Soon – First Islamic Bank in Sri Lanka

imagesThe Amana Group was recently given a Letter of Provisional Approval by the Central Bank (CB) to establish a licensed commercial bank named Amana Bank Ltd, and is taking steps to set up the ‘first truly’ Islamic commercial bank in the country, the group said in a press statement.It said upon achieving certain conditions listed in the Letter of Provisional Approval such as the raising of a minimum capital requirement of Rs. 2.5 billion, Amana Bank expects to receive a banking licence from the CB that will enable it to begin commercial banking operations.

The group said Amana Bank plans to use its position as the first Islamic bank in the country to attract Sharia-compliant investment flows from the Middle East and the Far East. Subject to Malaysian and Sri Lankan regulatory clearances, Amana Bank hopes to utilize the technical expertise and specialized Islamic banking know-how of Bank Islam Malaysia Berhad (BIMB), which currently holds a 10% stake in AIL, to design and deliver a new range of Islamic banking services, which includes current accounts, foreign exchange transactions, inward and outward remittances, export financing, guarantees, performance bonds, bid bonds, Corporate Treasury placements, private banking, wealth management, long term housing finance, infrastructure financing, agricultural finance, and leasing.

The statement said Amana Bank also plans to actively participate in the government’s ‘Re-awakening of the East’ programme by expanding its branch network in the Eastern Province beyond the currently existing five and offering appropriate Islamic banking solutions to facilitate the resurgence of the Eastern Province’s infrastructure and economy.

The Amana Group has established itself as the pioneer in providing Islamic financial services, from merchant banking to insurance, to Muslims and non-Muslims alike. Incorporated in 1997, Amana Investments Limited (AIL), being the investment and financing arm of the Group, offers a range of Sharia-compliant financial solutions to its customers.


Source : sundaytimelk


RAM Ratings Lanka – workshop on Islamic finance

images25 RAM Ratings Lanka Ltd (“RAM Ratings Lanka”), one of only 2 approved rating agencies in Sri Lanka, is organising a series of educational events to build capacity in the local capital markets. RAM Ratings Lanka, a wholly owned subsidiary of Malaysia-based RAM Holdings Berhad (“RAM Holdings”), is pursuing its mission of developing the domestic bond market and creating awareness among market participants.RAM Holdings is the parent of Malaysia’s premier credit-rating agency, RAM Rating Services Berhad (“RAM RS”), which has played a pivotal role in the development of the Malaysian bond market. The valuation of the Malaysian private debt market has increased tremendously in the last 2 decades, from RM1.5 billion in 1989 to RM158.8 billion in 2007.

Meanwhile, RAM RS’s expertise in bond-market development was acknowledged as early as 2002 by the Asian Development Bank (“ADB”), which voted it the most influential rating agency in the Asia-Pacific region. In 2006, RAM RS was designated the World’s Second Best Islamic Rating Agency, as part of the Islamic Finance News Awards. These 2 accolades may well have helped Malaysia become – and retain its title as – the world’s top issuer of Islamic bonds (or sukuk). In 2007, about 69% of outstanding global sukuk issues originated from Malaysia.

In Sri Lanka, RAM Ratings Lanka is now replicating the formula that RAM RS had so successfully deployed in Malaysia – to be a “market educator”. RAM Ratings Lanka is also leveraging on its sister company’s expertise in sukuk. To this end, a workshop on Islamic Finance: Reality or Myth will be the first of a series to be held on 20 March 2009 at the Cinnamon Grand, Colombo.  

The workshop will be conducted by Mr Roslan Abdul Razak, who is currently the Director of Training and Shariah Business Advisory at the Islamic Banking and Finance Institution of Malaysia (or IBFIM). Mr Roslan, a veteran in Islamic finance, played a significant role in Malaysia’s maiden sukuk issuance in 1994. During the workshops, participants will be introduced to basic Islamic concepts; most importantly, they will gain an invaluable insight into the success of the Malaysian bond market.

