Since United Arab Emirates is an Islamic country the Islamic code of conduct is followed by certain banks to cater to a strongly religious clientèle. These banks follow the Hadiz / Hadij which is the Muslim code of conduct. Dubai Bank make a gift payment to their customers since usury is strictly banned by the Muslim social laws.
There are two major difference between Islamic Banking and Conventional Banking: 1. Conventional banking practices are concerned with "elimination of risk" where as Islamic banks "bear the risk" when involve in any transaction. 2. When Conventional banks involve in transaction with consumer they do not take the liability only get the benefit from consumer in form of interest whereas Islamic banks bear all the liability when involve in transaction with consumer. Getting out any benefit without bearing its liability is declared Haram in Islam.
Islamic Banks Are Unscathed Despite of Financial Crisis
By Prof. Rodney Wilson Professor-Durham University
The collapse of leading Wall Street institutions, notably Lehman Brothers, and the subsequent global financial crisis and economic recession, are encouraging economists world-wide to consider alternative financial solutions.
Attention has been focused on Islamic banking and finance as an alternative model. What lessons can be learnt, and how resilient have Islamic banks been during the current crisis?
Islamic Banking Principles And Sub-prime Lending
The religious teaching underpinning Islamic finance is concerned with justice in financial contracts to ensure that none of the parties is being exploited.
Riba( interest or usury) is one source of exploitation, especially, as in the case of sub-prime lending, the highest rates were charged to lower earners. Such discriminatory charging by conventional banks was justified as being a reflection of the risks involved.
Those on lower incomes, with poorer prospects of finding new employment in the event of redundancy, were less likely to be able to service their interest payments.
Islamic housing finance involves risk sharing between the bank and the client, rather than transferring all the risk to the latter.
Under the most commonly used diminishing musharaka(partnership) contract, the bank and the client form a partnership, with the bank providing up to 90 percent of the purchase price, and the client at least 10 percent.
Over a period of usually 10 to 25 years, the client buys out the ownership share of the bank which makes its profit from the rent paid by the client for the share the bank owns.
In the event of a rental or repayments default, the bank may advance the clients an interest-free loan (qard hassan in Arabic) to enable them to continue their payments during the recession in anticipation that they will pay in full when the economy rebounds.
The client retains their home rather than being faced with eviction— like the victims of the sub-prime crisis.
Of course Islamic banks have to appraise credit risk, and indeed are more cautious about who they should finance than conventional banks.
The banks in the United States charged high arrangement fees for sub-prime borrowers which were used to pay bonuses for those signing up new clients.
As the mortgages were sold on to Freddie Mac and Fanny Mae, the arrangers were unconcerned that the sub-prime borrowers might be unable to meet their financial obligations.
Indeed, gifts were provided to entice the feckless to sign up, and the mortgages often exceeded the value of the property.
The banks in other words became mere booking agents, with no long term commitment to their clients.
The Islamic Banking Record
Consequently when the credit crunch came and borrowing from wholesale markets was halted, Islamic banks were not exposed.
In contrast to conventional banks, no Islamic bank has failed and has needed government recapitalization which ultimately becomes a burden on hard pressed taxpayers.
All Islamic banks comply with the Basel II capital adequacy requirements and the Islamic Financial Services Board (IFSB)- the body which advises regulators with respect to Islamic finance- has produced detailed guidelines on compliance. The IFSB has an on-going relationship with the Bank for International Settlements-the institution which developed the Basel standards- and is certain to be consulted as Basel III guidelines are drafted for capital adequacy which are likely to be implemented globally in the coming decade.
The soundness of Islamic banks is accounted for by the fact that they use a classical banking model, with financing derived from deposits, rather than being funded by borrowings from wholesale markets.
Consequently when the credit crunch came and borrowing from wholesale markets was halted, Islamic banks were not exposed. However, Islamic banks are not immune from the effects of the global recession, and the fall in oil prices will inevitably have a negative impact on 2008 results of Gulf-based Islamic banks. The situation will become clearer from February once the audited financial statements start to appear.
Two Islamic housing financial institutions, Amlak and Tamweel are being merged, as both have faced problems given their exposure to the Dubai property market.
In Iran where all financial operations have been shariah-based since the Law on Usury Free Banking was introduced in 1983, banks have been relatively insulated from the financial crisis, ironically because United States sanctions meant they could not deal with institutions such as Lehman Brothers which were trying to place large amounts of toxic debt with Middle Eastern banks.
The sanctions therefore proved to be a blessing in disguise for Iran— although the Islamic banks there have been adversely affected recently by the fall in gas prices.
Nevertheless being state owned, institutions such as Bank Melli, the largest Islamic bank in the world, are well placed to ride out the global financial storm. With assets of over $50 billion, and 2007 profits exceeding $540 million, it has more than adequate resources to cope.
Islamic Financial Stability
Islamic banks enjoy a built-in stabilizer to help them cope with economic downturns, as instead of paying interest to depositors, those with investment mudaraba accounts share in the banks profits.
Thus, if profitability declines in an economic downturn, depositors receive lower returns, but if profits rise they enjoy higher returns.
This profit sharing reduces risk for the banks and means they are less likely to become insolvent. However as the banks build up a profit equalization reserve, which can be used to finance pay-outs during difficult years, depositors benefit from some protection of their returns during economic downturns.
The last year has been difficult, if not disastrous, for equity investors, given the fall in stock market prices globally.
Investors in equities screened for shariah compliance have also suffered, but less than their conventional counterparts, because they have not invested in the shares of riba-based banks which have fared especially badly during the global financial turmoil.
Investors seeking Shariah compliance have portfolios which are more heavily weighted in sectors such as healthcare or utilities where revenue streams are maintained even during cyclical down-turns.
Prospects for Islamic Finance
Islamic banking provides a viable alternative to conventional banking and is less cycle prone. The spread of Islamic finance into western markets demonstrates that it now being treated seriously by regulators and finance ministries.
There are already five wholly Islamic banks in London, and the first Islamic bank will open in France in 2009. According to the conservative estimates of the Banker in October 2008, Islamic financial assets globally exceed $500 billion, a figure that could easily double over the coming decade.
The experience of Islamic banking in the United Kingdom has been extremely positive. Islamic Bank of Britain has been operating as a retail bank for over four years, and has attracted over 40,000 customers. HSBC Amanah, the Islamic finance subsidiary of HSBC, has been operating for ten years in London, focusing mainly on institutional clients and business finance.
Alburaq, the Islamic finance subsidiary of Arab Banking Corporation, has become the market leader for shariah compliant home finance in the United Kingdom.
None of these institutions has been affected by the global financial crisis, and their resilience bodes well for the future.
Sukuk Are Real Assets
In addition to banking, Islamic sukuk security issuance has enormous potential. Unlike conventional bonds and notes, sukuk are backed by real assets, which provides assurance to investors.
Although global sukuk markets were adversely affected by the global recession in 2008, longer term prospects look promising, with the United Kingdom authorities promoting London as an international centre for sukuk issuance to rival Bahrain, Dubai and Kuala Lumpur.
The Malaysian ringgit sukuk market has been largely unaffected by the global turmoil in securities markets, and issuers such as the Saudi Arabia Basic Industries Corporation, one of the world’s largest petrochemical producers, view sukuk as a desirable instruments to raise funding for plant expansion.
There can be no doubt that Islamic finance has an exciting future, and the quest for a financial system based on moral values rather than greed and fear, is bound to enhance its position in the global system
he Qur'an is very clear about the prohibition against usury-based business transactions (riba'):
"Those who devour usury cannot stand.... That is because they say, trade is only like usury; yet Allah has allowed trade and forbidden usury.... Allah does not bless usury, and He causes charitable deeds to prosper, and Allah does not love any ungrateful sinner. Oh you who believe! Be careful of your duty to Allah and relinquish what remains due from usury, if you are believers. If the debtor is in difficulty, grant him time until it is easy for him to repay. But if you remit it by way of charity, that is best for you if you only knew." Qur'an 2:275-280
"O you who believe! Do not devour usury, making it double and redouble, and be careful of (your duty to) Allah, that you may be successful." Qur'an 3:130
In addition, the Prophet Muhammad is said to have cursed the consumer of interest, the one who pays it to others, the witnesses to such a contract, and the one who records it in writing.
