Banks that keep to shariah law could offer a solution to some of the problems facing Western financiers


Luke Hunt


The global turmoil that has ravaged the international banking sector is breathing fresh life into alternative investments like Islamic finance which has undergone an image makeover in recent years and improved its appeal among conservative investors. 

Behind that appeal is the trillions of petrodollars that arose out of a quadrupling in the cost of crude since 2001 and the sharp increase in the number of Middle East investors seeking to expand their portfolios beyond their traditional oil and construction remits in the desert kingdoms.


Saiful Azhar Rosly, the head of Islamic banking at the International Centre for Education in Islamic Finance (ICEIF), said Islamic financing was not without its problems, however, the rigours imposed by shariah law would have prevented the collapse of Wall Street institutions and the $700 billion rescue package that has since followed.


“Prudent lending was a root cause of the sub-prime crisis in the United States. The borrower did not have to make a down-payment for a home loan, he was just asked whether he could pay it back, that I can presume will not happen in Islamic banking where you would have to pay much closer attention,” he told Bangkok Post Sunday.


Islamic finance in the modern era is a late-comer when compared with the different styles of Western capitalism.


Its development first emerged in the early 1970s with the establishment of Gulf banks on the back of an earlier oil boom, however, the philosophies of Islamic finance go far deeper and back to the times of the Prophet Muhammad and the beginnings of shariah law in the 7th century.


Under shariah law, speculation, the payment of interest and complicated derivative products like those that brought Wall Street to its knees are prohibited.


“You’re not allowed to sell a loan,” Rosly adds, with reference to the re-packaging and selling of bad loans in the US.


Companies that are considered heavily in debt are shunned, and those that deal in gambling, alcohol, pornography or illicit products like pork are strictly off limits.


As opposed to a mortgage, Islamic finance operates more along a lease basis. Officially, the lender owns the property while the borrower makes a substantial down payment and enters a rental agreement. Ownership is transferred once the total value is paid out.


Islamic banks and insurance companies also profit share among customers and are much more geared towards spreading risks when compared with their Western counterparts.


It’s for Muslims who are prepared to pay a piety premium, to ensure their investments measure-up to the moral standards imposed by the shariah code.


“The growing preference for Islamic financial instruments is all the more meaningful with the spread of Islamic banking into new markets,” Standard & Poor’s wrote in its 2008 outlook on Islamic finance.


“Banking customers in the Arab world and a large part of Asia as well as Muslims in the West are increasingly attracted by the Islamic model.”


This has resulted in $500 billion worth of shariah-compliant assets around the world which have grown at an average 10 per cent a year for the last decade.


Malaysia has invested heavily by pioneering sukuk, or Islamic bonds, which are mainly backed by property assets. Equally important, Malaysia wrote benchmark laws that underpin and secured its Islamic financial market. Coherent regulations have been the biggest issue confronting the industry.


Also more and more non-Muslim countries are vying for a share of the market. Governments around the world want to tap Islamic finance particularly if they can raise cheaper funds to finance big ticket projects like electricity, roads and mass transportation projects.


The UK and Germany have been prominent while in Asia, Thailand, Hong Kong, Singapore and Indonesia are attempting to follow Malaysia’s lead.


Hong Kong has launched an Islamic China Offshore Index on its stock exchange where sharia-compliant companies can list and raise capital to further leverage themselves into Mainland China.


Indices that contain shariah-compliant companies are becoming increasingly popular in the West and in non-Muslim Asia. Standard & Poor’s already covers 30 shariah stock market indices and screens close to 30,000 global stocks for potential Islamic investment.


But Rosly said uncertainty faced by Western investors, the liquidity crisis and freefalls in global equity markets would rub off on Islamic finance.


“The global crisis is creating a lot of uncertainty and this will hurt the issue of sukuks,” he said, adding that sukoks were more suited to governments and sovereign wealth funds as opposed to companies.


In July, Thailand – home to six million Muslims – scrapped plans to issue its first $500 million Islamic bond this year due “to several issues”. Although Finance Ministry deputy permanent secretary Sathit Limpongpa insisted “we should see a bond issue in the next fiscal year”.


Rosly added that ratings issues would impact on a government’s ability to launch an Islamic bond and this need to be considered.


Malaysia, for instance, which is “A” rated and holds about two-thirds of the global sukuk market enjoys slightly stronger ratings than Thailand, where agencies are warning that ongoing political turmoil could lead to downgrades.


And this, Rosly says, will challenge Bangkok’s ability to raise cash for its economy whether through a sukuk or a regular international government bond tender.

source : bangkokpost


Islamic Finance in Asia

A growing river of money seeks investment consistent with Islamic religious principles

Three races are now underway on the topic of Islamic Finance and Asia.

Firstly, there is a race among financial markets to get their share of a fast-growing (15 percent or more a year) business.

Secondly, just as important, there is a race to see how much business Islamic finance products can attract against competition from conventional forms particularly in Muslim-majority countries.