Although RAM Ratings Lanka is well aware of the currently less-than-conducive climate for capital markets, we are also cognisant of Sri Lanka’s vast potential. As such, the present environment is perceived as an opportune backdrop against which to develop the technical capacity of market players. This can be well taken advantage of when market sentiment starts turning around.

“Only by equipping it with the requisite knowledge can we expect the Sri Lankan debt-capital market to experience sustainable growth. Learning and educating is part of RAM’s culture; they are the pillars that support our credit insights,” says RAM Ratings Lanka’s Country Manager, Mr Kingston Ng. “RAM Ratings Lanka pledges its firm commitment to its role as market educator on bonds, by dedicating the necessary time as well as financial and human resources to cultivate an enlightened and savvy debt-capital market,” adds Kingston.  

Going forward, more sukuk-related workshops will be organised to promote better understanding of this type of instrument, and its relevance to the development of the Sri Lankan capital market.

Islamic Finance to overtake the conventional system?

The Islamic Finance banking system is apt to “overtake” the conventional banking system, an expert in the field said yesterday.

It was highlighted that with the current conventional banking methods having proven themselves to be unsuccessful it is only right for the industry to turn towards the other; which is the Shariah system. These statements were made by the Training and Business Advisory Director of the Islamic Banking and Finance Institute, Malaysia, Shariah Roslan Abdul Razak during an interview with the Daily Financial Times.

He also pointed out that the perception among many was that Islamic Finance is centred on the elimination of interest rates. However, it was pointed out that this was incorrect and that the myth and reality of the Islamic Finance system will be tackled today when the workshop based on the theme “Islamic Finance System: Reality or Myth” will be highlighted.

Commenting on the future of this system of banking in the future, Mr. Razak observed that during the last five years the industry has seen an average growth of 15%-20% annually the world over. However, he noted that most people in Europe and the UK were not looking at Islamic Finance in a big way although its gaining its popularity now even in non Muslim states. “The growth is there and currently this is the only alternative left; because if conventional banking is not working then you can go for sukuk as opposed to conventional bonds,” he explained.Today’s workshop is expected to be attended by regulators from the Central Bank, the Securities and Exchange Commission (SEC), the Finance Ministry, the Insurance Board of Sri Lanka (IBSL) and the Employees Provident Fund (EPF). Among others scheduled to participate are lawyers, auditors, financial institutions, corporates and investors.

By Sunimalee Dias

Source : dailymirror

Islamic Finance workshop in Sri Lanka

Themed “Islamic Finance – Reality or Myth” the first workshop organised by RAM ratings will be held on March 19 at the Cinnamon Grand Hotel.

In this workshop, the presenter, Roslan Abdul Razak will not only share his knowledge but also his vast experiences in Islamic Finance throughout Asia, said Country Manager, Acting CEO – Sri Lanka Kingston Ng. He said that some of Roslans achievements include pioneering Malaysia’s maiden Islamic Sukuk and his involvement in the clearance system for Islamic Banking in Malaysia. Ng said that there is a substantial Islamic population in Sri Lanka and they also have a substantial amount of savings but according to the Islamic law there are constraints for them to invest in normal savings products.. The market players who saw this opportunity established investment companies and education companies.

But still there is a necessity for a basic understanding of Islamic finance.

This is a first in a series of seminars on Islamic finance said Ng.

source : sunday observer

Islamic bonds to help Indonesia fund crisis spending

Indonesia launched its first retail Islamic bond this month hoping to catch up with its neighbours in the Islamic finance business and help fund a US six-billion-dollar ($8.9 billion) economic stimulus package.

It may be the world’s most populous Muslim country and Southeast Asia’s largest economy but Indonesia has been slow to capitalise on strong demand for Islamic bonds, or sukuk, which follow principles of Islamic sharia law.

The SR-001 sukuk, which have a yield of 12 percent, will mature in three years effective from February 25 this year.

The government has not disclosed the amount of the issuance and will decide the size based on total demand.

“I think demand will be strong because the 12 percent coupon is very attractive,” PT Mandiri Sekuritas bond analyst Handy Yunianto told Dow Jones Newswires.

President Susilo Bambang Yudhoyono said sharia finance was “more crisis-proof” than the Western model of free-market capitalism, as he opened a “Sharia Economy Festival” in Jakarta earlier this month.

