulting in new challenges to those who are responsible for overseeing and supervising financial institutions,” he said.

He hoped that the 46 participants from 24 institutions would be able learn the main elements of Islamic banking supervision and address differences between Islamic banking and conventional banking regulatory arrangements throughout the five-day course at Rizqun International Hotel.

Participants will also explore techniques and applications on Islamic banking regulation through case studies on the experiences of specific countries.

Dato Paduka Hj Ali Apong, Permanent Secretary at the Ministry of Finance, said that regulators and supervisors of Islamic banks need to keep abreast with the latest developments in Islamic financial services because “Islamic banks have now become a world force”.

He said that the launch of the first 91-day Sukuk Al-Ijarah, or Islamic bond in 2006, has “paved the way for Brunei to become the first sovereign to bypass conventional capital markets towards developing an Islamic capital market instrument”.

“The Ministry of Finance has issued the sukuk six times, which totalled $730 million to date, as one of the efforts to promote and develop Brunei as the hub for Islamic banking and finance,” he said.

Brunei has two Islamic banks, the Bank Islam Brunei Darussalam and Tabung Amanah Islam Brunei, or Brunei Islamic Trust Fund (Taib).

Islamic financial services comprise an estimated US$1 trillion market worldwide, according to credit rating agency Standard & Poor’s.

SEACEN Research and Training Centre, which has 16 member countries, including Brunei, was established in 1982 to review and analyse financial, monetary, and economic developments in the region.

The Islamic Research and Training Centre, on the other hand, provides training and information services in developing financial and banking activities that conform to Syariah or Islamic law principles.

The course is the third of its kind to be organised by SEACEN centre and the Islamic Research and Training Institute of the Islamic Development Bank. Malaysia and Indonesia previously hosted the course in 2005 and last year, respectively.

Shareen Han
The Brunei Times

Sharia-compliant Islamic Banking in India, a wealthy proposition

Globally, Islamic finance is estimated to be worth about $300 billion, growing at 20% annually. With this growth, the need for Shariah compliant financial products has also increased. The product offerings are similar to normal banking products; however the main difference is that the funds collected are not for the purpose of accumulating/ paying interest or invested in any negative businesses that harm morality of the society. The basic principle of Islamic banking is the prohibition of interest.

India with a 13% Muslim population, the highest in a non-Islamic country, should have been in the forefront of Islamic banking initiatives, but it is yet to be permitted here. It will hugely benefit the Indian economy by attracting investments from the cash rich Middle Eastern economies on the lookout for new investment destinations. Five Indian companies, Reliance Industries, Infosys Technologies Wipro, Tata Motors and Satyam Computer Services figure in the Standard & Poor’s BRIC Shariah Index.


Under Islamic banking, the conditions for investing in shares are:
1. It is not permissible to acquire the shares of the companies providing financial services on interest, like conventional banks, insurance companies, or the companies involved in some other business not approved by the Shariah, such as companies manufacturing, selling or offering liquors, pork haram (prohibited) meat, or involved in gambling, night club activities, pornography, gold trading, advertising and media (with the exception of newspapers).
2. If the main business of the companies is halal (lawful), like automobiles, textiles etc, but they deposit their surplus amounts in an interest-bearing account or borrow money on interest, the shareholder disapprove such dealings.
3. If income from interest-bearing accounts is included in the income of the company, the proportion of such income in the dividend paid to the shareholder must be given to charity, and must not be retained by investor.
4. The shares of a company are negotiable only if the company owns some illiquid assets. If all the assets of a company are in liquid form, i.e. in the form of money, they cannot be purchased or sold except on par value, because in this case the share represents money only and the money cannot be traded in except at par.
5. For companies whose main activity is not un-Islamic but a part of their income is not purely Islamic or a minor part of it comes from un-Islamic activities are prohibited, for example hotel, sugar, entertainment etc.

Once companies are chosen from the above criteria, further screening is done on the basis of following financial ratios:
• Exclude companies if Total Debt divided by Trailing 12-Month Average Market Capitalization is greater than or equal to 33%.
• Exclude companies if the sum of Cash and Interest Bearing Securities divided by Trailing 12-Month Average Market Capitalization is greater than or equal to 33%.
• Exclude companies if Accounts Receivables divided by Total Assets is greater than or equal to 45%.