The third race is between varying interpretations of shariah law to determine how far down the road of exotic products — hedge funds, options and derivatives — Islamic finance can honorably go while adhering to the spirit of the law. The Gulf countries tend to follow stricter interpretations than Malaysia. The region is often referred to as the GCC states, the six members of the Gulf Cooperation Council – Saudi Arabia, Kuwait, United Arab Emirates, Qatar, Bahrain, Oman.

A recent Euromoney Seminar on Islamic Finance in Kuala Lumpur provided a good background in all these races – but also drew attention to the fact that Islamic Finance is still something of a specialized sideshow attracting its own players to discussion but remaining outside the ken of conventional finance.

The most important hub of Islamic finance is the Gulf, partly because it has a stronger history of links between religion and finance and partly because its huge capital surpluses have created a demand by its financial intermediaries for Islamic products in other jurisdictions, not necessarily Islamic ones. Overall there are estimated to about US$70 billion worth of sukuk (the main form of traded Islamic security) outstanding though only about 25 percent of that is listed and trading is very modest.

Dubai is the main centre for listing and trading followed by London. However, Malaysia is now probably the fastest-expanding center, having moved from purely domestic listings to international ones, with the government raising US$600 million with a sovereign sukuk and allowing foreign Islamic finance institutions easy access to the domestic market, which encouraged the entry of GCC players and created much cross-fertilization.

It is the sheer rate of growth of Islamic finance and the possibility that its share of global finance will continue to increase rapidly which is pushing Tokyo, Singapore and Hong Kong to try to grab a piece of the action. At the very least they need to be able to offer shariah-compliant products to rich GCC investors, and perhaps even sell the concept of sukuk to local, non-Muslim investors.

However all this is easier said than done. Of the three Singapore clearly has the best opportunity. Its proximity to the Malaysian market and to Indonesia, its links (partly due to oil trading) with the GCC and even its local Muslim population are helpful. It has changed its banking and tax laws to ensure that Islamic products are treated in the same way as conventional debt securities (even though they supposed to be different in principle) and also put them under the same regulator. The Monetary Authority of Singapore is able to provide clarity on tax and regulatory matters for Islamic asset management.

Singapore has attracted more Middle East banks and its large REIT market is also attractive to Islamic investors who look for regular returns from real assets. Even so, Malaysia is likely to lead the region as originator of Islamic products.

Next is Tokyo. Even this seemingly ever-parochial financial centre has now come up with action by its Financial Services Agency to accommodate Islamic finance institutions, in particular by changing firewall regulations to allow financial institutions to engage in asset trading (the essence of shariah-compliant finance) through subsidiaries.

Japan, which has long been behind the Asian Bond Market Initiative – designed to encourage the issue and cross border trading of local currency bond issues – now aims to bring sukuk bonds into this framework. The Japan Bank for International Cooperation is looking to do con-financing involving Islamic and conventional financing tranches. And Islamic-compliant equity funds focused on energy and environmental issues are being aimed at GCC investors.

Well behind in the race is Hong Kong, which has only very recently appeared to recognize the existence of Islamic finance and the need to make special arrangements for it. It is making a few attempts at a quick start, but these largely come from a government which seems ill at ease with Islamic issues and is simply desperate to be seen to be doing something to boost the territory’s international trading role after years of ignoring anything that was not China-related. Its Airport Authority has suggested it may make a sukuk issue and a tiny Islamic Index Fund which tracks the Dow Jones China Islamic Index, comprised of mainland and Hong Kong companies deemed to be shariah-compliant. Such vehicles can doubtless attract some smaller investors but the larger ones can pick and choose between individual companies on the compliant list.

Hong Kong has yet to get to grips with a fundamental tax problem – the city taxes profits arising locally but not interest – as well as various regulatory issues if its is to become an originator of sukuk issues, or even a trading location. It may also need to look at how, if at all, it will vet shariah compliance. Will it set up a board of shariah experts, or just leave that to issuers? For sure there is potential GCC and other Muslim demand for shariah-compliant investments in China and elsewhere in East Asia. But that may be more easily filled with equity investments. Shariah-compliant equities are easy – almost anything qualifies which does not profit from alcohol, gambling, entertainment, pork or usury or have financial ratios showing over-reliance on debt funding.

For sure, GCC countries, already over-stocked with North American and European assets, are increasingly looking to fast-growing Asia and to currencies which seem likely to appreciate. However, with or without sukuk, this is easier said than done given that most of these countries have their own foreign surpluses and high domestic savings rates. The big GCC investors’ preferences anyway have been for big equity purchases.

The next issue is whether there is much interest among non-Muslims in Asia in Islamic finance products. Promoters say that sukuk financing provides profit sharing opportunities unavailable in debt finance. They note too that so far at least no Islamic finance institutions have been badly hurt by the global credit crisis because they do not engage in the leverage, hedging and derivatives trading which has proved so costly to western banks. Sukuk products, they say, deserve some place in a portfolio and as secondary trading develops that will become more accepted. Likewise takaful – the Islamic version of insurance based on mutual principles and profit sharing and will become a more significant buyer of shariah-compliant assets.