The Islamic judicial system is committed to fairness and equity among all parties. The fundamental belief is that interest-based transactions are inherently unfair, giving a guaranteed return to the lender without any guarantees for the borrower. The basic principle of Islamic banking is the sharing of risk, with shared responsibility for profit and loss.
What Are the Islamic Alternatives? Modern banks usually offer Islamic financing of two main types: murabahah (cost plus) or ijarah (leasing).
Murabahah: In this type of transaction, the bank purchases the property and then re-sells it to the buyer at a fixed profit. The property is registered in the buyer's name from the beginning, and the buyer makes installment payments to the bank. All costs are fixed at the time of the contract, with the agreement of both parties, so no late payment penalties are permitted. Banks usually ask for strict collateral or a high down payment in order to protect against default.
Ijarah: This type of transaction is similar to real estate leasing or rent-to-own contracts. The bank purchases the property and retains ownership, while the buyer makes installment payments. When payments are complete, the buyer gains 100% ownership of the property.
Misconception no 1 Risk Protection (insurance) is against Tawakkul - total dependence upon Allah (swt). No human actions change the Will of Allah (swt) for our destiny. Whether a person has insurance/Takaful or not has no effect on future events. However, we are instructed to take precautions and then fully trust and depend upon Almighty Allah (swt): in Hadith narrated by Anas bin Malik when an Arab Bedouin asked Prophet Muhmmad (PBUH), "Shall I leave my camel untied and seek Allah's protection on it, or should I tie it?" The Holy Prophet replied, "Tie your camel and then depend upon Allah (swt)." {as quoted by Sunan Al Tarmizi, 1981,}.
Misconception No. 2: All Risk Protection (insurance) is Haram-prohibited Fiqh Council of World Muslim League (1398/1978) resolution and Fiqh Council of Organization of Islamic Conference (1405/1985) in Jeddah resolved that, "..conventional insurance as presently practiced is Haram." And that, "..cooperative insurance (Takaful) is permissible and fully consistent with Shariah principles." Hence, conventional insurance is prohibited for Muslims because it contains elements of Riba, Al Maisir, and Al Gharar. By contrast, Takaful provides risk protection in accordance with Sharia using principles of Ta'awun (mutual assistance), brotherhood, piety and ethical operations.
Misconception No. 3: All Insurance is a form of Gambling of Wagering, which is forbidden in Islam Risk or uncertainty can be divided into: Pure Risk and Speculative Risk. Pure Risk involves the possibility of Loss or No Loss. For example, damage to property due to fire. Pure Risks are the subject of insurance risk protection and Takaful. On the other hand, Speculative Risks involves the possibility of Loss, No Loss or Gain. For example, venturing into a new business, or gambling on horse race. Speculative Risks that include a potential gain or profit cannot be insured.
Takaful schemes use the principle of indemnification to compensate for the loss that occurs to a Takaful Participant. Takaful insures only Pure Risks and claims pay in the event of Loss to cover repairs, damage, replacement of property, or an agreed fixed sum. In Takaful Taawuni (assurance), the compensation equals each participant's accumulated savings plus investment profit added to a sum covered taken from the Takaful general pool.
Misconception No. 4: All Insurance seeks to maximize profits which takes benefits away from policyholders Most conventional insurance companies are stock companies that seek to maximize profits. Since the interests of shareholders conflicts with policyholders, by raising prices, denying claims, etc. these insurers can boost profits for shareholders. Takaful operators, by contrast, are mutual or cooperative entities. The goal of Takaful is community well-being and self-sustaining operations - not high profits. Under the Takaful Mudarabah Model, surplus (or "profits") is shared fairly between shareholders and policyholders. Under the Takaful Wakalah Model, surplus is owned by the policyholders and may be reduced by a performance fee incentive for the operator before distribution to the policyholders.
Misconception No. 5: All Takaful operators are the Same Alhumdilallah , in Islam there is unity in diversity. Over the centuries, several Takaful Models have evolved which are approved by Islamic scholars. While they all share the fundamental goals of cooperative risk sharing, these models differ slightly in legal structure and organizational operations. Takaful Models usually are described by the Islamic contracts used; namely Hebbah or 100% Tabarru (Sudan), or al Mudarabah {Bahrain/Malaysia}, or Al Wakalah {Saudi Arabia}.
Misconception No. 6: Insurance shemes are a modern day invention Actually, social arrangements for pooling of risks existed may centuries ago. The Takaful system evolved from ancient methods of risk protection in Arabia 14 centuries ago called : (a) daman Khtr-altariq-surety for traders; (b) a'qila - payment to family of murdered victim by accused relatives (c) hilf - confederation for mutual assistance. The year 1706 marked the emergence in United Kingdom of the first "perpetual assurance scheme". The first insurance company in America (1740s) founded by Ben Franklin was a merchant's cooperative. However, in modern times many of these old cooperatives have "demutualized" and converted into stock companies to pursue higher profits.
Misconception No. 7: "I don't need Insurance/Takaful." A Takaful scheme gives us an opportunity to practice the virtues of Islam, including self-purification. Surah Al Maidah (V.2) says: "Help one another in furthering virtue and Taqwa (God-consciousness), and do not help one another in evil and transgression." In Hadith by Ahmad and Abu Daud: "Whosoever fulfils the intention of his brother, Allah will fulfil his intentions." And "Always help those who helps his brother."
The first Constitution in Medinah (622 CE) arranged by Prophet Muhammad (PBUH) contained three aspects directly related to risk protection: social insurance for the Jews, Ansar and Christians; Article 3 concerning 'wergild' or 'blood money' and provision for Fidyah (ransom) and Aqila. We should follow his example to meet our needs and social obligations.
A Takaful scheme provides us the self-discipline for savings and the habits of sound financial planning to take care of ourselves and the needs of our children and families. Hadith by Sahih Al-Bukhari, as narrated by Amir bin Saad bin Abi Waqqas, describes Prophet Muhammad (PBUH) as saying: "verily, it is better for you to leave your offspring (heirs) wealthy than to leave them poor asking others for help" and "..The one who looks after and works for a widow and for a poor person is like a warrior fighting for Allah's cause.." Also, from Sahih Muslim Hadith No. 59, as narrated by Abu Huraira, has the Holy Prophet (PBUH) saying: "Whosoever removes a wordly hardship from a believer, Allah (swt) will remove from him one of the hardships of the day of Judgment."
The concept of takaful, or Islamic insurance, where resources are pooled to help the needy does not contradict Shariah. The concept is in line with the principles of compensation and shared responsibilities among the community. It is not a new concept, in fact it had been practised by the Muhajrin of Mecca and the Ansar of Medina following the hijra of the Prophet over 1400 years ago. It is generally accepted by Muslim Jurists that the operation of conventional insurance does not conform to the rules and requirements of Shariah.
Conventional insurance involves the elements of uncertainity (Al-gharar) in the contract of insurance, gambling (Al-maisir) as the consequences of the presence of uncertainty and interest (Al-riba) in the investment activities of the conventional insurance companies which contravene the rules of Shariah. Takaful is an alternative form of cover which a Muslim can avail himself against the risk of loss due to misfortunes.
The insurance providers in year 2001 and beyond should find Takaful sector an exciting sector of insurance to be in. This presentation focuses on growth potential that exists in Takaful with great many opportunities for innovative development of unique products, techniques and systems needed to fill gaps in insurance penetration in many of the markets around the globe. This paper presents an insight into the size of the current takaful industry worldwide and sketches the signs of change that may lead to realization of the potential that exists in this sector.
Overview of takaful
The takaful brand of insurance is a classic example of consumer-driven response to their needs. For generations, Muslims around the world have grown with a mind set that insurance (especially life insurance) is taboo because it contravenes some of the Islamic tenets. Life insurance as sold in conventional way was declared unacceptable in 1903 by some prominent Islamic scholars in the Arab countries. The search was on for an acceptable alternative ever since, and not until the 1970’s the debate took sufficient momentum to reach a consensus. In 1985, the Grand Counsel of Islamic scholars in Makkah, Saudi Arabia, Majma al-Fiqh, approved takaful system as the alternative form of insurance written in compliance with Islamic Sharia. It is outside the scope of this presentation to explain how the takaful system works except to say that it is a concept of protection for the good of society, a concept that was never an issue in Islam in the first place. The Grand Counsel approved this system as a system of co-operation and mutual help but the exact method and operation was left to Islamic scholars and insurance practitioners to resolve, develop and implement.