He urged local sharia banks, which do most of their business with small and medium-sized enterprises, to play a bigger role in the economy this year and “respond to the national development agenda”.

Sukuk conform to Islamic Shariah law in which charging interest is forbidden and speculation is shunned, as is investment in businesses such as gambling and alcohol.

They create returns through profit-sharing agreements or from the lease of securitised assets owned by the seller.

Indonesia’s sukuk use the assets model, known as ijarah, and are backed by government land and buildings.

Although Muslims form the majority in the country of 234 million people, shariah finance comprises only one to two percent of all finance, said Islamic scholar Azyumardi Azra.

Until now Jakarta had only issued sukuk to institutional investors.

Its first rupiah-denominated sukuk was issued last year while a global sukuk planned in October was delayed.

The government has been eager to publicise the retail offering as it tries to catch up with the more sophisticated Islamic finance markets in neighbouring Malaysia and Singapore.

Central Bank Governor Boediono told the festival the US-led global economic meltdown was a reminder of the low-risk advantages of Islamic finance.

“The crisis has provided us with a lesson that we should not become too involved in speculative activities, but should be primarily focused on providing a real contribution to the productive sector and society as a whole,” he said, according to The Jakarta Globe daily.

“Taking this lesson on board, banks should go back to basics and sharia lenders could serve as a role model.”

Finance Minister Sri Mulyani Indrawati said in a speech to kick off the bond sale that the retail sukuk was part of efforts to widen the investor base for government securities and to boost flagging revenues.

The government plans to use the income to finance its widening budget deficit and offset the cost of stimulus spending needed to boost domestic demand.

Indonesia has pared back its 2009 growth forecasts to 4.7 percent from an earlier 6.2 percent due to sharply declining commodity exports and foreign capital flight as investors pull out of emerging markets.

The projected budget deficit has climbed to 2.5 percent of gross domestic product from an earlier one percent.

The national budget for fiscal year 2009 assumes state revenues of roughly 82.8 billion dollars and 87.1 billion dollars in expenditures.

The stimulus package offered to parliament late last month is a mix of spending, tax breaks and business incentives designed to create jobs in an election year and prop up domestic demand – the engine of Indonesia’s economy along with commodity exports such as palm oil.

source : asiaone


Parliament has yet to approve the package.-


Islamic-style mortgages approved in Minnesota

images29Last month the Minnesota Housing Finance Agency approved its first mortgage that complies with Islamic law. The new homeowner, an American of Somali descent, had wanted to buy a house for years but did not because parts of the Quran are interpreted to mean that Muslims are forbidden from taking or paying interest on loans.

Now, before you begin to fantasize about student loan payments sans interest, it is important to emphasize that this new homeowner’s payments are exactly the same as they would have been had he taken out a regular 30-year mortgage. It is simply the structure that is different.

Rather than borrowing money from a bank with a lien on the house guaranteeing repayment, the bank bought the house from the seller and resold it to the “borrower” at a profit. This is called a murabaha agreement, and it is probably the most straightforward of Islamic mortgages. Another type resembles a rent-to-own, while a third involves the home buyer and the bank forming a company, which owns the house, and the home buyer gradually buys out the bank’s share in the company.

(A brief word on terminology. An old Muslim consultant whom I was begging for a job once lectured me for forty-five minutes on how there are no borrowers in Islamic finance. “There are only partnerships!” he said. Well, he never gave me a job so I’m going to call them borrowers, with all the normal caveats about its legal inadequacy.)

All Islamic mortgages do essentially the same thing: they imitate interest without actually charging it. Leaving aside the religious sensibilities of American Muslims, this process raises several important questions. Can the borrower claim the mortgage interest deduction? If he defaulted, would he be eligible for a bailout under the Obama (or any other) plan? Most importantly, why should the Minnesota Housing Finance Agency—a state owned bureau—want to do this?