However, working against these aspirations are a number of factors. Firstly, that the sukuk concept is little understood outside relatively small circle both domestically and internationally. Sukuk itself comes in different forms depending on type and duration of transactions – murabaha, mudaraba, musharaka and ijara. Much public education of non-Muslims (indeed of most Muslims as well) will be needed before they are going to be prepared to buy in a major way.

Disputes about shariah compliance are a barrier to trading. (Some Gulf institutions have declared that a majority of Malaysian issues are not, by their standards, compliant and thus cannot be included in portfolios. Kuwait Finance House had to get special treatment from Malaysia’s Bank Negara to conform to Kuwaiti interpretations.)

Big arguments are also currently raging about whether it is possible to create Islamic products which mirror the derivative products of conventional finance. This in turn reflects a wider debate over whether shariah compliance is simply an exercise in legal manipulation in interpreting the words of the Koran to create Islamic equivalents of conventional products, or whether it is a key part of a very different economic philosophy and thus its promoters should be emphasizing its differences, not trying to mirror systems based on usury and gambling.

The philosophy, indeed theology, behind Islamic finance may also be alien to many Asian investors who like to gamble and hope that some luck will make them rich quickly. Islamic finance abhors gambling and views return on investment as something to be shared. There is as yet also a lack of common auditing and regulatory standards for Islamic products. The various markets are edging towards standardization but it is a slow process.

How long the Islamic finance growth momentum can continue will depend on two principle factors. First is the duration and scale of the surpluses of the GCC countries (and Malaysia) which have been Islamic fnance’s mainspring. That is largely an issue of energy prices. So long as oil holds above about $75, surpluses will continue to be so big that GCC countries will continue to grow their financial muscle and use it to promote shariah-compliant products.

But either way it’s a very un-Islamic gamble to bet on either oil being for long at $150 or falling to $50. Any early collapse of the oil price could indeed create trouble for supposedly conservative Islamic financial institutions in the GCC in particular. Huge inflows of money have had to be invested—much of is directly or indirectly in very ambitious construction projects as in Dubai and Qatar which could prove investment black holes when the price pendulum swings.

The other issue is whether the populous Islamic states will show more enthusiasm for Islamic finance. Indonesia is to issue sukuks to attract GCC capital but has only very recently changed laws to accommodate Islamic instruments in its domestic markets. Pakistan’s history of Islamic finance goes back 20 years but has been scarred by scandals and poor regulation so only now is it again beginning to gain some local traction. In Bangladesh it is virtually non-existent.

Despite Islamic finance’s claims to be more socially responsible than conventional finance, there is no Islamic equivalent of the Grameen Bank. Indeed promoters of Islamic finance themselves admit that at present it is appealing more to a few very rich investors (as in the GCC) than to the average man in the mosque.

However, if Islamic banking can take root among the masses in fast-developing parts of the Islamic world it must surely have a bigger global future. At a time when most of the rest of the world is headed toward zero population growth, the Islamic world mostly continues to show higher than average birth rates. Demography could be the ultimate determinant of Islamic hopes, but first the ummah (Muslim community at large) needs to be convinced that the system is more beneficial in this world as well as the next.

source : AS

Malaysia Progressively Liberalising Its Islamic Finance System To Attract Foreigners

Malaysia has been progressively liberalising its Islamic financial system to increase foreign participation, as it forms an integral and competitive component of the country’s overall financial system.

The Islamic financial system operates in parallel with the conventional banking system, servicing both the Muslim and non-Muslim communities.

Pointing this out, the Raja Muda of Perak, Raja Dr Nazrin Shah Saturday said the syariah principles which underline Islamic finance have contributed towards its stability and resilience in facing issues such as the current global financial turmoil.

“Therefore, it comes as no surprise that during the current global financial turmoil, Islamic funds have seen less volatility and risk, and as a result have performed better compared with conventional funds,” he said.

He said this in his speech at a luncheon talk with investors in conjunction with the Malaysia International Islamic Financial Centre (MIFC) roadshow to Kuwait and Saudi Arabia, here.

Liberalisation of Malaysia’s Islamic financial system has taken the form of the issuance of new licences and increasing foreign participation in Islamic banks and takaful companies, coupled with new licences issued to foreign fund managers and foreign stockbroking firms.

Raja Dr Nazrin also cited syariah injunctions like those prohibiting excessive leverage and speculative financial activities as having insulated Islamic funds from too much risk exposure, thus limiting their exposure to the meltdown of the financial system in the United States and Europe.

“It therefore comes as no surprise that during the current global financial turmoil, Islamic funds have seen less volatility and risk, and as a result have performed better compared with conventional funds,” he said.

Raja Dr Nazrin said Malaysia believed there was tremendous upside potential for Islamic finance and that the current financial turmoil provides an opportunity for Islamic finance to position itself as a complementary, if not alternative, to conventional finance by providing investors with other asset classes and markets that provide stability.