Takaful industry is still not past its formative years and there are many areas unresolved, especially in life insurance. The key areas to resolve are the global standardization of takaful terminology, the development of an acceptable form of life insurance (family takaful) especially for countries in the Arab regions and a common consensus for a system to determine profits (or surplus) distributable to participants and shareholders.
The very first Takaful company was established in 1979 – the Islamic Insurance Company of Sudan. Today there are some 28 registered Takaful companies worldwide writing takaful directly and 10 more as Islamic windows or marketing agencies placing insurance risk with conventional and takaful companies. In fact the number of takaful companies is higher as all insurance companies in Sudan are deemed to operate in accordance with Islamic Sharia principles. In addition, new takaful companies have been established recently in Sri Lanka and Tunisia. At least four more Takaful companies are under formation in the Middle East (viz. Kuwait, UAE and Egypt). Several other Takaful companies are being contemplated in various countries such as Pakistan, Australia and Lebanon. It is also understood that interest is shown in Takaful in South Africa, Nigeria, and some of the former states of the Soviet Union.
Takaful industry in the Middle East is under-developed compared to other markets such as Malaysia. The more successful companies in the Middle East have grown at 10% p.a. whereas in Malaysia the rate of growth has been 60% p.a.
* Takmila Fathul Mulhim - An Arabic commentary on Sahih Muslim in six volumes * Ulum ul Qur'an - An Urdu work on the sciences related to the revelation and exegesis of the Qur'an; it has been translated into English under the title, An Approach to the Qur'anic Sciences. * Ma'ariful Qur'an - An eight-volume English edition of the famous commentary of the Qur'an compiled in Urdu by his father, Mufti Muhammad Shafi Uthmani * The Meanings of the Noble Qur'an - A two-volume English translation of the Qur'an with explanatory notes * Islamic Laws of Animal Slaughter * An Introduction to Islamic Finance
Muhammad Taqi Uthmani is currently a member of the following organizations:
* Islamic Fiqh Academy, Jeddah (Permanent Member) * Darul Uloom Karachi, Karachi (Vice Principal) * Accounting and Auditing Organization of Islamic Financial Institutions, Bahrain (Chairman of Shari'a Standard Council) * Central Bank of Bahrain, Bahrain (Chairman of Shari'a Board) * Amana Investments Limited, Sri Lanka (Chairman of Shari'a Board) * Abu Dhabi Islamic Bank, UAE. (Chairman of Shari'a Board) * Guidance Financial Group, USA (Member of Shari'a Supervisory Board) * Meezan Bank Ltd, Pakistan (Chairman of Shari'a Board) * Dubai Bank, Dubai * BankIslami Pakistan Limited (Chairman of Shari'a Board), [2] * Jamiatul Ulama USA, USA
Justice (R) Mufti Maulana Sheikh Muhammad Taqi Uthmani (Arabic/Urdu: محمد تقی عثمانی) (b. 1943) is an eminent Hanafi Islamic scholar from Pakistan. He served as a judge on the Federal Shariat Court of Pakistan from 1980 to 1982 and the Shari'a Appellate Bench of the Supreme Court of Pakistan from 1982 to 2002. He is an expert in the fields of Islamic Jurisprudence (fiqh), economics, hadith and tasawwuf. He also held a number of positions on the boards of prestigious Islamic institutions. He is the brother of another notable Islamic scholar, Mufti Muhammad Rafi Usmani and Maulana Wali Razi. Mufti Sahab was born in Deoband, a city in the Saharanpur district of Uttar Pradesh, India, in 1943] After completing the Alim course at Darul Uloom Karachi, he specialized in fiqh under the guidance of his eminent father, Grand Mufti of PakistanMufti Muhammad Shafi Usmani. He received his Takhassus degree in Islamic education from Darul Uloom Karachi in 1961. He also holds a Master of Arts degree in Arabic literature from the University of Punjab and a Bachelor of Laws (LLB) degree from the University of Karachi. Mufti Sahab received ijaza to teach hadith from a number of scholars such as Sheikh Hasan Mashat, Mufti Muhammad Shafi Uthmani, Maulana Idris Kandhlawi, Mufti Rashid Ahmad Ludhianvi, and Shaikhul Hadith Muhammad Zakariyya Kandhlawi. He pioneered the concept of Islamic banking in Pakistan when he established the Meezan Bank. Mufti Sahab has authored a number of books in Arabic, Urdu, and English on Islamic topics in addition to a large number of articles on Islamic banking and finance published in a number of journals and magazines.
In March 2004, United Arab Emirates Vice President and Prime Minister Mohammed bin Rashid Al Maktoum presented an award to Mufti Sahab in recognition of his lifetime service and achievement in Islamic finance during the annual International Islamic Finance Forum (IIFF) in Dubai.
In accordance with the tradition of the scholars of Deoband and recognizing the importance of tasawwuf, Mufti Sahab's bay'ah was accepted by Shaikh Dr. Abdul Hayy Arifi Abdul Hayy Arifi and Maseehullah Khan. Mufti Sahab is currently a mentor to numerous spiritual aspirants all over the world and delivers weekly lectures on self-improvement at Darul Uloom Karachi on Sundays between Asr Salaah and Maghrib Salaah.
He currently teaches Sahih al-Bukhari, fiqh, and Islamic economics at Darul Uloom Karachi and is known for his Islahi Khutbat. He was a key member of a team of scholars which helped declare Qadianis as non-Muslims by Pakistan's National Assembly during the era of former Pakistani president, Zulfikar Ali Bhutto, in the 1970s. During the presidency of General Zia ul Haq, he was instrumental in drafting laws pertaining to Hudood, Qisas, and Dayiat. He strongly opposes the Women Protection Bill. According to him, it was designed to distract attention from issues such as flaws in the law enforcement system. According to a comment piece in The Times, Usmani has written that aggressive military jihad should be waged by Muslims “to establish the supremacy of Islam” worldwide
The first modern experiment with Islamic banking was undertaken in Egypt under cover, without projecting an Islamic image, for fear of being seen as a manifestation of Islamic fundamentalism which was anathema to the political regime. The pioneering effort, led by Ahmad El Najjar, took the form of a savings bank based on profit-sharing in the Egyptian town of Mit Ghamr in 1963. This experiment lasted until 1967 (Ready 198l), by which time there were nine such banks in the country. These banks, which neither charged nor paid interest, invested mostly by engaging in trade and industry, directly or in partnership with others, and shared the profits with their depositors (Siddiqi 1988). Thus, they functioned essentially as saving investment institutions rather than as commercial banks. The Nasir Social Bank, established in Egypt in 197l, was declared an interest-free commercial bank, although its charter made no reference to Islam or Shariah (Islamic law).
The IDB was established in 1974 by the Organization of Islamic Countries (OIC), but it was primarily an intergovernmental bank aimed at providing funds for development projects in member countries. The IDB provides fee based financial services and profit-sharing financial assistance to member countries. The IDB operations are free of interest and are explicitly based on Shariah principles.
In the seventies, changes took place in the political climate of many Muslim countries so that there was no longer any strong need to establish Islamic financial institutions under cover. A number of Islamic banks, both in letter and spirit, came into existence in the Middle East, e.g., the Dubai Islamic Bank (1975), the Faisal Islamic Bank of Sudan (1977), the Faisal Islamic Bank of Egypt (1977), and the Bahrain Islamic Bank (1979), to mention a few.