For profits made through capital gains, the accepted rule is that if requirements of the ‘halal’ shares are observed, then most of the assets of the company are ‘halal’, and a very small proportion of its assets may have been created by the income of interest, so the whole price of the share therefore, may be taken as the price of the ‘halal’ assets only.

The real estate sector is attracting investment from Middle East, as fund raising has got difficult in this sector. Around 50% of Indian stocks are believed to be Shariah complaint, but very few companies realize the potential., which is primarily due to non-availability of data on Shariah based investment appetite among local Muslims. Investors, local as well as global, will find Indian stock market a better place to invest, and sectors like IT, pharmaceuticals, automobile, energy, cement, steel and mining to choose from. Thus Islamic investment options available in India are wider and much better than the availability of the same in many Islamic countries.

source : labnol

Islamic Banking: Doing Things Right and Doing Right Things

Malaysian Journal of Economics Studies

By Rosly, Saiful Azhar.


To do the right thing, the contract (‘aqad) method is usually employed to define Syariah legitimacy of Islamic banks. Equally important, the Islamic banking business is expected to operate on the moral principles of risk-taking (ghorm), work (kasb) and responsibility (daman). By doing so, the ethico-legal dimension of Islamic banking can be made evident. While claiming Syariah legitimacy, doing things right is critical where Islamic banks must compete on the basis of efficiency. In this way, factors affecting bank performance such as size of capital, scale economies and adverse selection must not be discounted in determining the success of the Islamic banking business.

1. Introduction

The globalisation and liberalisation of the financial sector are expected to result in greater participation in Malaysia of Arab Islamic banks, notably Al-Barakah, Al-Rajhi and Kuwait Finance House (KFH), and western banks such as Citibank, ABN-Amro and Hong Kong and Shanghai Banking Corporation (HSBC). Islamic banking in Malaysia began operations in 1983 and is set to command a 20 per cent market share by the year 2010. Currently, Islamic banking consists of two full-fledged Islamic banks and the Islamic banking system (IBS) banks. Although it only accounts for 11 per cent of the Malaysian market share, up from 2.5 per cent in 1997, it has grown at an average rate of 18 per cent per year, against the global growth rate of 15 per cent. The IBS banks are governed by the Banking and Financial Institution Act (BAFIA) 1992 while the two full-fledged Islamic banks are run under the Islamic Banking Act 1983.

More broadly, the Securities Commission has prepared guidelines on Syariah stock screening. About 80 per cent of the stocks traded in the Bursa Malaysia are Syariah compliant. Although not accepted globally, Malaysian Islamic bonds have a sizeable 50 per cent share of the Malaysian bond market. Sale-buyback (bay ‘al- ‘inah) and debt-trading (bay ‘al-dayn) contracts are widely used in the Islamic money market. These include the Khazanah bonds, Islamic accepted bills and inter-bank money Islamic negotiable instruments (INI).

The Islamic insurance (takaful) business is relatively new and commands about 5 per cent of the Malaysian insurance market. There is no window-based takaful. Takaful operations are run by four full-fledged takaful companies namely, Syarikat Takaful Malaysia, Takaful Nasional Malaysia, Mayban Takaful and Takaful Ikhlas. Unit trust management companies (UTMCs) are also making inroads into Islamic financial markets. Issuance of units is made by the UTMCs via the contract of agency (wakalah). As a wakil (representative) of unit holders, UTMCs charge nominal fees for the service rendered. There are more than 13 Islamic funds in the market with about 5 per cent market share. These funds are invested in Syariah compliant financial assets as approved by regulatory bodies such as the securities Commission and Bank Negara Malaysia. Some examples are the Syariah Index, equity and Islamic bond funds.

Islamic finance is a huge business today and represents more than USD200 billion in funds worldwide. Western investment banks including HSBC and Citibank have made significant inroads into the fee-based business in structured Islamic finance involving more than USD50 billion global sukuks. It has also elevated some Muslim jurists into extremely well-paid global Islamic finance advisors to approve new Islamic financial products such as Islamic hedge funds. To some extent they are becoming more aggressive in ensuring that Islamic finance matters in the global financial market, even though they may cause controversies and misinterpretation of Islamic law. Are they doing the right thing?

2. Modern Islamic Finance: The Contract (‘Aqad) Approach

The nature of Islamic finance today is largely fashioned by Islamic finance jurists who hold the authority in determining the Syariah value of financial products. Syariah status is given by virtue of contract validation. That is, a financial instrument that uses a contract deemed valid by Islamic finance jurists is usually granted Syariah compliant status.