He said over the last few years, there has been increasing interest among the Middle Eastern investors in the Asian market with Saudi Arabia financial institutions already having made their presence felt in Malaysia including Al-Rajhi Bank and Rsud Bank’s shareholding in Asian Finance Bank.

To date, one of the more prominent investments in Malaysia is the Saudi Telecom’s US$3 billion stake in local telco firm, Binariang.

“We welcome the continued participation of Saudi financial institutions and investors in Malaysia, especially to take advantage of the numerous opportunities offered under the MIFC initiatives,” he said.

Raja Dr Nazrin also explained that Malaysia could be the perfect gateway for investors to take advantage of the Asean region which comprises a potential market of about 600 million people and a combined gross domestic product of US$1 trillion.

The MIFC was launched in 2006 as part of Malaysia’s initiative to globally integrate within the international Islamic financial community, and to position the country as an international Islamic financial centre.

Since then, significant progress has been made as the Islamic financial system in Malaysia today comprises the Islamic banking institutions, the takaful (insurance) and re-takaful industry, and the Islamic money and capital markets.

Raja Nazrin said significant progress has been achieved, in particular, in positioning Malaysia as a centre for the origination, distribution and trading of Islamic bonds or sukuk.

“The Malaysian sukuk market has now evolved into the world’s largest Islamic bond market, accounting for about 60 percent of the global sukuk outstanding.

“Malaysia is also becoming a centre for Islamic fund and wealth management services and for international Islamic banking business, as well as a centre for Islamic finance education, training, consultancy and research,” he said.

source bernama

UAE Islamic insurance sector growing rapidly

dubai1_s_The Islamic insurance (takaful) industry in the UAE and Qatar enjoy higher average premium per capita than the global average of $554.8 (Dh27.33), according to a report by Dubai Chamber.

Malaysia and Kuwait both have premium per capita below the world average by 47 per cent and 59 per cent respectively.

The UAE Islamic insurance industry is the second fastest growing market in the Gulf after Bahrain, the report said yesterday.

Capitalising on their robust economic growth, GCC takaful model market share is rapidly growing.

Bahrain takaful market grew 64 per cent during 2005-2006, while the UAE has an average growth rate of about 46.1 per cent.

Nevertheless the market size is still small when compared with the conventional insurance market.

The percentage of takaful premiums to total insurance premiums is still low yet increasing, ranging on average between 0.5 per cent in Bahrain and 1.8 per cent in Kuwait. The exception is, the Saudi Arabia which scores the highest average percentage share of about 17.9 per cent.

In the UAE, the estimated takaful premium share to total insurance premiums for 2006 is 1.5 per cent, second after Kuwait.

The UAE and the Muslim countries insurance penetration ratios (IPR) are very low. IPR is defined as the percentage of premiums to nominal GDP. Malaysia scores the highest insurance penetration ratio among the Muslim countries of about 4.9 per cent, followed by Lebanon with 3.9 per cent, Morocco 2.99 per cent and UAE 1.83 per cent.

IPR scores of the Muslim courtiers are below the world average penetration ratio of 7.5 per cent.

UAE takaful market is rapidly growing and becoming competitive as the number of takaful insurance providers is increasing, the report said. As of September, there are four UAE Islamic compliant insurance companies listed at Dubai Financial Market.

Source : emirates business news


Türkiye Finans named Best Islamic Bank

images17Türkiye Finans, Turkey’s leading participation bank, has been given the Best Islamic Bank in Turkey award by the New York-based Global Finance magazine.

With improved services offered, Türkiye Finans has made an indelible impression both in Turkey and internationally. Türkiye Finans Deputy General Manager Osman Çelik said yesterday that his bank received this reward due to its impressive performance. “We have now made a name for ourselves in both the domestic and global banking sector,” he noted and underlined that receiving such awards encourages the bank to work even harder. The award was accepted at the National Press Club in Washington, D.C., by Türkiye Finans International Financial Corporations Manager Mehmet Fatih Bulaç on behalf of Türkiye Finans.

Türkiye Finans was also named the Best Islamic Bank in Turkey by Global Islamic Finance magazine and was recently given awards for its successful bank operations by Standard Chartered Bank and the Bank of New York Mellon.

Source: Today’s Zaman

Islamic Finance Terms

 Al Ajr

A commission, fees or wages levied for services.


Reliability or trustworthiness. Important value of Islamic society in mutual dealings. It also refers to deposits in trust. A person may hold property in trust for another, sometimes by implication of a contract.

Al Wadia

Resale of goods at a discount to the original cost.

Al Wakala

Absolute power of attorney.

Al Rahn Al

Arrangement where a valuable asset is placed as a collateral for a debt. The collateral is disposable in the event of a default. Pawn Broking.

Al Wadiah

Safe keeping.


A religious foundation set up to assist the poor and needy.

Bai Muajjal (Deferred Payment Contract)

A contract involving the sale of goods on a deferred payment basis. The bank or provider of capital buys the goods (assets) on behalf of the business owner. The bank then sells the goods to the client at an agreed price, which will include a mark-up since the bank needs to make a profit. The business owner can pay the total balance at an agreed future date or pay by installments over a pre-agreed period. This is similar to a Murabaha contract since it is also a credit sale.