The answers to the first two questions are unclear. The IRS has not published any guidance on the matter and seems to accept deductions on Islamic mortgages; indeed Professor Roberta Mann at the University of Oregon argues that the government ought to revisit the mortgage interest deduction to ensure that there is no discrimination in either direction. Certainly the MHFA ought to clarify their recommendations on the matter before this program becomes very large.

The larger issue, however, is the separation of religion and state. While Islamic mortgages are open to anyone, it says right there on the contract that the murabaha agreement is an “attempt to arrange the purchase of the Property in accordance with the Shari’a approved Islamic precepts.” On the surface that’s troublesome (and were I the MHFA’s lawyer I might have worded it differently), but consider what these contracts do. Rather than restricting mortgages, they attempt to expand homeownership to a whole new class of Americans. That’s an admirable goal, and assuming the Islamic mortgages are made to otherwise qualified borrowers, it’s hard to see a downside.

Homeownership gives a person a stake in society, an added incentive to see one’s community and country to do well. That was underlying assumption behind Clinton’s expansion of the Community Reinvestment Act and Bush’s “ownership society.” Rather than discriminating against non-Muslims—as some will no doubt argue—Islamic mortgages help make Muslim immigrant populations economically and socially more American.

On top of that, the structure of Islamic mortgages makes them difficult to refinance—so at least we don’t have to worry about a Shari’a housing bubble in Minnesota.

source :


Dubai Islamic Bank posts $471m profit for 2008




BANK PROFIT: Dubai Islamic Bank reported a small decline in net profit in 2008, compared to the previous year. (Getty Images)Dubai Islamic Bank (DIB) has reported AED1.73 billion ($471m) in net profit for 2008, a small decline compared to 2007.

DIB’s total assets as of December 31, 2008, stood at AED84.6 billion, up slightly compared to the end of the same period in 2007.

Financing activity registered strong growth, bank bosses said, with total financing assets reaching AED52.7 billion in 2008 compared to AED 40.4 billion in 2007, an increase of 30 per cent.

Customer deposits increased two percent to reach AED66.4 billion in the 12 months ending December 31, 2008.

The bank said it maintained a financing-to-deposit ratio of 79 percent as of December 31, 2008, which bank chiefs said was a clear indication of DIB’s healthy liquidity position.

DIB’s full-year results reflected total impairment provisions of AED521 million (including writedowns on its investment portfolio) and mark-to-market losses on equity investments of AED277 million.

The majority of these were recorded in the fourth quarter of the year, one of the primary reasons impacting profitability during the last quarter of 2008.

Mohammed Ibrahim Al Shaibani, chairman of Dubai Islamic Bank, said: “Over the past 12 months, the world has witnessed unprecedented challenges to the stability of the global financial system.

“DIB has prudently managed its core operations during these challenging times. Our long-term strategy of the diversification of both operations and revenue streams continues to prove successful.”

The Board of directors of Dubai Islamic Bank has proposed a cash dividend of 25 percent and bonus share of five percent for 2008.

source : arabnews

Islamic banking in India: Challenges and prospects

By Syed Burhanur Rahman,

After discussing the different principles of Islamic banking, this is an attempt to explore the feasibility of Sharia banking in India. The rise of “interest” as a blood sapping social evil is alarming. To get rid of this menace and save the nation from the clutches of interest, suitable amendments should be made in the Banking Act. Indira Gandhi’s slogan, “Garibi Hatao” and “Roti,Kapda Aur Makaan” as enunciated by Zulfikar Ali Bhutto are still relevant today as it was in the early seventies. Yet even today, horrendous disparities exist between different segments of the Indian society. The majority of the unorganized sector; workers, semi-skilled persons, small farmers are all non-bankable. .Access to finance by the poor and the vulnerable groups is a prerequisite for poverty reduction and social cohesion. Such “financial apartheid” is one of the main causes of exclusion of the majority of the population in terms of growth. Government must provide the disadvantaged classes with the tools they need to improve their condition.The Indian banking sector has opened up considerably in the past decade or so and openness to interest-free banks is a logical next step. Islamic banking is one way to ameliorate the disadvantaged classes. The potential benefits of allowing Islamic banking include; decreased economic disparity between the haves and the have nots, better integration, and consequently accelerated economic growth. Government of India can leap a step closer towards the fulfillment of Indira Gandhi’s much cherished dream of “Garibi Hatao” by reforming its banking sector and allowing the establishment of Islamic Banks.