Since the Holy Quran has condemned interest and enjoins profit creation via trading (bay”), the Islamic finance jurists have resorted to applying the explicit meaning of al-bay i.e. trading in determining the Syariah legitimacy of financial instruments. By trading, they usually make reference to sale of goods and services. For example, a contract of sale consists of the following pillars:

(i) Buyer and seller

(ii) Object of sale

(iii) Price

(iv) Offer and acceptance

A valid contract must ensure that each of the above pillars does not contain the following prohibitions:

(i) Interest as riba

(ii) Ambiguities (gharar)

(iii) Gambling (maisir)

(iv) Prohibited commodities such as liquor, pork etc.

As an example, both buyer and seller must be rational. The object of sale is a permissible property (mal-mutaqawim). The seller must also hold ownership before making the sale. Price must be determined on the spot. The offer and acceptance is made explicit by way of a written document or verbal statement. These requirements must be strictly observed to avoid ambiguities (gharar) in the contract. Some sale contracts become invalid (batif) if they are inclined to gambling such as selling fish in the water or determining price using stones or arrows. As long as the contracting parties have fully observed the legal requirements concerning their transaction, the contract of sale is deemed valid (sahih).

The Contract Approach therefore looks at the explicit or external (zahir) properties of contracts. It does not give qualification to the role of intention (niyyah) of the contracting parties. In doing so, the Contract Approach has given birth to a number of products where profits are created by virtue of time value. It opens Islamic banking to a variety of credit sales and credit-based transactions. These are:

(i) Al-murabahah (sale with lump sum deferred payment,)

(ii) Al-bai-bithaman Ajil (BBA) (sale with instalment payment)

(iii) Bay’al- ‘inah (sale-buyback with instalment payment)

(iv) Tawaruq (instalment sale + cash sale)

(v) Bay’al-dayn (sale of debt at discount)

(vi) Ijarah Thumma Al-bay AITAB (interest-free financial leasing)

In 2004, BBA and murabahah constituted 49.9 per cent and 7 per cent of total Islamic bank financing respectively while AITAB accounted for 24 per cent.

In other words, credit financing accounted for 80.9 per cent of total Islamic financing. The Contract Approach has led Islamic banking into offering credit-based products (CBP) as a means of generating profit. The implications are examined in the following section.

3. The Contract (‘Aqad) Approach: Economic Impacts

Islamic banks today face similar problems as those experienced by conventional banks. However, there are some that are totally new and unique to Islamic banking. These are discussed below.

3.1. Economies of Scale – Reducing Overheads by Adopting the Universal Banking Model

The Contract Approach puts credit-based products to the forefront of Islamic banking operations. It displaces the potential of niche products such as salam, istisna’, mudarabah and musyarakah. Although the Islamic Banking Act 1983 (IBA 1983) allows Islamic banks to venture beyond credit-based financing, Islamic banks have chosen not to do so. The IBA 1983 states that an Islamic bank is, “any company which carries on the Islamic banking business and holds a valid license”. Further on, it defines the nature of Islamic banking business as “a banking business whose aims and operations do not involve any element which is not approved by the religion of Islam.”

The main idea is to conduct many financing facilities under one roof, say by Bank A. If a customer wishes to renew or purchase an insurance policy he can do so in Bank A; or if he wants to purchase stocks he does not have to waste his time to see a broker elsewhere since Bank A can handle stock transactions as well. Companies that hold accounts with Bank A and plan to go public do not have to look for underwriters since Bank A can also underwrite securities. Leasing and venture capital can also be conducted in Bank A. What we see here is a simple model where bank A does not have to form new subsidiaries to undertake these “non-banking” activities. It can save operations costs and help reduce the cost of banking services and price of financial products.

A firm is said to benefit from economies of scale when cost per unit falls as output increases. BAFIA 1992 does not allow banks to be engaged in leasing, insurance, stock and underwriting transactions under one roof. Hence to circumvent banking laws, attempts to venture into new “non-banking” activities can only be made by forming subsidiaries. These subsidiaries are no longer governed by banking laws. However, if bank A plans to form a subsidiary, or many subsidiaries, the cost of doing so is not cheap. New CEOs, managers and officers must be appointed, which adds more pressure on manpower shortages. Other costs such as rentals of office premises and maintenance must also be met, putting more pressure on capital.