Bai al Dayn Debt financing


The provision of financial resources required for production, commerce and services by way of sale/purchase of trade documents and papers. Bai al-Dayn is a short-term facility with a maturity of not more than a year. Only documents evidencing debts arising from bona fide commercial transactions can be traded.

Bai al Salam

This term refers to advance payment for goods which are to be delivered later. Normally, no sale can be effected unless the goods are in existence at the time of the bargain. But this type of sale forms an exception to the general rule provided the goods are defined and the date of delivery is fixed. One of the conditions of this type of contract is advance payment; the parties cannot reserve their option of rescinding it but the option of revoking it on account of a defect in the subject matter is allowed. It is usually applied in the agricultural sector where the bank advances money for various inputs to receive a share in the crop, which the bank sells in the market.

Bai Bithaman Ajil

This contract refers to the sale of goods on a deferred payment basis. Equipment or goods requested by the client are bought by the bank which subsequently sells the goods to the client an agreed price which includes the bank’s mark-up (profit). The client may be allowed to settle payment by instalments within a pre-agreed period, or in a lump sum. Similar to a Murabaha contract, but with payment on a deferred basis.

Baitul Mal



A religious decree.


Islamic jurisprudence. The science of the Shariah. It is an important source of Islamic economics.

Gharar Lit

Uncertainty, hazard, chance or risk. Technically, sale of a thing which is not present at hand; or the sale of a thing whose consequence or outcome is not known; or a sale involving risk or hazard in which one does not know whether it will come to be or not, such as fish in water or a bird in the air. Deception through ignorance by one or more parties to a contract. There are several types of gharar, all of which are haram. The following are some examples:

• Selling goods that the seller is unable to deliver

• Selling known or unknown goods against an unknown price

• Selling goods without proper description

• Selling goods without specifying the price

• Making a contract conditional on an unknown event

• Selling goods on the basis of false description

Selling goods without allowing the buyer to properly examine the goods

The root Gharar denotes deception. Bay’ al-Gharar is an exchange in which there is an element of deception either through ignorance of the goods, the price, or through faulty description of the goods. Bay’ al-Gharar is an exchange in which one or both parties stand to be deceived through ignorance of an essential element of exchange. Gambling is a form of Gharar because the gambler is ignorant of the result of his gamble.


That which is permissible. In Islam there are activities, professions, contracts and transactions which are explicitly prohibited (haram) by the Qur’an or the Sunnah. Barring them, all other activities, professions, contracts, and transactions etc. are halal. An activity may be economically sound but may not be allowed in the Islamic society if it is not permitted by the Shari’ah.


Lit: bill of exchange, promissory note, cheque or draft. Technically, a debtor passes on the responsibility of payment of his debt to a third party who owes the former as debt. Thus the responsibility of payment is ultimately shifted to a third party. Hawala is a mechanism for settling international accounts, by book transfers.



Ijara (Leasing)

A contract where the bank or financier buys and leases equipment or other assets to the business owner for a fee. The duration of the lease as well as the fee are set in advance. The bank remains the owner of the assets. This type of contract is a classical Islamic financial product. Leasing is also a lawful method of earning income, according to Islamic law. In this method, tangible assets such as machinery, a car, a ship, a house, can be leased by one person (lessor) to the other (lessee) for a specific period against a specific price. The benefit and cost of the each party are to be clearly spelled out in the contract so that any ambiguity (Gharar) may be avoided.

Ijarah wa Iqtina (Lease to Purchase)

This term refers to a mode of financing adopted by Islamic banks. It is a contract under which the Islamic bank finances equipment, a building or other facility for the client against an agreed rental together with an undertaking from the client to purchase the equipment or the facility. The rental as well as the purchase price is fixed in such a manner that the bank gets back its principal sum along with some profit which is usually determined in advance.


Lit: effort, exertion, industry, diligence. Technically, endeavor of a jurist to derive or formulate a rule of law on the basis of evidence found in the sources.

Istisna (Progressive Financing)

A contract of acquisition of goods by specification or order where the price is paid progressively in accordance with the progress of a job. An example would be for the purchase of a house to be constructed, payments are made to the developer or builder according to the stage of work completed. This type of financing along with bai salam are used as purchasing mechanisms, and murabaha and bai muajjal are for financing sales.


Lit: stipulated price for performing any service. Technically applied in the model of Islamic banking by some. Bank charges and commission have been interpreted to be ju’ala by the jurists and thus considered lawful.

Mudaraba / Modaraba (Trust Financing)

The term refers to a form of business contract in which one party brings capital and the other personal effort. The proportionate share in profit is determined by mutual agreement. But the loss, if any, is borne only by the owner of the capital, in which case the entrepreneur gets nothing for his labour. The financier is known as ‘rab-al-maal’ and the entrepreneur as ‘mudarib’. Mudarib In a mudaraba contract, the person or party who acts as entrepreneur.

Mu’amalah (t)

Lit: economic transaction.