To get a clear picture, let us analyze the position of Islamic banking in India on SWOT(Strength, Weakness, Opportunity and Threat) Scale. SWOT analysis will help us to logically examine the chances if this concept would flourish or flounder in India.


Islamic Banking will unequivocally ameliorate the deplorable condition of the poor and marginalized segments of society. Banking products which comply with Islamic law are becoming increasingly popular, not only in the Gulf countries and far eastern states like Malaysia, but also in other developed markets such as the United Kingdom. Reputed banks like Standard Chartered, Citibank, HBSC are operating interest free windows in several West Asian countries, Europe and USA. There is a huge potential market in India for Islamic banking products.

We have seen the fall of giants in the world of financial sector like Lehman Brothers in the aftermath of the US sub-prime mortgage crisis. Therefore, it is of paramount importance to be strict about credit rating system, to circumvent any chance of further bankruptcy. Since Islamic banking adheres to strict credit rating system and prohibits indebted economic agents to avail more debt finance, it could save our financial and economic enterprises from bankruptcy. Interest is strictly proscribed in Islamic banking. Principles of equity finance abhor financing the indebted enterprises thereby arresting the chances of bankruptcy to great extends. Under Islamic banking, equity finance needs cost yield and pre-rating analysis of projects. It thus considerably subdues the mindless competition in financial sector to get more credit shares and tends to provide stability in the financial market. Islamic banks are unaffected by the subprime mortgage crisis. In fact, now many non-Muslim countries are turning up to Islamic banking as they are immune against such crisis due to inherent business ethics within Islamic banking.

Moreover, Islamic banking helps the weaker and hapless section of the society through various financial products. Islamic banking finances (through its Joint ventures,partnerships and leasing)are provided by investors or banks to the borrowers with a condition that financial risk is to be borne by the investors, and other risks to be borne by the borrower. This helps even the indigent and vulnerable to get finance at a no risk and cost basis, but definitely requires other credits like strong business proposal, rational planning, skilled hands and specialized art to attract the financier. Better business proposals succeed in fetching funds as opposed to the projects with comparatively poor propositions. Such inclusive growth will aggrandize the Indian economy.

A bank in India cannot raise deposits without promising a specified rate of return to depositors, but under Sharia, returns can only be determined post-facto depending on profit. Also banks have to maintain a Statutory Liquidity Ratio (SLR), which involves locking up a substantial portion of funds either as cash, gold or in government securities. Such cash will not get any return, keeping it in gold is risky as it could depreciate and government securities come with interest.Moreover, Islamic banking can eliminate unaccountable economic activities, as every economic activity has to be financed through legal contract and physical verification of real assets under contract. There is no room for diversion of funds. Therefore, investment in consonance with Islamic banking principles will surely boost the engine of economic growth in our country.

The high powered Raghuram Rajan Committee draft Report as released on 7th April 2008, strongly suggested interest-free banking as a part of recommendations made for financial sector reforms. The Committee postulates that interest free banking is another area that falls broadly in the ambit of financial infrastructure.Certain faiths prohibit the use of financial instruments that pay interest. The non-availability of interest-free banking products (where the return to the investor is tied to the bearing of risk, in accordance with the principles of that faith) results in some Indians, including those in the economically disadvantaged strata of society, not being able to access banking products and services due to reasons of faith. This non-availability also denies India access to substantial sources of savings from other countries in the region. While interest-free banking is provided in a limited manner through NBFCs and cooperatives, the Committee recommends that measures be taken to permit the delivery of interest-free finance on a larger scale, including through the banking system. This is in consonance with the objectives of inclusion and growth through innovation. The Committee believes that it would be possible, through appropriate measures, to create a framework for such products without any adverse systemic risk impact.