However, when these “non-banking” operations are carried out by one bank alone, unnecessary costs can be avoided. It can reduce the cost of banking operations. Banks can run more efficiently when they are allowed to take on “non-banking” activities under one roof.

In banking, cost reduction from economies of scale refers to the non-financial aspects of banking operations. These costs include the physical cost of operations, sometimes known as the resource costs involving personnel, fixed overheads and buildings. How these costs are translated into cost of financing, namely interest rates or profit rates, can easily be observed in the following equations:

(i) Contractual interest-rate = base lending rate + risk premium (spread)

(ii) Contractual profit-rate1 = base profit rate + risk premium (spread)

(iii) Base lending rate or Base profit rate = cost of deposits + operating cost + bank’s profit margin.

If a bank embarks on the “non-banking” activities under one roof, it can reduce cost of operation. This in turn lowers interest rates on loans or profit rates on credit-based products.

In Japan and Germany, banks are allowed to do all of the above, hence the name “universal banking”. They are allowed to purchase stocks of public listed corporations as well as those over the counter. In Germany a bank provides insurance as well as stockbroking services. But in Malaysia, the BAFIA 1992 prevents commercial banks from doing the same as their main business is lending and borrowing. However, they are allowed to pursue non-banking transactions by forming subsidiaries.

Interestingly enough, full-fledged Islamic banks in Malaysia, namely Bank Islam Malaysia Berhad (BIMB) and Bank Muamalat are free from BAFIA 1992, since both run under the Islamic Banking Act 1983. Since businesses relating to insurance services (takaful), leasing (ijarah), stockbroking (wakalah), unit trusts (wakalah-mudarabah), underwriting (al-bay ‘) and equity (musyarakah) are approved by Islam, they can be pursued under one roof by Islamic banks. But why they are not in fact pursued is an interesting question.

Economies of scale can only be realised as size increases. One way of doing so is through portfolio diversification. What seems to happen today is the opposite. For example, BIMB promotes credit sale products. Whilst the Islamic Banking Act 1983 allows BIMB to offer multiple services under one roof, it opted not to do so. Instead, it has opened new subsidiaries such as Syarikat Takaful Sdn. Bhd. (Insurance), Amanah Saham Bank Islam (Unit Trusts), Bank Islam Brokerage (Stock Broking), Bank Islam Consumer Financing (Trading) and Bank Islam Research and Training (BIRT).

What we see in the above is an Islamic banking operation that seems to run under BAFIA control. The losers are not the bank managers since they are salaried personnel but the customers who may have to absorb the bank’s high overheads. If BAFIA 1992 put a wall between banking and commerce, why didn’t the Islamic banks pursue universal banking when such walls do not exist in the IBA 1983?

Failure to adopt the universal banking model can impact Islamic banks in two ways. First, it has to compete with conventional banks on size alone. But with a small asset base, the average cost per unit of financing will be much higher than conventional banks, and this explains why profit rates and transaction costs of Islamic banks are usually higher than conventional rates. Second, the credit system will not allow asset diversification since it is easier to manage financing via credit than financing under a system of partnership.

By adopting the universal banking model, Islamic banks can help reduce the price of credit-based products (CBP). Cheaper financing can lead to higher demand for CBP funds and increase the volume of Islamic financing. In the same vein, to increase the supply of CBP, the supply of deposits must increase. This is only possible when Islamic deposits provide better rates of return than conventional deposits. But this approach requires an Islamic bank to diversify its assets by reducing credit based financing. A good mix of equity, leasing and credit sale activities is a workable option, as it poses no violation of the Islamic Banking Act 1983.

3.2. Dealing with Adverse Selection and Default Risk

Financing contracted under the murabahah, BBA and AITAB (i.e. CBP) contracts usually embrace the credit culture. The financial requirement includes collateral, guarantors and a system of credit assessment in determining the credit worthiness of a prospective customer. Islamic risk management generally points to credit risk management, i.e. protecting banks from defaulting customers.