Murabaha / Morabaha (Cost-Plus Financing)

Lit: sale on profit. Technically a contract of sale in which the seller declares his cost and profit. This has been adopted as a mode of financing by a number of Islamic banks. As a financing technique, it involves a request by the client to the bank to purchase a certain item for him. The bank does that for a definite profit over the cost which is agreed in advance. It has been estimated that 80 to 90 percent of financial operations of some Islamic banks belong to this category. There are a number of requirements for this transaction to meet the Islamic standards of a legal sale. The entire transaction is to be completed in two stages and as two separate contracts. In the first stage, the client requests the bank 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 payments basis and agrees to a payment schedule. The Murabaha form of financing is being widely used by the Islamic banks to satisfy various kinds of financing requirements. It is used to provide finance in various and diverse sectors e. g. in consumer finance for purchase of consumer durable such as cars and household appliances, in real estate to provide housing finance, in the production sector to finance the purchase of machinery, equipment and raw material etc.

Musharaka (Venture Capital)

Musharaka is a technique of financing used as a partnership. It is where two or more financiers provide finance for a project. All partners are entitled to a share in the profits resulting from the project in a ratio which is mutually agreed upon. However, the losses, if any, are to be shared exactly in the proportion of capital proportion. All partners have a right to participate in the management of the project. However, they can waive the right of participation in favour of any specific partner or person. There are two main forms of Musharaka: Permanent Musharaka and Diminishing Musharaka. These are briefly explained below:

Permanent Musharaka – In this form of Musharaka an Islamic bank participates in the equity of a project and receives a share of profit on a pro rata basis. The period of contract is not specified. So it can continue so long as the parties concerned wish it to continue. This technique is suitable for financing projects on a longer term where funds are committed over a long period and gestation period of the project may also be protracted.

Diminishing Musharaka – Diminishing Musharaka allows equity participation and sharing of profit on a pro rata basis but also provides a method through which the equity of the bank keeps on reducing its equity in the project and ultimately transfers the ownership of the asset on of the participants. The contract provides for a payment over and above the bank share in the profit for the equity of the project held by the bank. That is the bank gets a dividend on its equity. At the same time the entrepreneur purchases some of its equity. Thus, the equity held by the bank is progressively reduced. After a certain time the equity held by the bank shall come to zero and it shall cease to be a partner. Musharaka form of financing is being increasingly used by the Islamic banks to finance domestic trade, imports and to issue letters of credit.


A contract in which the owner of the garden shares its produce with another person in return for his services in irrigating the garden.


A contract in which one person agrees to till the land of the other person in return for a part of the produce of the land.



Qard Hasan

(Interest free loans)
Most of the Islamic banks also provide interest free loans (Qard Hasan) to their customers. If this practice is not possible on a significant scale, even then, it is adopted at least to cover some needy people. Islamic view about loan (Qard) is that it should be given to borrower free of charge.

Lit: gambling. Technically, an agreement in which possession of a property is contingent upon the occurrence of an uncertain event. By implication it applies to those agreements in which there is a definite loss for one party and definite gain for the other without specifying which party will gain and which party will lose.

In a mudaraba contract the person who invests the capital.

This term literally means an increase or addition. Technically it denotes any increase or advantage obtained by the lender as a condition of the loan. Any risk-free or “guaranteed” rate of return on a loan or investment is riba. Riba, in all forms, is prohibited in Islam. In conventional terms, riba and “interest” are used interchangeably. Sadaqah

Charitable giving.

Shariah / Sharia / Shari’a

Islamic canon law derived from 3 Primary sources: the Quran; the Hadith (sayings of the Prophet Muhammad); and the Sunnah (practice and traditions of the Prophet Muhammad), and three Secondary sources Qiyas (Analogical deductions and reasoning), Ijma (Consensus of Islamic Scholars) and Ijtihad (Legal reasoning).


A contract between two or more persons who launch a business or financial enterprise to make profit. Shirka = musharaka.


A banking instrument used for the delegation of credit and was used to collect taxes, disburse government dues and transfer funds by merchants. In some cases suftajahs were payable at a future fixed date and in other cases they were payable on sight. Suftajah is distinct from the modem bill of exchange in some respects. Firstly, a sum of money transferred by suftajah had to keep its identity and payment had to be made in the same currency. Exchange of currencies could not take place in this case. Secondly, Suftajah usually involved three persons. ‘A’ pays a certain sum of money to ‘B’ for agreeing to give an order to ‘C’ to pay back to ‘A’. Third, a Suftajahs could be endorsed.


A certificate entitling the holder to the benefits of the income stream of the assets backing the certificate. Equivalent to a Fixed income bond.


This is a form of Islamic insurance based on the Quranic principle of Ta’awon or mutual assistance. It provides mutual protection of assets and property and offers joint risk sharing in the event of a loss by one of its members. Takaful is similar to mutual insurance in that members are the insurers as well as the insured. Conventional insurance is prohibited in Islam because its dealings contain several haram elements including gharar and riba, as mentioned above.