Indian banking laws do not explicitly prohibit Islamic banking but there are provisions that make Islamic banking almost an unviable option. The financial institutions in India comprises of Banks and Non Banking Financial Institutions. Banks in India are governed through Banking Regulation Act 1949, Reserve Bank of India Act 1934, Negotiable Instruments Act 1881, and Co-operative Societies Act 1961.

Certain provisions regarding this are mentioned below

* Section 5 (b) and 5 (c) of the Banking Regulation Act, 1949 prohibit the banks to invest on Profit Loss Sharing basis -the very basis of Islamic banking.
* Section 8 of the Banking Regulations Act (BR Act, 1949) reads, “No banking company shall directly or indirectly deal in buying or selling or bartering of goods…”
* Section 9 of the Banking Regulations Act prohibits bank to use any sort of immovable property apart from private use –this is against Ijarah for home finance
* Section 21 of the Banking Regulations Act requires payment of Interest which is against Sharia.

As regards to partnership by Islamic banks in a firm, the bank has to make sure that the manager does not avoid his responsibilities or obtain other non-pecuniary benefits at the expense of non-participating partners and ensure the veracity of the profit statements. Monitoring of data about firms in which Islamic bank invests would involve exorbitant cost. However, Islamic banks need to set up monitoring cell to keep them informed of the internal function of their joint venture. The implication is that banks and entrepreneur have to function very closely.

Islamic banking needs to introduce corporate governance with transparent accounting standards. It needs to perform detailed evaluation before embarking Profit Loss Sharing Scheme, which demand a pool of highly trained professionals. The imparting of professional training is costly. Detailed principles are still to be laid down and techniques and procedures evolved to carry them out. It is only after the satisfactory achievement of these that proper training can begin.

It is observed that inability to evaluate a projects’ profitability has tended to act against investment financing. Some borrowers frustrate the banks appraisal efforts as they are reluctant to provide full disclosures of their business. These exercises are not limited to relatively few large loans but need to be carried out on nearly all the advances made by the bank. Yet, widely acceptable and reliable techniques are yet to be devised.Moreover, the borrowers do not observe business ethics which make it difficult to establish close bank-clientele relationship – a condition for successful Islamic banking. Adverse selection has been one of the major impediments in the world of Islamic banking.

Among the other disincentives from the borrower’s point of view are the need to disclose his accounts to the bank if he were to borrow on the Profit Loss Sharing basis. However, many small-time businessmen do not keep any accounts, leave alone proper accounts. And large conglomerates do not like to disclose their real accounts to anybody. The widespread lack of business ethics among certain business community will be another major hurdle in the path of Islamic banking in India.

The practices in use by the Islamic banks have evoked questions of morality. Some critics view Sukuk(Islamic Bond) as unIslamic in nature. Others criticize that financing through the purchase of client’s property with a buy-back agreement and sale of goods to clients on a mark-up, involved the least risk and are closest to the old interest-based operations. Bai’ mu’ajjal (sale with deferred payment) and Murabaha (cost-plus financing) are permitted in the Sharia under certain conditions.What is being done in many countries are fictitious deals which ensure a predetermined profit to the bank without actually dealing in goods or sharing any real risk. This is against the letter and spirit of Sharia.

OPPORTUNITYIndia with a 15% Muslim population, the highest in a non-Islamic country and second highest in the world offers huge opportunities to exploit . The size of the market will be very large as the Indian population is above 100 crore and Muslim population itself is about 15 crore and majority of them, in the name of religious faith, are looking for interest free banking and finance. It is pertinent to mention here that Islamic banking is not meant for Muslims only but non Muslims may also avail the benefit of it. And it is feasible to have a parallel banking system based on Sharia along with a conventional one.

After 9/11, most of these countries started pulling out their investments from the US and Europe because of the fear of freezing of assets. Another reason could be the slowdown in the economies of western countries. A growing Indian economy has created a huge enthusiasm among Islamic nations as it sees the unlimited opportunities it can avail. In fact, five Indian companies, Reliance Industries, Infosys Technologies, Wipro, Tata Motors and Satyam Computer Services figure in the Standard & Poor’s BRIC Sharia Index.