Table 2 shows that Islamic banks have a higher default rate than conventional banks. The six months non-performing financing is almost double that of conventional banks at 9.6 per cent. This may have to do with the problem of adverse selection. With a smaller market share in assets and deposits, economies of scale are harder to come by for Islamic banks relative to conventional banks. To that effect, Islamic banks usually run under high operating budgets, which are absorbed by bank customers who have to pay high profit rates. When credit products are sold at higher rates than conventional loans, liquidity in Islamic banks may increase as the demand for credit-based products is lower than the demand for loans. To reduce the idle balances, Islamic banks may have acted with less prudence when approving credit based products. But only the bad paymasters are willing to pay higher rates. Often rejected by conventional banks, they have nowhere to go except the Islamic banks. The good ones usually resort to loans. This may well explain the higher rate of nonperforming financing in Islamic banks.

Credit risk management in Islamic banks therefore should go beyond assessing the credit worthiness criteria of customers. The problem of adverse selection can be overcome by not extending new facilities to customers with less financial viability, but this may not improve the liquidity problem. By not doing the right thing how can one do right?

Failure to adopt the universal banking model can impact Islamic banks in two ways. First, it has to compete with conventional banks on size alone. But with a small asset base, the average cost per unit of financing will be much higher than conventional banks, and this explains why profit rates and transaction costs of Islamic banks are usually higher than conventional rates. Second, the credit system will not allow asset diversification since it is easier to manage financing via credit than financing under a system of partnership.

By adopting the universal banking model, Islamic banks can help reduce the price of credit-based products (CBP). Cheaper financing can lead to higher demand for CBP funds and increase the volume of Islamic financing. In the same vein, to increase the supply of CBP, the supply of deposits must increase. This is only possible when Islamic deposits provide better rates of return than conventional deposits. But this approach requires an Islamic bank to diversify its assets by reducing credit based financing. A good mix of equity, leasing and credit sale activities is a workable option, as it poses no violation of the Islamic Banking Act 1983.

3.2. Dealing with Adverse Selection and Default Risk

Financing contracted under the murabahah, BBA and AITAB (i.e. CBP) contracts usually embrace the credit culture. The financial requirement includes collateral, guarantors and a system of credit assessment in determining the credit worthiness of a prospective customer. Islamic risk management generally points to credit risk management, i.e. protecting banks from defaulting customers.

Table 2 shows that Islamic banks have a higher default rate than conventional banks. The six months non-performing financing is almost double that of conventional banks at 9.6 per cent. This may have to do with the problem of adverse selection. With a smaller market share in assets and deposits, economies of scale are harder to come by for Islamic banks relative to conventional banks. To that effect, Islamic banks usually run under high operating budgets, which are absorbed by bank customers who have to pay high profit rates. When credit products are sold at higher rates than conventional loans, liquidity in Islamic banks may increase as the demand for credit-based products is lower than the demand for loans. To reduce the idle balances, Islamic banks may have acted with less prudence when approving credit based products. But only the bad paymasters are willing to pay higher rates. Often rejected by conventional banks, they have nowhere to go except the Islamic banks. The good ones usually resort to loans. This may well explain the higher rate of nonperforming financing in Islamic banks.

Credit risk management in Islamic banks therefore should go beyond assessing the credit worthiness criteria of customers. The problem of adverse selection can be overcome by not extending new facilities to customers with less financial viability, but this may not improve the liquidity problem. By not doing the right thing how can one do right?

3.3. Coping with Interest Rate Volatilities

Islamic banking products should be able to withstand changes in the cost of funds, notably interest rates. Products contracted under partnership (musyamkah) and leasing (ijarah) can make the necessary adjustment as the former faces price risk while the latter can adjust the rental rates once the leasing period expires. Neither is tied to the rate of interest, as both are not based on credit. Likewise, sale by order contract (salam and istisna) is subject to price-risk.


But the same does not apply to products contracted under sale by deferred payments (murabahah/BBA). BBA prices are usually determined the same way as loans. Rising cost of funds can cause the BBA profit rate to increase just like the interest rate on loans. But this is not how it works today. Islamic banks cannot alter the al-bai bithaman ajil (BBA) profit rate, as it will change the selling price in existing contracts. Doing so will violate the third principle of sale (al-bay1), according to which the contractual price cannot be altered. The law of contract says there must be only one price in one sale. A sale with two or more prices is not a valid sale.

3.4. Rising Interest Rates

When an Islamic bank sees conventional banks raising interest rates on loans, there is nothing much it can do to stop customers from using its services since now loans are relatively more expensive.