Lit: detention. Technically appropriation or tying-up of a property in perpetuity so that no propriety rights can be exercised over the usufruct. The Waqf property can neither be sold nor inherited or donated to anyone. Awqaf consists of religious foundations set up for the benefit of the poor.


A tax which is prescribed by Islam on all persons having wealth above an exemption limit at a rate fixed by the Shariah. According to the Islamic belief Zakah purifies wealth and souls. The objective is to take away a part of the wealth of the well-to-do and to distribute it among the poor and the needy. It is levied on cash, cattle, agricultural produce, minerals, capital invested in industry, and business etc. The distribution of Zakah fund has been laid down in the Qur’an (9:60) and is for the poor, the needy, Zakah collectors, new converts to Islam, travellers in difficulty, captives and debtors etc. It is payable if the owner is a Muslim and sane. Zakah is the third pillar of Islam. It is an obligatory contribution which every well-off Muslim is required to pay to the Islamic state, in the absence of which individuals are required to distribute the Zakah among the poor and the needy as prescribed by the Shariah.

Islamic bank card to be rolled out across Russia

imagesRussian Muslims, currently fasting for the holy month of Ramadan, may soon have one less financial worry on their plates. A new Islamic debit card is due to be launched across the country, with terms and conditions guaranteed to be halal by Muslim spiritual leaders.

The card, offered by Express Bank, has already been introduced in the predominantly Muslim region of Dagestan, but Express Bank told The Moscow News that the card has been so popular it is now working on a system to make it available across the whole country;


“Muslims are thinking more about the principles of their religion, particularly at this holy time of year, so the card is becoming more and more popular. Although it is currently only available in Dagestan we are working on a way for people to be able to apply for the card using the internet so it will soon be available to Muslims all across Russia,” a spokeswoman for the bank told The Moscow News.

Conventional bank accounts are considered a taboo under Sharia Law, which prohibits Muslims from both receiving interest on deposits and paying interest on overdrafts and loans. But as there are currently no Islamic banks in Russia, Muslims in the country have been left with few alternatives.

The new Islamic debit card promises customers that any interest earned on their accounts will be donated to charitable causes, such as maternity wards for local hospitals. The terms of the card were decided by the bank in cooperation with the Spiritual Council of Muslims in Dagestan, which also helped with the card design to insure its appearance would conform to Islamic law, such as avoiding visual depictions of living beings.

“There are no other banks in Russia offering this kind of service so we had no format to follow, we had to do it all on our own, consulting Muslim leaders every step of the way. But the success of the card shows that there is a demand for this type of service and we are considering expanding into other types of Islamic financial services,” said the spokeswoman.

There have been other attempts to develop an Islamic financial services industry in Russia, most notably with Badr-Forte Bank, the only Islamic bank to be established in Russia. Badr-Forte Bank opened in Moscow in 1991 and offered customers a similar interest-free debit card as well as halal money transfers and mortgages.

However the bank had its licence revoked by the Russian Central Bank in 2006, a decision that caused controversy at the time. The Association of Russian Banks complained that most of the reasons given by the Central Bank for the decision were “Not based on the legal norms and acts of the Central Bank”, and that the Central Bank had refused to recognise the fact that Badr-Forte had developed a plan of action to address the legitimate reasons given.

“There were, and still are, some people working in the Russian Central Bank who do not support the idea of Islamic banking,” Renat Bekkin, expert in Islamic finance and professor at the Moscow State Institute of International Relations, told The Moscow News

“Some people think that they support terrorism or other illegal activities. There can also be opposition from conventional banks who don’t want the competition.”

Bekkin welcomed the new debit card as a step in the right direction but added that other Islamic financial services such insurance and mortgages are more urgently required than a debit card particularly in the capital:

“Conventional cards often only offer a small amount of interest and people can donate this to charity so they don’t really consider it to be a problem. But there are a number of financial products that you can’t avoid if you live in a big city, for example you need insurance if you have a car. I think the majority of Muslims in Moscow just get conventional products without thinking about it, they often don’t realize that they go against Islamic principles.”

One of the biggest obstacles to the development of specialised Islamic financial services in Moscow is the lack of awareness and education among many Muslims about the prohibition on usury. Whereas in Dagestan the principles of Islamic banking are preached by Sufi sheiks to packed-out mosques, the religious leaders in Moscow have far less clout and smaller audiences.

Tugrul Comert, a Muslim expat from Turkey who has been working in Moscow for two years told The Moscow News he was surprised about the lack of services and awareness regarding Islamic banking:

“There are many Arabic banks in Turkey and people are interested in Islamic banking but I have never heard people talking about it in Russia. It makes being a practicing Muslim in Moscow very difficult.”

The card has also received attention from some unexpected quarters since its release in Dagestan: “The card has been surprisingly popular with Christians and Jews in the region, apparently they really like the design,” explained Express Bank’s spokeswoman.