The Asia-Pacific region was not oblivious to the winds of change. The Philippine Amanah Bank (PAB) was established in 1973 by Presidential Decree as a specialized banking institution without reference to its Islamic character in the bank's charter. The establishment of the PAB was a response by the
Philippines Government to the Muslim rebellion in the south, designed to serve the special banking needs of the Muslim community. However, the primary task of the PAB was to assist rehabilitation and reconstruction in Mindanao, Sulu and Palawan in the south (Mastura 1988). The PAB has eight branches located in the major cities of the southern Muslim provinces, including one in Makati (Metro Manila), in addition to the head office located at Zamboanga City in Mindanao. The PAB, however, is not strictly an Islamic bank, since interest-based operations continue to coexist with the Islamic modes of financing. It is indeed fascinating to observe that the PAB operates two 'windows' for deposit transactions, i.e., conventional and Islamic. Nevertheless, efforts are underway to convert the PAB into a full-fledged Islamic bank (Mastura 1988).
Islamic banking made its debut in Malaysia in 1983, but not without antecedents. The first Islamic financial institution in Malaysia was the Muslim Pilgrims Savings Corporation set up in 1963 to help people save for performing hajj (pilgrimage to Mecca and Medina). In 1969, this body evolved into the Pilgrims Management and Fund Board or the Tabung Haji as it is now popularly known. The Tabung Haji has been acting as a finance company that invests the savings of would-be pilgrims in accordance with Shariah, but its role is rather limited, as it is a non-bank financial institution. The success of the Tabung Haji, however, provided the main impetus for establishing Bank Islam Malaysia Berhad (BIMB) which represents a full fledged Islamic commercial bank in Malaysia. The Tabung Haji also con tributed l2.5 per cent of BIMB's initial capital of M$80 million. BIMB has a complement of fourteen branches in several parts of the country. Plans are afoot to open six new branches a year so that by 1990 the branch network of BIMB will total thirty-three (Man 1988).
Reference should also be made to some Islamic financial institutions established in countries where Muslims are a minority. There was a proliferation of interest-free savings and loan societies in India during the seventies (Siddiqi 1988). The Islamic Banking System (now called Islamic Finance House), established in Luxembourg in 1978, represents the first attempt at Islamic banking in the Western world. There is also an Islamic Bank International of Denmark, in Copenhagen, and the Islamic Investment Company has been set up in Melbourne, Australia.
Shariah mainly is based on the versus of the Holy Quran and the teachings and practices of the Prophet Mohammed (the Sunna). The consensus of opinions and interpretations of religious scholars is considered a secondary source of Shariah.
In the Area where the majority of the population is Muslim, there is a notable trend for the applications of Shariah. While most of the laws are based on Shariah, specific areas of laws are now increasing adopting important aspects of Shariah which will be indicated below where GLS has advised and assisted clients.
1. Islamic Banking
Except for Saudi Arabia, the banking laws and practices of countries of the Area are generally based on western banking systems. A notable trend for the application of banking based on Shariah (called Islamic Banking) started in the Area in recent years. Islamic Banking could, in theory, be fairly straight forward. In accordance with Shariah Muslims can trade and invest in anything that is accepted (called halal) and not prohibited (haram). Prohibited matters broadly include things that are illegal or immoral such as gambling, prostitution, pornography, alcohol, drugs and similar other matters. The main difficulty arises in the classification of interest charged on funds in Shariah. While some Islamic jurists and scholars consider all types of interest as usury which is prohibited in Shariah, others consider simple interest acceptable and only compounded interest to be prohibited. Although the argument on interest continues, Islamic banking is expanding in the Area where banks and investment funds based on Shariah banking are being established.
For more information see Extracts from the book "UAE Company Law"
2. Inheritance
Shariah provides specific rules of inheritance that are applied to Muslims. Generally these rules are based on the principle of providing specific allocation/shares of the estate of the deceased to certain types of his relatives such spouse or parents and the distribution of the remainder to other heirs such as offsprings, brothers/sisters and uncles/aunts. Shariah rules of inheritance are applied in the countries in the Area. They might also apply to the assets of a deceased Moslem person in a western jurisdiction or a Moslem resident in such a country.
3. Wills
Wills might form part of the probate of the estate of a deceased Moslem. Shariah inheritance rules regulate wills by providing that a will can only be applied and valid to a certain portion of the total estate and to specific persons.
* Dawood Islamic Bank Limited * Dubai Islamic Bank Pakistan limited * Meezan Bank Premier Islamic Bank In Pakistan * AlBaraka Islamic Bank * BankIslami Pakistan Limited * Emirates Global Islamic Bank
Islamic Banking -Any predetermined payment over and above the actual amount of principal is prohibited.
Islam allows only one kind of loan and that is qard-el-hassan (literally good loan) whereby the lender does not charge any interest or additional amount over the money lent. Traditional Muslim jurists have construed this principle so strictly that, according to one commentator "this prohibition applies to any advantage or benefits that the lender might secure out of the qard (loan) such as riding the borrower's mule, eating at his table, or even taking advantage of the shade of his wall." The principle derived from the quotation emphasises that associated or indirect benefits are prohibited.
Islamic Banking - The lender must share in the profits or losses arising out of the enterprise for which the money was lent.
Islam encourages Muslims to invest their money and to become partners in order to share profits and risks in the business instead of becoming creditors. As defined in the Shari'ah, or Islamic law, Islamic finance is based on the belief that the provider of capital and the user of capital should equally share the risk of business ventures, whether those are industries, farms, service companies or simple trade deals. Translated into banking terms, the depositor, the bank and the borrower should all share the risks and the rewards of financing business ventures. This is unlike the interest-based commercial banking system, where all the pressure is on the borrower: he must pay back his loan, with the agreed interest, regardless of the success or failure of his venture.
The principle which thereby emerges is that Islam encourages investments in order that the community may benefit. However, it is not willing to allow a loophole to exist for those who do not wish to invest and take risks but rather content with hoarding money or depositing money in a bank in return for receiving an increase on these funds for no risk (other than the bank becoming insolvent). Accordingly, under Islam, either people invest with risk or suffer loss through devaluation by inflation by keeping their money idle. Islam encourages the notion of higher risks and higher returns and promotes it by leaving no other avenue available to investors. The objective is that high risk investments provide a stimulus to the economy and encourage entrepreneurs to maximise their efforts. Islamic Banking -Making money from money is not Islamically acceptable.
Money is only a medium of exchange, a way of defining the value of a thing; it has no value in itself, and therefore should not be allowed to give rise to more money, via fixed interest payments, simply by being put in a bank or lent to someone else. The human effort, initiative, and risk involved in a productive venture are more important than the money used to finance it. Muslim jurists consider money as potential capital rather than capital, meaning that money becomes capital only when it is invested in business. Accordingly, money advanced to a business as a loan is regarded as a debt of the business and not capital and, as such, it is not entitled to any return (i.e. interest). Muslims are encouraged to purchase and are discouraged from keeping money idle so that, for instance, hoarding money is regarded as being unacceptable. In Islam, money represents purchasing power which is considered to be the only proper use of money. This purchasing power (money) cannot be used to make more purchasing power (money) without undergoing the intermediate step of it being used for the purchase of goods and services. Islamic Banking -Gharar (Uncertainty, Risk or Speculation) is also prohibited.
Under this prohibition any transaction entered into should be free from uncertainty, risk and speculation. Contracting parties should have perfect knowledge of the counter values intended to be exchanged as a result of their transactions. Also, parties cannot predetermine a guaranteed profit. This is based on the principle of 'uncertain gains' which, on a strict interpretation, does not even allow an undertaking from the customer to repay the borrowed principal plus an amount to take into account inflation. The rationale behind the prohibition is the wish to protect the weak from exploitation. Therefore, options and futures are considered as un-Islamic and so are forward foreign exchange transactions because rates are determined by interest differentials.
A number of Islamic scholars disapprove the indexation of indebtedness to inflation and explain this prohibition within the framework of qard-el-hassan. According to those scholars, the creditor advances the loan to win the blessings of Allah Almighty and expects to obtain the reward from Allah Almighty alone. A number of transactions are treated as exceptions to the principle of gharar : sales with advanced payment (bai' bithaman ajil); contract to manufacture (Istisna); and hire contract (Ijara). However, there are legal requirements for the conclusion of these contracts to be organised in a way which minimises risk. Islamic Banking -Investments should only support practices or products that are not forbidden
-or even discouraged- by Islam. Trade in alcohol, for example would not be financed by an Islamic bank; a real-estate loan could not be made for the construction of a casino; and the bank could not lend money to other banks at interest.