Although it is ideal to increase BBA financing, it would be relatively difficult to do because Islamic banks need more deposits to make new BBA. As existing BBA financing have locked in a specific profit margin, Islamic banks will find it tough to compete with conventional deposits that offer higher interest rates. To give higher returns (hibah) would cut earnings since the locked-in BBA financing is unable to generate more revenue.

In the final analysis, Islamic banks will find themselves on the losing side. To secure more deposits, they have to resort to the inter-bank money market where the cost of funds is even higher than hibah rates. Doing so will erode earnings as the cost of deposits increases more than revenue.

3.5. Declining Interest Rates

If interest rates are expected to trend downwards, Islamic banks may see more trouble. This time the bad news is excess liquidity. As more people expect interest rates to fall, the demand for BBA financing will drop. Now it can be more expensive using BBA. This is because existing loans can now charge lower interest rates that existing BBA cannot do.

For example, if annual profit rate of a BBA is 12 per cent, a drop in interest rate cannot allow Islamic banks to revise the rate downwards, as this will induce changes in the contractual selling price. Suppose at 10.5 per cent profit rate per annum, an asset costing RM 150,000 will command a selling price of RM428,882 at a monthly instalment of RM1,416 with a 25-year maturity. If the bank plans to reduce profit rate to 9.5 per cent to keep up with the competition, the monthly instalment will fall to RM 1,310, which translates into a lower selling price of RM393,162. Changes in contractual price such as this will invalidate the BBA contract.

In the case of Islamic banks, the inability to cut profit rates will make it possible for them to increase the return on Islamic deposits. To some extent non-Muslim depositors will find Islamic deposits more attractive. Placing their money in the Islamic deposits shifts some deposits away from conventional products.

What we see in the above is the following: a lower demand for BBA but higher supply of Islamic deposits. Such a mismatch can destabilise Islamic banking operations. It leads to excess liquidity as the BBA-dependent Islamic banks have fewer options in financing.

3.6. Performance of Islamic Banks

Empirical studies on Malaysian Islamic banking are limited to Bank Islam Malaysia Berhad (BIMB). As a credit-intensive Islamic bank that has opted not to adopt the universal banking model, BIMB has to compete based on price and market share. Without niche products, BIMB’s credit-based products must be competitive in order to do well.

Samad (1999) evaluates BIMB’s productivity and managerial efficiency in the sources and uses of the bank’s funds. He finds that managerial efficiency of mainstream banks is higher than BIMB. Productive efficiency or the average fund utilisation rate and profit earned by BIMB are also found to be lower than those for mainstream banks. All profitability indexes indicate that profits earned by BIMB are lower than those for the mainstream banks.

Dirrar ( 1996) evaluates the performance of BIMB and makes comparisons with Maybank Berhad and BSN Commercial. He examines the growth, profitability, liquidity and the capital adequacy ratio of the three banks. He finds that BIMB’s major financing is concentrated on credit-based investment compared to the other two banks. Wong (1995) evaluated the performance of BIMB after 10 years in operation. He showed that BIMB’s achievements are commendable, although the over-dependence on credit finance remains its major shortcoming. His study shows that an Islamic bank has the ability to maintain its viability and growth in a capitalistic financial environment. However, in terms of social obligations, generally, BIMB has not made sufficient contributions towards achieving a more equitable distribution of income in Malaysia.

Kader (1995) conducted a survey on BIMB’s Muslim depositors and found that 61.4 per cent of them also hold accounts in the mainstream banks for reasons related to financial deepening. As the banking industry is further developed, the willingness of, and the opportunity for, the public to utilise the system, is directly affected by factors such as accessibility to, and the attractiveness of, the financial instruments and the kind of services they are able to provide. Kader (1995) also showed that Muslims hold accounts in the mainstream banks mainly due to convenience such as the availability of more branches and ATMs as well as location convenience. The religious factor is not in itself sufficient to drive Muslims to use Islamic banking facilities.

The above findings show that increasing asset size and asset portfolio is not possible if the Contract Approach is used in determining the Syariah legitimacy of products. The Contract Approach has led many Islamic banks to offer many credit-based products. The displacement effect of changing interest rates is serious when very few non-banking facilities are made available by the Islamic banks.

4. The Remedy: The Equivalent Countervalue (Iwad) Approach

The Contract Approach adopted by Islamic banks in Malaysia has shown evidence of product duplication using features commonly found in interest-bearing instruments. By doing so it is readily exposed to credit risk. It is also prone to instability when interest rates are volatile. Without niche products, Islamic banks are heavily dependent on credit-based products and cannot be expected to outperform conventional banks as the latter are larger and therefore run on lower overheads than Islamic banks.