Eleventh Five Year Plan envisages inclusive growth with development in all sectors of economy. Islamic banking is an effective mechanism to subjugate the liquidity and inflation problems along with allowing inclusive growth. For real inclusive growth, we have to ensure increase in income and employment status of workers in all segments.

If Islamic banking is introduced, the inadequate labor capital ratio, for informal sector workers associated with agriculture and manufacturing industries could be resolved through equity finance, which might be a revolution in our agriculture and unorganized sector. With improved labor capital ratio, our vulnerable workers associated with agriculture and unorganized sector might be able to compete effectively with the formal sector workers. Thus Islamic Banking may financially empower majority of Indian workers.

Islamic banking may induce our political leaders to substitute grants and subsidies with equity finance schemes through specialized financial institutions because equity finance allows access to credit without debts of borrowers. Equity Finance helps achieve self-reliability which never comes through grant and subsidies. Islamic banking should not be a religion based banking business, but could be profitably used to resolve our issues pertaining to economy.

Moreover with introduction of Islamic banking, Indian government will certainly gain diplomatic advantages to make financial dealings with Muslim dominated nations especially to attract trillion dollars of equity finance from the gulf countries. This is more important after the fall of the titans like Lehman Brothers because it reflects the economic downturn in the west and the need of alternative sources of FDI for the Indian economy. India needs to provide a congenial economic environment to attract the financial inducement from the Gulf region.

Islamic scholars have defined market instruments in length and they have permitted with some conditions to have investments in stock market .Certain broad criteria are:

* The company’s activities should not include liquor, pork, hotel, casino, gambling, cinema, music, interest bearing financial institutions, conventional insurance companies, etc.
* The total interest bearing debt of the company at any point in time should remain below one third of its average market capitalization during the last twelve months.
* Its aggregate of account receivables should remain below 45% of total assets.
* If company has any interest bearing income it should not be more than 10% in any condition.

While Sharia compliant investment avenues are now becoming available in most countries, India has not seen large-scale development. To estimate the scope of Islamic investment opportunities in the Indian stock market, it is imperative to examine stocks that conform to Islamic Shariah principles “Out of 6,000 BSE listed companies, approximately 4,200 are Sharia compliant. The market capitalization of these stocks accounts for approximately 61% of the total market capitalization of companies listed on BSE. This figure is higher even when compared with a number of predominantly Islamic countries such as Malaysia, Pakistan and Bahrain. In fact, the growth in the market capitalization of these stocks was more impressive than that of the non-Sharia compliant stocks. The software, drugs and pharmaceuticals and automobile ancillaries sector were the largest sectors among the Sharia compliant stocks. They constitute about 36% of the total Sharia compliant stocks on NSE. Further on examining the BSE 500 the market capitalization of the 321 Sharia compliant companies hovered between 48% and 50% of the total BSE 500 market capitalization.”(Source:

Another opportunity is mutual fund which is based on 100% equity. These funds are invested in different sectors like IT, automobile telecommunication, cement. In fact, Tata Mutual Fund made a pioneering attempt when, at the instance of the Barkat and some other Islamic financial group, it launched Tata Core Sector Equity Fund in 1996 . This scheme was specially tailored keeping in view the Muslims’ inhibition of dealing with interest bearing and haram investments. This scheme surprised many by being able to raise Rs. 230 million from the public.

Moreover, large number of Muslims who are considered unworthy of credit by commercial banks would welcome Islamic banking. People prefer to put their money in gold or jewellery, which is the worst kind of investment from the economic point of view. Some Islamic societies in India accept deposits and lend money, but can’t make a business out of it because of the Sharia’s prohibition of interest. And they are not able to convert themselves into banks because the government will not permit any form of banking without interest. Some of them have collected crores in interest-free deposits, but they do not have any avenue to invest that money,


Islamic banking could be a huge political issue. Certain parties might abhor the use of the word “Islamic” and could term it as anti-Indian. They might argue that the very concept of Sharia banking would go against the secular fabric of our country. We are already facing problems pertaining to Muslim Personnel Law and trying to implement Uniform Civil Code. Therefore, at this juncture, if we introduce Islamic banking in India, it will create more problems than solving the issue. Moreover, it may bring financial segregation in the economy. The compartmentalization of Sharia compliant and Non Sharia Compliant banking might be used by certain vested interest to communalize the finance sector in India. Such questionably sane but unquestionably dangerous trend must be prevented with full might.