Pakistani piggybanks, or gallas. Photo by Umair Mohsin (CC).
Islamic finance is booming. The market is estimated at $1 trillion with an expected growth rate of 15 percent per year, as reported by Forbes.com. Although Islamic banking emerged in the 1970s in the Muslim world, the global economy is now realizing that non-Muslims can also take advantage of the sector. Hong Kong is looking to establish its own market for Islamic bonds, or sukuk. Western companies are starting to target Muslim consumers with halal products. And conventional banks like HSBC are offering Islamic financial services.
For many Muslims, the importance of Islamic finance derives from its adherence to Islamic law, or sharia. The principles that serve as ethical investment guidelines are laid out in the Koran and the Sunnah. Most schools of Islam forbid interest and speculation, as well as investment in products considered immoral, such as alcohol. These guidelines prevent against unearned or immorally earned profit, and they also protect the investor against exploitation and the risks of excessive leverage.
To meet these requirements, Islamic finance relies on asset-based transactions, rather than money alone. It also employs profit- and risk-sharing mechanisms that distribute risk and reward among borrower and lender, and contracts base ROI on the outcome of the venture rather than a predetermined rate. This system reflects Islam's teachings on wealth distribution and social and economic justice.
Despite the seeming rigidity of these strictures, the Islamic financial services industry has not been impeded. Bonds, mortgages, insurance, and other conventional services have been adapted for compliance with sharia, and the need for continued innovation is widely recognized by experts in the field.
Modern Islamic banks are supervised by a body of Muslim jurists who ensure that transactions adhere to the principles of Islam and the standards of conventional financial institutions. Their expertise encompasses Islamic law, commercial law, and finance, making these jurists hard to come by. The Internet and satellite television have enabled existing Islamic jurists to gain popularity, and growing access to translations of the Koran in print and electronic copies has led to an increasing number of self-taught or amateur jurists.
Adherence to and interpretation of sharia varies by country and financial institution, due to different schools of Islam and different national and subnational laws. This means cross-border transactions and international competition can be difficult. For this reason, multilateral institutions, such as the Accounting and Auditing Organization for Islamic Financial Institutions and the Islamic Financial Services Board, are working to increase coordination among governments and harmonize international standards. The International Monetary Fund and the Islamic Development Bank (IDB) also facilitate understanding of Islamic banking, issue guidelines for the industry, and advise governments and supervisory agencies.
Pakistan, whose constitution requires that all laws be brought in conformity with sharia, is transitioning to a completely interest-free economy. The country began pursuing this goal in the 1980s but ran into difficulties when it tried to convert the entire banking system too suddenly. In 2001, the State Bank of Pakistan (SBP) launched the Islamic Banking Policy, which promotes simultaneous development of Islamic and conventional financial industries. The policy is meant to establish a full-fledged Islamic banking system in an evolutionary and flexible manner that allows markets and customers to gain confidence in Islamic banks and prepare for an eventual launch of the new system.
Six Islamic banks currently exist in Pakistan, and 13 conventional banks with roughly 170 branches offer Islamic financial services. In five years, Islamic deposits have reached a 2.9 percent market share in Pakistan, a benchmark that took Malaysia and Bahrain, notable for the success of their Islamic banking systems, ten years to realize.
Another distinguishing aspect of Pakistan's banking system is its attention to financial inclusion. In light of Islam's emphasis on economic justice, Islamic banks have come under criticism for not doing more to help the poor. Examples of sharia-compliant development initiatives do exist. The IDB was established in 1975 to provide development financing to Muslim communities and offers interest-free loans to member countries for agricultural and infrastructural projects.
Yet there is valid concern that Islamic banks in general cater to the wealthy. The World Bank reports that no more than 30 percent of people in the developing world have access to any banking services. In the poorest countries this figure is as low as 10 percent. In Pakistan, where the majority of the population lives in rural areas, all of the country's Islamic banks are in urban locations.
Recognizing this problem, the government issued a Microfinance Institutions Ordinance in 2001 to provide a legal framework to regulate the establishment and operations of microfinance institutions. SBP recently developed a separate financial inclusion strategy to extend financial services, including those that are sharia-compliant, to the country's rural poor.
In addition to the proposed development of Islamic microfinance banks and opening of branches of commercial Islamic banks in rural areas, SBP is working with private sector companies to develop sharia-compliant insurance products to encourage small lending to the agricultural sector. The Chairman of the Senate of Pakistan, Muhammedian Soomro, echoed the need for such a strategy at a recent conference, calling for Islamic banks to issue loans to rural areas for agricultural development, education, and vocational training.
While it will take time for the results of this strategy to actualize, Pakistan is one of few countries with the coordination and framework necessary to extend banking services to low-income sectors of the population. With a growing demand for Islamic financial products and a concurrent need for sustainable and equitable development financing, Pakistan's strategy may serve as a model for the sector.
Pakistani piggybanks, or gallas. Photo by Umair Mohsin (CC).
Islamic finance is booming. The market is estimated at $1 trillion with an expected growth rate of 15 percent per year, as reported by Forbes.com. Although Islamic banking emerged in the 1970s in the Muslim world, the global economy is now realizing that non-Muslims can also take advantage of the sector. Hong Kong is looking to establish its own market for Islamic bonds, or sukuk. Western companies are starting to target Muslim consumers with halal products. And conventional banks like HSBC are offering Islamic financial services.
For many Muslims, the importance of Islamic finance derives from its adherence to Islamic law, or sharia. The principles that serve as ethical investment guidelines are laid out in the Koran and the Sunnah. Most schools of Islam forbid interest and speculation, as well as investment in products considered immoral, such as alcohol. These guidelines prevent against unearned or immorally earned profit, and they also protect the investor against exploitation and the risks of excessive leverage.
To meet these requirements, Islamic finance relies on asset-based transactions, rather than money alone. It also employs profit- and risk-sharing mechanisms that distribute risk and reward among borrower and lender, and contracts base ROI on the outcome of the venture rather than a predetermined rate. This system reflects Islam's teachings on wealth distribution and social and economic justice.
Despite the seeming rigidity of these strictures, the Islamic financial services industry has not been impeded. Bonds, mortgages, insurance, and other conventional services have been adapted for compliance with sharia, and the need for continued innovation is widely recognized by experts in the field.
Modern Islamic banks are supervised by a body of Muslim jurists who ensure that transactions adhere to the principles of Islam and the standards of conventional financial institutions. Their expertise encompasses Islamic law, commercial law, and finance, making these jurists hard to come by. The Internet and satellite television have enabled existing Islamic jurists to gain popularity, and growing access to translations of the Koran in print and electronic copies has led to an increasing number of self-taught or amateur jurists.
Adherence to and interpretation of sharia varies by country and financial institution, due to different schools of Islam and different national and subnational laws. This means cross-border transactions and international competition can be difficult. For this reason, multilateral institutions, such as the Accounting and Auditing Organization for Islamic Financial Institutions and the Islamic Financial Services Board, are working to increase coordination among governments and harmonize international standards. The International Monetary Fund and the Islamic Development Bank (IDB) also facilitate understanding of Islamic banking, issue guidelines for the industry, and advise governments and supervisory agencies.
Pakistan, whose constitution requires that all laws be brought in conformity with sharia, is transitioning to a completely interest-free economy. The country began pursuing this goal in the 1980s but ran into difficulties when it tried to convert the entire banking system too suddenly. In 2001, the State Bank of Pakistan (SBP) launched the Islamic Banking Policy, which promotes simultaneous development of Islamic and conventional financial industries. The policy is meant to establish a full-fledged Islamic banking system in an evolutionary and flexible manner that allows markets and customers to gain confidence in Islamic banks and prepare for an eventual launch of the new system.
Six Islamic banks currently exist in Pakistan, and 13 conventional banks with roughly 170 branches offer Islamic financial services. In five years, Islamic deposits have reached a 2.9 percent market share in Pakistan, a benchmark that took Malaysia and Bahrain, notable for the success of their Islamic banking systems, ten years to realize.
Another distinguishing aspect of Pakistan's banking system is its attention to financial inclusion. In light of Islam's emphasis on economic justice, Islamic banks have come under criticism for not doing more to help the poor. Examples of sharia-compliant development initiatives do exist. The IDB was established in 1975 to provide development financing to Muslim communities and offers interest-free loans to member countries for agricultural and infrastructural projects.