The author believes that the Contract Approach is an important methodology in determining Syariah value but must incorporate an additional criterion to further define Syariah legitimacy on a broader scale. The criteria reflect both legal and moral dimensions of contracts such that they are able to fend off any attempt to instil credit mechanisms under an Islamic label and making money from time.

Although the main trust of Islamic banking and finance has been the prohibition of interest, the application of trade and commerce (al-bay’) as an alternative to riba has not received equal attention as had the interest (riba) factor. This has led many people to think that the only distinction between an Islamic bank and a conventional bank is that the Islamic bank operates without interest.

But the cornerstone of Islamic banking is that it runs on the principle of trade and commerce (al-bay ‘). Justice and fairness can be realised from trading but is absent in riba. It is argued that profit arising from trade contains an equivalent countervalue (‘iwad) in the form of: (i) risk (ghorrn), (ii) work and effort (kasb), and (iii) responsibility (daman).

As an example, a trader buys 100 units of goods X for $50 per unit wholesale and sells it for $80 retail where he earns $3000 profit. The question is “what earns him the $3000 profit?” A quick answer can be the following:

(i) He has put his money or capital ($5000) at risk. There is no guarantee that he can sell the goods for $80. He may not find buyers at all or only manage to sell a few at a lower price. By facing market or price risk he thus deserves the profit.

(ii) He has put a lot of hard work in terms of planning, promotion, negotiation and networking skills to get the goods sold. This addition in value earns him the profit.

(iii) By providing warranties on the goods sold, he holds responsibility over any product defects. The customer can return the goods for cash or accept a rebate or discount.

When the ‘iwad factors are incorporated in contractual obligations, there is less tendency for Islamic banks to use credit-based products (CBP) as it is clear that the CBPs actually” make profits out of time and not risk, effort and responsibility. And when profit is created from time, then it is plainly a riba mechanism at work. Interest or riba is paid as a reward for waiting. It compensates the creditor for postponing his current consumption. The creditor must be compensated for the displeasure or disutility for postponing his current spending. He believes that money today gives more pleasure than money tomorrow since the future is uncertain.

Likewise, the elements of risk, work and responsibility are not apparent in the contract of loan with interest. For example:

1. Risk: A prudent bank will only give loans that are free from default risk. A debtor must place a collateral or guarantor on the loan. If the debtor fails to pay up, the bank can recover the loan from the sale of the collateral or payments from the guarantor. Thus interest as profit is generated from waiting and not risk-taking.

2. Work and effort: The interest received by the bank does not come from skills, knowledge and other value-added elements originating from the loan agreement. The loan to the borrower is money. For example, when the bank makes a loan to a businessman, it does nothing to the business but still receives interest income from the loan.

3. Responsibility: The bank holds no responsibility over the business performance of borrowers. A business failure will still require the borrower to pay up. The interest charged on the loan is the payment for waiting and has less to do with responsibility.

5. Conclusion

This paper examines the nature of the Contract Approach and its impact on the Islamic banking business. Although it is a right thing to do, disregarding the intentions of the contracting parties has led Islamic banks to generate income (via CBPs) by virtue of time instead of price risk, effort and responsibility. When operations are largely based on credit financing, Islamic banks can be exposed to credit risk which is a norm in conventional banks. The pricing of CBP products is also similar to interest-bearing ones when a default premium (i.e. spread) is added to the cost of funds and overheads. Adverse selection is also a worrying trend. With smaller market share and sizes, Islamic banks run on higher operating costs. It is hard to do things right under these circumstances. With higher overheads, CBP’s profit rates are usually higher than interest-rates. Lower demand for credit-based products increases idle balances. To mop up the excess liquidity, it is suspected that Islamic banks have acted with less prudence in conducting credit assessment. Adverse selection seems to have affected Islamic banks more than their conventional competitors as is evident in their relatively higher non-performing financing (NPF). The CBPs are also prone to destabilising the bank’s earnings, as they are predominantly fixed-rate assets.