Islamic banking is at an incipient stage. The existing legal framework does not permit Islamic Banking. Only selective activities like equity investment is possible, while trade finance aspects like taking title to goods is not possible. A lot of amendments need to be carried out in the prevalent legal set up. Appropriate models need to be selected and implemented to suit society’s diverse financial needs. Islamic Bank of Britain, Islamic banks of Thailand, Singapore and USA may be glaring models for Indian bankers. The reputed domestic and international banks along with the collaboration of RBI should be involved in the process of determining and implementing Islamic Banking products.

The importance and relevance of Islamic banking in India in the context of “Financial Tsunami” that has taken place in recent times further enhances the need of Sharia banking. Also the political parties need economic rationality to convince majority of voters that Islamic banking is not being introduced to please Muslim voters but to genuinely boost faster and inclusive growth for the Indian economy. Obnoxious politics in the name of religion must be avoided. I personally believe to refer ‘Islamic Banking’ as ‘Interest Free Banking’ so that it could be looked through the broad economic kaleidoscope and not a narrow religious prism.

With only minor changes in their practices, Islamic banks can get rid of all their cumbersome and sometimes doubtful forms of financing and offer a clean and efficient interest-free banking. Participatory financing is a unique feature of Islamic banking, and can offer responsible financing to socially and economically relevant development projects. This is an additional service that Islamic banks offer over and above the traditional services provided by conventional commercial banks. Such a system will offer an effective banking system where Muslims in India may invest in pursuant to Islamic principles and the rest may have an alternative to interest bearing conventional banking. Both systems can co-exist. Let the people of the largest democracy decide democratically which one they should bank upon. The young sapling of Islamic banking must be nurtured by the Government so that the country may reap the benefit of its fruit in the coming period.


Syed Burhanur Rahman is a practicing attorney in New Delhi.

Vatican Says Islamic Finance May Help Western Banks in Crisis

images20The Vatican said banks should look at the rules of Islamic finance to restore confidence amongst their clients at a time of global economic crisis.


“The ethical principles on which Islamic finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service,” the Vatican’s official newspaper Osservatore Romano said in an article in its latest issue.

The Vatican said banks should look at the rules of Islamic finance to restore confidence amongst their clients at a time of global economic crisis.

“The ethical principles on which Islamic finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service,” the Vatican’s official newspaper Osservatore Romano said in an article in its latest issue late yesterday.

Author Loretta Napoleoni and Abaxbank Spa fixed income strategist, Claudia Segre, say in the article that “Western banks could use tools such as the Islamic bonds, known as sukuk, as collateral”. Sukuk may be used to fund the “‘car industry or the next Olympic Games in London,” they say.

Pope Benedict XVI in an Oct. 7 speech reflected on crashing financial markets saying that “money vanishes, it is nothing” and concluded that “the only solid reality is the word of God.” The Vatican has been paying attention to the global financial meltdown and ran articles in its official newspaper that criticize the free-market model for having “grown too much and badly in the past two decades.”

Islamic Banking: Doing Things Right and Doing Right Things

Malaysian Journal of Economic 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).

Government to Sell $500m in Sukuk

Indonesia may sell as much as $500 million in its first sale of global Islamic bonds, the central bank’s deputy governor, Hartadi Sarwono, said on Thursday in Singapore.

The government plans to sell the bonds this year, Dahlan Siamat, director of Islamic financing policy at the Finance

Ministry, said in a separate interview from Jakarta. Indonesia has more than $600 million in assets available to back the sale of Islamic bonds, Siamat said. The debt, known as sukuk , is typically backed by assets or cashflow because Islamic law bars payment of interest.

Indonesia last month raised $3 billion from the largest sale of conventional dollar debt by an emerging market so far this year. Debt sales and overseas loans will help the government finance its budget deficit.

 Jakarta Globetejakarta_s_