Yet there is valid concern that Islamic banks in general cater to the wealthy. The World Bank reports that no more than 30 percent of people in the developing world have access to any banking services. In the poorest countries this figure is as low as 10 percent. In Pakistan, where the majority of the population lives in rural areas, all of the country's Islamic banks are in urban locations.
Recognizing this problem, the government issued a Microfinance Institutions Ordinance in 2001 to provide a legal framework to regulate the establishment and operations of microfinance institutions. SBP recently developed a separate financial inclusion strategy to extend financial services, including those that are sharia-compliant, to the country's rural poor.
In addition to the proposed development of Islamic microfinance banks and opening of branches of commercial Islamic banks in rural areas, SBP is working with private sector companies to develop sharia-compliant insurance products to encourage small lending to the agricultural sector. The Chairman of the Senate of Pakistan, Muhammedian Soomro, echoed the need for such a strategy at a recent conference, calling for Islamic banks to issue loans to rural areas for agricultural development, education, and vocational training.
While it will take time for the results of this strategy to actualize, Pakistan is one of few countries with the coordination and framework necessary to extend banking services to low-income sectors of the population. With a growing demand for Islamic financial products and a concurrent need for sustainable and equitable development financing, Pakistan's strategy may serve as a model for the sector.
Islamic Banking -Any predetermined payment over and above the actual amount of principal is prohibited.
Islam allows only one kind of loan and that is qard-el-hassan (literally good loan) whereby the lender does not charge any interest or additional amount over the money lent. Traditional Muslim jurists have construed this principle so strictly that, according to one commentator "this prohibition applies to any advantage or benefits that the lender might secure out of the qard (loan) such as riding the borrower's mule, eating at his table, or even taking advantage of the shade of his wall." The principle derived from the quotation emphasises that associated or indirect benefits are prohibited.
Islamic Banking - The lender must share in the profits or losses arising out of the enterprise for which the money was lent.
Islam encourages Muslims to invest their money and to become partners in order to share profits and risks in the business instead of becoming creditors. As defined in the Shari'ah, or Islamic law, Islamic finance is based on the belief that the provider of capital and the user of capital should equally share the risk of business ventures, whether those are industries, farms, service companies or simple trade deals. Translated into banking terms, the depositor, the bank and the borrower should all share the risks and the rewards of financing business ventures. This is unlike the interest-based commercial banking system, where all the pressure is on the borrower: he must pay back his loan, with the agreed interest, regardless of the success or failure of his venture.
The principle which thereby emerges is that Islam encourages investments in order that the community may benefit. However, it is not willing to allow a loophole to exist for those who do not wish to invest and take risks but rather content with hoarding money or depositing money in a bank in return for receiving an increase on these funds for no risk (other than the bank becoming insolvent). Accordingly, under Islam, either people invest with risk or suffer loss through devaluation by inflation by keeping their money idle. Islam encourages the notion of higher risks and higher returns and promotes it by leaving no other avenue available to investors. The objective is that high risk investments provide a stimulus to the economy and encourage entrepreneurs to maximise their efforts. Islamic Banking -Making money from money is not Islamically acceptable.
Money is only a medium of exchange, a way of defining the value of a thing; it has no value in itself, and therefore should not be allowed to give rise to more money, via fixed interest payments, simply by being put in a bank or lent to someone else. The human effort, initiative, and risk involved in a productive venture are more important than the money used to finance it. Muslim jurists consider money as potential capital rather than capital, meaning that money becomes capital only when it is invested in business. Accordingly, money advanced to a business as a loan is regarded as a debt of the business and not capital and, as such, it is not entitled to any return (i.e. interest). Muslims are encouraged to purchase and are discouraged from keeping money idle so that, for instance, hoarding money is regarded as being unacceptable. In Islam, money represents purchasing power which is considered to be the only proper use of money. This purchasing power (money) cannot be used to make more purchasing power (money) without undergoing the intermediate step of it being used for the purchase of goods and services. Islamic Banking -Gharar (Uncertainty, Risk or Speculation) is also prohibited.
Under this prohibition any transaction entered into should be free from uncertainty, risk and speculation. Contracting parties should have perfect knowledge of the counter values intended to be exchanged as a result of their transactions. Also, parties cannot predetermine a guaranteed profit. This is based on the principle of 'uncertain gains' which, on a strict interpretation, does not even allow an undertaking from the customer to repay the borrowed principal plus an amount to take into account inflation. The rationale behind the prohibition is the wish to protect the weak from exploitation. Therefore, options and futures are considered as un-Islamic and so are forward foreign exchange transactions because rates are determined by interest differentials.
A number of Islamic scholars disapprove the indexation of indebtedness to inflation and explain this prohibition within the framework of qard-el-hassan. According to those scholars, the creditor advances the loan to win the blessings of Allah Almighty and expects to obtain the reward from Allah Almighty alone. A number of transactions are treated as exceptions to the principle of gharar : sales with advanced payment (bai' bithaman ajil); contract to manufacture (Istisna); and hire contract (Ijara). However, there are legal requirements for the conclusion of these contracts to be organised in a way which minimises risk. Islamic Banking -Investments should only support practices or products that are not forbidden
-or even discouraged- by Islam. Trade in alcohol, for example would not be financed by an Islamic bank; a real-estate loan could not be made for the construction of a casino; and the bank could not lend money to other banks at interest.
Islam is an entire way of life, and Allah's Guidance extends into all areas of our lives. Islam has given detailed regulations for our economic life, which is balanced and fair. Muslims are to recognize that wealth, earnings, and material goods are the property of God, and we are merely His trustees. The principles of Islam aim at establishing a just society wherein everyone will behave responsibly and honestly. The fundamental principles of the Islamic economic system are as follows:
* Muslims are not to deal in interest. "Those who devour usury will not stand....Allah has permitted trade and forbidden usury.... Allah will deprive usury of all blessing, but will give increase for deeds of charity...." (Qur'an 2:275-6) "O you who believe! Devour not usury, doubled and multiplied. But fear Allah, that you may really prosper." (3:130) This prohibition is for all interest-based transactions, whether giving or receiving, whether dealing with Muslims or non-Muslims. It is reported that the Prophet Muhammad (peace be upon him) cursed those who pay interest, those who receive it, those who write a contract based on it, and those who witness such a contract.
* It is forbidden to gain property or wealth by fraud, deceit, theft, or other falsehoods. "...Give just measure and weight, and do not withhold from people the things that are their due. And do not do mischief on the earth after it has been set in order. That will be best for you, if you have faith." (7:85)
* It is particularly hateful for a guardian to take from an orphan's property. "To orphans restore their property (when they reach their age). Do not substitute your worthless things for their good ones, and do not devour their property by mixing it up with your own. For this is indeed a great sin." (4:2)
* Forbidden are earnings from gambling, lotteries, and the production, sale, and distribution of alcohol. "O you who believe! Intoxicants and gambling, sacrificing to stones, and divination by arrows are an abomination of Satan's handiwork. Eschew such abomination, that you may prosper." (5:90)
* It is unlawful to hoard food and other basic necessities. Everyone should take what they need and no more. "And let those who covetously withhold of the gifts which Allah has given them of His Grace, think that it is good for them. No, it will be the worse for them. Soon it will tied to their necks like a twisted collar, on the Day of Judgment. To Allah belongs the heritage of the heavens and the earth, and Allah is well-acquainted with all that you do." (3:180)
* A Muslim should be responsible in spending money. Extravagance and waste are strongly discouraged. "[The Servants of Allah are] Those who, when they spend, are not extravagant and not stingy, but hold a just balance between those extremes." (25:67) "O Children of Adam! Wear your beautiful apparel at every time and place of prayer. Eat and drink, but waste not by excess, for Allah loves not the wasters." (7:31)
* Payment of Zakat (alms). "And they have been commanded no more than this: to worship Allah, offering Him sincere devotion, being true in faith. To establish regular prayer, and to give zakat. And that is the religion right and straight." (98:5) Every Muslim who owns wealth, more than a certain amount to meet his or her needs, must pay a fixed rate of Zakat to those in need. Zakat is a means of narrowing the gap between the rich and the poor, and to make sure that everyone's needs are met.