The right thing to do is to adopt the ‘iwad approach. The globalisation of Islamic banking should lead to Islamic banking products which contain the elements of risk, effort and responsibility. These three elements should be explicitly defined in the contractual agreement in writing and be recognised by the civil law of the countries where Islamic banks are doing business. By doing so, asset sizes should increase. This can help cut down the cost of operations and therefore reduce the cost of Islamic financial instruments. In this way Islamic banks can become more competitive in the global financial system.

1 Since interest is not allowed in Islamic banking, financing is done through sale with deferred payments, so the profit rate refers to the ratio of profit margin over total financing given by the bank to the customer.


Bank Negara Malaysia. 2004. Annual Report 2004. Kuala Lumpur.

Dinar, E. Elbeid. 1996. Economics and Financial Evaluation of Islamic Banking Operations: A Case of Bank Islam Malaysia 1983-1995. Unpublished paper, IIUM.

Kader, R. 1995. Bank Islam Malaysia: Market Implication. In Leading Issues in Islamic Banking and Finance, ed. Al-Harran. Kuala Lumpur: Pelanduk Publications.

Rosly, Saiful Azhar. 2005. Critical Issues on Islamic Banking and Financial Markets. Bloomington: Authorhouse.

Rosly, Saiful Azhar and Abu Bakar, Affendi. 2003. Performance of Islamic banks and mainstream banks in Malaysia. International Journal of Social Economics 30: 1249-1265.

Rosly, Saiful Azhar. 1999. Al-Bay Bithaman Ajil financing: impacts on Islamic banking performance. Thunderbird International Business Review 41: 461-480.

Samad, A. 1999. Comparative efficiency of the Islamic bank vis-a-vis traditional banks in Malaysia. IIUM Journal of Economics and Management 7(1).

Wong, Choo Sum. 1995. Bank Islam Malaysia: Performance Evaluation. In Leading Issues in Islamic Banking and Finance, ed. Al-Harran. Kuala Lumpur: Pelanduk Publications.

SAIFUL Azhar Rosly*

Malaysian Institute of Economic Research

Deutsche launches Islamic investment product in Asia

Islamic investors in the region get their first chance to buy Deutsche’s Croci certificates.
Deutsche Bank is bringing its Islamic index certificates to Asian investors for the first time. The notes use the bank’s proprietary equity valuation model, known as Croci (short for cash return on capital invested), to pick stocks that meet Islamic investment guidelines.

Investors in the Middle East and Europe already have the opportunity to buy the bank’s four Islamic Croci certificates and Deutsche says that investors in Asia, particularly Malaysia, are now keen to get a piece of the action – during the past five years the notes have all averaged year-on-year returns around 10% better than their benchmarks.

Three of the certificates are linked to specific geographic regions – Europe, Japan and the US – and the fourth is a global certificate, which takes exposure to 30 equally weighted stocks from the US, 20 from Europe and 10 from Japan.

The relevant Dow Jones Islamic index provides the base for the universe of stocks. Each month the indices are re-balanced, with Deutsche applying its Croci analysis to pick the cheapest stocks from the Dow Jones index.

In effect, Croci is a way of comparing companies on a like-for-like basis regardless of the accounting techniques they use. Deutsche’s team of analysts burrow through a company’s accounts and revamp them so that companies from different parts of the world and different sectors are directly comparable.

From this analysis Deutsche ranks each stock in the index by an economic price-earnings ratio that is derived through the Croci method of analysis. This lets investors see at a glance which stocks are the cheapest. According to Deutsche, returns from Croci indices more or less match a rising market and outperform a falling one.

Comparing the historic returns of the Croci US index against the S&P500 bears this out. From its inception in 1996, the Croci index neatly tracked the broad bull run on the S&P500, lost ground during the irrational returns of the era and streaked ahead in the bubble’s bearish aftermath. As confidence has returned during the past two years, the Croci methodology has again been generating similar returns to the S&P500.

To be sure, the Croci method has certainly proven its worth in the Islamic sector. Annualised five-year returns for the four indices are impressive: up 11.78% against the Dow Jones Islamic Europe index, 9.8% against the Dow Jones Islamic US index, 11.5% against the Dow Jones Islamic Japan index and 11.63% against the Dow Jones Islamic Global index.

Investors in the certificates pay an initial fee of up to 3% and 0.375% a quarter in management fees. The US and global certificates are denominated in dollars, the Europe certificates in euros and the Japan certificates in yen.

As well as the certificates, investors can take exposure to the index through swaps or options, which Deutsche can use to create structured products.