By Rebeccah Billing

source : nmweekly

Financial Risk Management for Islamic Banking and Finance

Publisher: Palgrave Macmillan

ISBN-13: 9780230553811
ISBN: 0230553818

Author Ioannis Akkizidis, Sunil Kumar Khandelwal

IOANNIS AKKIZIDIS is Risk Management Consultant & Analyst at IRIS integrated risk management ag, Zürich, Switzerland.

SUNIL KUMAR KHANDELWAL is Head of Risk Management – Middle East at IRIS integrated risk management ag, Dubai, United Arab Emirates.

Can Islamic Finance go micro?


With more than half-a-trillion dollars in assets and an annual growth rate that has outpaced conventional banks’ by nearly 50 percent, the Islamic finance industry is already making waves among investment fund managers. And this not only applies to the Muslim world: The Banker magazine recently named the United Kingdom to its list of the top 15 countries managing Sharia-compliant assets.

The new CGAP Publication Islamic Microfinance: An Emerging Market Niche argues that the Islamic finance industry, with its unprecedented popularity and growth, may be well-placed to address a critical need in microfinance: reaching the some 72 percent of people in Muslim-majority countries who do not use formal financial services.


Much of that gap owes to unmet demand for products that comply with Islamic law, or Sharia, according to Aamir A. Rehman, former Global Head of Strategy with HSBC Amanah

“Sharia compliance can help microfinance institutions reach a large number of Muslims who prefer Sharia-compliant forms of financial activity,” says Rehman. But he also adds that microfinance is “a fantastic opportunity for Islamic finance to reflect its core values and mission” of supporting the underprivileged.

This “win-win” situation is stimulating greater discussion between microfinance practitioners and practitioners of Islamic finance, who seek to draw upon the experience of a highly professionalized microfinance industry while acknowledging that there may be no turn-key solutions for Islamic financial services directed to poorer customers.

Soure : worldbank blog


Islamic banking on the roll despite challenges

 Sorouh Real Estate Company based in Abu Dhabi completed the world’s largest shariah compliant securitisation on Thursday last week. This transaction may set the pace for future Islamic financing transactions and serve as a model for issuers of shariah compliant products.

This transaction is unique as it is Middle East’s first true sale Islamic securitisation as well as the premier in securitisation of sales receivables.

It is Abu Dhabi’s first asset backed securitisation and the highest rated issuance from a non-sovereign in the region.

Securitisation in Islamic financing takes three main forms and is the issuance of certificates of ownership against an investment pool.

The securitisation may occur within a trust, equipment leasing or cost plus financing transaction. Securitisation within a musharakah (cost plus financing) transaction is common with project financing where large capital outlay is required and where only a limited number of people can subscribe.

Each investor is issued with a separable share and a certificate of ownership, which can be traded in the secondary markets. A securitised murabaha ( trust) cannot create a negotiable instrument tradeable in the secondary markets, as the certificate issued is only but evidence of debt.

Securitisation is common in ijara transactions (equipment leasing) where the certificates of ownership are tradeable and exchangeable.

Should the lessor in an ijara securitisation opt out, then he may trade his certificate to a new party who will take over all his rights and obligations as if he were the original lessor.

The concept of Islamic banking is relatively new in Kenya. There is no clear-cut legislation  regulating the issuance of shariah compliant products. The banks are licensed by the Central Bank of Kenya and the statutes regulating the banking industry are applicable to them.

Calls have been made for a clear-cut legislation on Islamic banking to support the sector. The reference of “interest” in some of the statutes has posed a problem to both the regulator and the issuers as one of the core principles of Islamic financing is the absence of riba (interest).

Globally the AAOIFI organisation, (Accounting and Auditing Organisation for Islamic Financial Institutions), has provided some sort of guidance for the sector.

Re-financing of loans
However, the concept is picking up in Kenya. The main Islamic banks are First Community and Gulf African Bank.

The Gulf African Bank offers shariah compliant products and services including equipment and vehicle financing, re-financing of loans, musharakah transactions in real estate and murabaha transactions in the petroleum sector.

The bank is expanding and shall soon offer shariah compliant services and products for the construction industry and will soon commence securitisation transactions.

Issuers in Kenya are, however, happy with the support granted by the regulators, in the absence of a clear-cut legislation for the sector.

According to one issuer, “The regulators have been supportive so far and are working with us to ensure growth of the industry despite the lack of regulation, which may otherwise cause confusion.”

The advantages of Islamic finance are mainly due to the fact that planning and cash flow forecasting is clearer due to the absence of interest. The customer knows before hand the amount of instalments payable.

The instalments are fixed regardless of the economic situation at hand. This advantage is unique to Islamic banking unlike conventional banking, where the instalments are pegged on inflation, political, financial and bankruptcy risks.

The risk of defaulting is higher in conventional banking than sharia banking as proper planning can take place.

With housing transactions, the bank upon the customer’s instructions, buys the house in its name and enters into a musharakah with the customer.
The customer pays fixed instalments over a period of time while increasing his ownership in the house.

Meaning that with time the customer takes on a higher share in the house eventually taking 100 per cent ownership.

In the event of default, the bank sells the house and refunds the customer’s share.