* Muslims are encouraged to give constantly in charity. "Your riches and your children may be but a trial. Whereas Allah, with Him is the highest reward. So fear Allah as much as you can, listen and obey, and spend in charity for the benefit of your own souls. And those saved from the selfishness of their own souls, they are the ones that achieve prosperity." (64:15-16) The Prophet Muhammad once said that "nobody's assets are reduced by charity."
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Economic System of Islam
Join the Discussion "Now, consumers are in debt up to their eyeballs. Their houses are financed, their cars are financed, their furniture is financed, etc. If an economic boom is a result of people going into debt to make a purchase, then that isn't an economic boom as far as I am concerned." DOGMATIST1
Related Resources • Islamic Business • Islamic Law
Islam is an entire way of life, and Allah's Guidance extends into all areas of our lives. Islam has given detailed regulations for our economic life, which is balanced and fair. Muslims are to recognize that wealth, earnings, and material goods are the property of God, and we are merely His trustees. The principles of Islam aim at establishing a just society wherein everyone will behave responsibly and honestly. The fundamental principles of the Islamic economic system are as follows:
* Muslims are not to deal in interest. "Those who devour usury will not stand....Allah has permitted trade and forbidden usury.... Allah will deprive usury of all blessing, but will give increase for deeds of charity...." (Qur'an 2:275-6) "O you who believe! Devour not usury, doubled and multiplied. But fear Allah, that you may really prosper." (3:130) This prohibition is for all interest-based transactions, whether giving or receiving, whether dealing with Muslims or non-Muslims. It is reported that the Prophet Muhammad (peace be upon him) cursed those who pay interest, those who receive it, those who write a contract based on it, and those who witness such a contract.
* It is forbidden to gain property or wealth by fraud, deceit, theft, or other falsehoods. "...Give just measure and weight, and do not withhold from people the things that are their due. And do not do mischief on the earth after it has been set in order. That will be best for you, if you have faith." (7:85)
* It is particularly hateful for a guardian to take from an orphan's property. "To orphans restore their property (when they reach their age). Do not substitute your worthless things for their good ones, and do not devour their property by mixing it up with your own. For this is indeed a great sin." (4:2)
* Forbidden are earnings from gambling, lotteries, and the production, sale, and distribution of alcohol. "O you who believe! Intoxicants and gambling, sacrificing to stones, and divination by arrows are an abomination of Satan's handiwork. Eschew such abomination, that you may prosper." (5:90)
* It is unlawful to hoard food and other basic necessities. Everyone should take what they need and no more. "And let those who covetously withhold of the gifts which Allah has given them of His Grace, think that it is good for them. No, it will be the worse for them. Soon it will tied to their necks like a twisted collar, on the Day of Judgment. To Allah belongs the heritage of the heavens and the earth, and Allah is well-acquainted with all that you do." (3:180)
* A Muslim should be responsible in spending money. Extravagance and waste are strongly discouraged. "[The Servants of Allah are] Those who, when they spend, are not extravagant and not stingy, but hold a just balance between those extremes." (25:67) "O Children of Adam! Wear your beautiful apparel at every time and place of prayer. Eat and drink, but waste not by excess, for Allah loves not the wasters." (7:31)
* Payment of Zakat (alms). "And they have been commanded no more than this: to worship Allah, offering Him sincere devotion, being true in faith. To establish regular prayer, and to give zakat. And that is the religion right and straight." (98:5) Every Muslim who owns wealth, more than a certain amount to meet his or her needs, must pay a fixed rate of Zakat to those in need. Zakat is a means of narrowing the gap between the rich and the poor, and to make sure that everyone's needs are met.
* Muslims are encouraged to give constantly in charity. "Your riches and your children may be but a trial. Whereas Allah, with Him is the highest reward. So fear Allah as much as you can, listen and obey, and spend in charity for the benefit of your own souls. And those saved from the selfishness of their own souls, they are the ones that achieve prosperity." (64:15-16) The Prophet Muhammad once said that "nobody's assets are reduced by charity."
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Dubai: Islamic banking assets continued double-digit growth this year as conventional bank growth stagnated, according to The Banker's Top 500 Islamic Financial Institutions survey, published in association with HSBC Amanah.
Assets held by fully Sharia-compliant banks or Islamic banking windows of conventional banks rose by 28.6 per cent to $822 billion (Dh3 trillion) from $639 billion in 2008. This is in striking contrast to The Banker's 2009 Top 1,000 World Bank rankings released in July, which showed annual asset growth of just 6.8 per cent at conventional banks.
The Islamic finance industry continues to build a solid track record: the compound annual growth rate for 2006-2009 is 27.86 per cent, with assets forecast to hit $1033 billion in 2010.
Brian Caplen, Editor of The Banker magazine, said: "A conservative approach to risk and a close link between the financial sector and real assets has helped shield the sector from the worst of the credit crisis. But finding improved ways to manage liquidity at Islamic banks, as well as harmonising Sharia and prudential compliance between institutions and markets, remain significant hurdles."
Alternative
David Dew, Deputy CEO of HSBC Amanah, said: "It is important that the Islamic finance industry continues to analyse its growth critically if it is to become a truly credible alternative to conventional banking in a significant number of markets.
"Our support for this global benchmark reflects HSBC Amanah's status as the premier cross-border provider of Sharia compliant financial services to retail, corporate and institutional clients. It also illustrates our commitment to continue to meet customer needs, which we believe will enable the industry to achieve meaningful scale and mainstream relevance in a growing number of international markets."
The Gulf Cooperation Council (GCC) states remained the dominant segment of Islamic finance, with $353.2 billion or 42.9 per cent of the total global aggregate. Iran remains the largest single market for Sharia-compliant assets, accounting for 35.6 per cent of the global aggregate.
Outside the Middle East, Malaysia remains by far the largest player, accounting for 10.5 per cent of the global aggregate, but other markets are expanding rapidly.
The UK now accounts for just under 2.5 per cent of global Sharia-compliant assets, and the Syrian Islamic finance market expanded an eye-catching 500 per cent.
When British banking giant HSBC Group (HBC ) began offering mortgages carefully formulated to meet Islamic banking practices last year in Malaysia, it was surprised that more than half of its customers were non-Muslim. What drew these customers to alternative financing that conforms to the strict dictates of Islam? Bank officials say that competitive pricing makes their Muslim-friendly mortgages -- which operate more like leases than loans -- competitive with traditional interest-based financing.
t's all part of a trend in which financial products that comply with the set of Koranic laws that govern a Muslim's daily life, or shariah, are evolving from a novelty into a normal part of doing business in much of the developing world. "Islamic banking isn't just for conservative or radical Muslims. It's mainstream business now," says Ross Mohamad Din, director of HSBC Amanah Malaysia, the bank's Islamic division. "That's why every bank wants a bigger piece of it."
From Jakarta to Jeddah, 265 Islamic banks and other financial institutions are now operating in some 40 countries, with total assets that top $262 billion, according to organizers of the International Islamic Finance Forum, a semi-annual industry conference. That pot of money, the investment of which adheres to the Koran's prohibition against receiving or paying interest, has been steadily building since 1994, when Malaysia created the world's first Islamic interbank money market. Now Islamic banking has broadened its appeal well beyond the confines of faithful Muslims. Indeed, nearly one-quarter of all Islamic banking business in Malaysia is being transacted by non-Muslims.
Islamic finance was long the preserve of specialty banks that handled shariah-compliant products exclusively, such as Malaysia's top-ranked Bank Islam and Saudi Arabia's Al Rajhi Banking & Investment Corp. But Western banks, no longer content to leave the market to Islamic lenders, are competing for a slice of the business. Two years ago, Citigroup (C ) began providing Islamic mortgages in Malaysia and has begun training staffers in Indonesia and Pakistan to offer them there. It also provides Islamic mortgages in Middle Eastern countries such as the United Arab Emirates. HSBC operates Islamic banking services all over the Arab world, and they now make up about 10% of its business in Malaysia. UBS, the world's top player in wealth management, set up a stand-alone Islamic private bank last year in Dubai to cater to its wealthiest Middle Eastern clients. And no wonder. Assets held by Muslims, led by Gulf Arabs, in all banks -- Islamic and otherwise -- are estimated at $1.5 trillion and are growing 15% a year, in large part because of high oil prices.
BRAGGING RIGHTS Behind the rapid growth in shariah-compliant investments are the development of new regulations and standards for Islamic financial services in the past few years. There's also much more awareness of Islamic financial alternatives in the Muslim world than ever before, thanks to stepped-up marketing by banks. Some Western lenders are even rolling out Islamic financial products in their home markets. Lloyds TSB Bank PLC (LYG ), Britain's fourth-largest, recently introduced Islamic mortgage products to cater to Britain's 2.5 million Muslims. "The biggest explosion [in growth] right now is in Islamic consumer banking and investment products," says Mohsin Nathani, Citigroup's Bahrain-based global head of Islamic banking.
What all Islamic financial products share is the absence of interest -- either assessed or paid. Instead, the investments are set up as leasing arrangements or investments in which money is turned over to third-party trustees who share profits with Islamic depositors.
While many countries boast a thriving market for Islamic banking products, Malaysia has positioned itself as the mecca of Muslim finance. That has given it bragging rights in a region where it has long been overshadowed by established financial hubs such as Hong Kong and Singapore. The Southeast Asian country is home to the Islamic Financial Services Board (IFSB), a global organization of Muslim bankers in charge of banking regulation and supervision that also works closely with the Bank for International Settlements. Islamic investments accounted for 11% of total banking assets in Malaysia last year. "By 2007 we expect that to grow to over 15% total banking assets, and we are targeting at least 20% by 2010," says Malaysian Finance Minister Nor Mohamed Yakcop.
There's more to Islamic finance than alternatives to simple savings accounts and home loans. Many banks offer Islamic charge and debit cards, although some Islamic scholars disapprove of them. Unlike standard cards, these are linked to personal lines of credit so users are only "borrowing" money from themselves -- not the issuing bank. The banks make money by charging service fees. What's more, the market for Islamic bonds hit $30 billon in 2004 and has topped $20 billion so far this year, the Monetary Authority of Singapore estimates. Recent issuers of ringgit-denominated Islamic notes include the Asian Development Bank, Swiss food giant Nestlé, and Saxony-Anhalt in Germany. That German state became the first European government body to issue an Islamic bond last year -- a $121 million five-year floating-rate note that provides "rent" in lieu of interest from a series of government properties that form the bond's collateral.
Some of the more sophisticated Islamic debt investments include asset-backed securities, in which Islamic assets such as property are bundled into bonds. A still newer product is a convertible bond that morphs into shares of shariah-compliant companies at a given strike price.
While bankers see Islamic finance as a growth area, they acknowledge that it's not for everyone. First, not all Muslims are as fastidious about how their cash is invested as others -- which limits the appeal of these carefully constructed investments. Some investments have no interest-free equivalent, which may also crimp the sector's growth. Plus, while profit margins on shariah-compliant products are comparable with interest rates on non-Islamic investments, they often cost more to set up. And Islamic scholars still differ on key aspects of shariah, making it difficult to standardize all products across the Islamic world.
At the same time, given a choice, many Muslims do opt for Islamic-approved banking. That may eventually eat into traditional financial services, which is one reason Western banks active in the Muslim world are so eager to bolster their shariah credentials. "There is a segment within the current market that would switch to Islamic if the quality and benefits offered were as good as conventional financial products," says Ray Ferguson, CEO of Standard Chartered Bank UAE in Dubai. Clearly, Islamic finance has moved into the mainstream.
The global market for sukuk (Sharia-compliant bonds) has grown tremendously in recent years. Total outstanding sukuk rose from $8 billion in 2003 to around $100 billion in 2008. Sukuk provides companies and governments with access to financing and liquidity and offer a much needed Sharia-compliant instrument to investors. While the growth of the fixed income market in the Kingdom has been dwarfed by that of the equity market, we think that conditions are in place for strong growth in sukuk issuance and trading.
An important step was the launch by Tadawul of an automated order-driven secondary market for sukuk in mid-June. Previously, sukuk transactions were in an over-the-counter market, meaning that they were executed through bank treasuries and settled by Tadawul. Liquidity was very low, as most sukuk issues were held until maturity. The introduction of the new platform is intended to encourage investors to more actively trade sukuk. With the new system, investors can buy and sell sukuk through their brokers.
With the new trading platform in place, we think the following factors will stimulate supply from issuers and demand from investors in Saudi Arabia:
* Predictability and portfolio diversification: The collapse in the stock market last year has encouraged investor interest in more predictable assets such as sukuk. Given the very limited investment channels open to investors in the Kingdom, sukuk could also play in important role in portfolio diversification. * Problems raising finance from traditional sources: Companies needing to raise finance have generally used a combination of bank loans and IPOs. With banks reluctant to lend and low valuations making IPOs unattractive, sukuk issuance should emerge as an important source of funding. * Balance sheet mismatches: Little long-term bank lending is available, meaning that companies borrowing to finance long-term projects face an asset-liability mismatch on their balance sheets. Long-term sukuk would ease this problem. * Healthy sukuk pipeline: Following two successful sukuk issues earlier this year, other local companies have announced their intention to issue sukuk, in addition to some GCC governments.
Notwithstanding the bright future for sukuk, there are still formidable challenges may impede growth. Liquidity is very low; there were only 50 transactions in the first two months of trading on the sukuk market. In addition, the local market lacks breadth and depth (there are only five listed sukuk) and there are no indications that the government will begin actively issuing sukuk (government support is generally a key factor in the development of debt markets). Furthermore, the lack of skilled human resources, Sharia-compliance standardization and innovative product development remain serious issues.
Background
Sukuk (plural of sak) are Sharia-compliant bonds. The main difference between sukuk and bonds is that sukuk holders take direct ownership of an underlying asset or pool of assets, whereas a bond is purely the financial debt of the issuer. Sukuk do not pay interest; rather they generate a return through actual economic transactions in the form of sharing or leasing the underlying assets. Nonetheless, in most other aspects sukuk and conventional bonds are similar.
The use of sukuk has become increasingly popular in recent years both for governments and companies. In part this has stemmed from the dramatic growth in Islamic banking that has been the result of the large inflows of liquidity (primarily oil revenues) into the Islamic world and a greater appetite among businesses and individuals to conduct their finances in a Sharia-complaint way. As the take up of Islamic financial services grew, demand from issuers for a product that performs a similar function to a bond leapt. Demand from investors has also surged as growing wealth within the Islamic world has made regional credit risk more attractive and greater understanding of the instrument and clarity of documentation, supported by credit ratings from international agencies, has enhanced investor comfort with sukuk.
Malaysia accounts for around 47 percent of global sukuk issuance by market value, followed by the GCC, which is the source of a further 46 percent. Sukuk issuance is not limited to Islamic countries and there have been issues from institutions in Singapore, Sri Lanka, Canada, Thailand, the UK and US. Recently, the second largest bank in Russia, VTB, indicated that it is considering a sukuk. The growing interest in sukuk worldwide reflects the spread of Islamic banking and the desire of foreign issuers to tap the liquidity within the GCC. As it is the structure of the instrument that has to be Sharia-compliant, rather than the issuer or the purchaser, the supply and demand for sukuk is set to grow in nontraditional markets.
Sukuk are generally built around one of six main contracts: Ijara, Mudaraba, Musharaka, Murabaha, Istisina and Istithmar. Ijara accounts for around 32 percent of global sukuk issuance followed by Musharaka and Mudaraba. The Saudi sukuk market is dominated by the Istithmar. The variation in the dominance of structures is explained by the lack of Sharia-compliance standardization. It is the responsibility of Sharia boards to determine what structures are Sharia-compliant and given that there are no universally agreed standards, boards across countries exercise considerable discretion in arriving at their opinions. Some countries adopt a conservative interpretation of Sharia, while others are more flexible, leading to an inconsistency about what is considered Sharia complaint. For instance, most Ijara structures that have been issued in other countries do not meet Sharia-compliance requirements in Saudi Arabia. This lack of Sharia standardization poses a great challenge to growth of suk
