Islamic Finance, it's a Whole New World

By John Wood
http://www.terrorfinance.org/the_terror_finance_blog/2007/08/islamic-finance.html

In April 2007, a $600 million sukuk (Islamic bond) was structured and registered in the Cayman Islands. On August 26, 2007, the Khaleej Times reported that the Cayman Islands was introducing Arabic and English language registrations and certificates. According to Arab News, other tax havens have also been courting the Islamic finance market: Bahamas, British Virgin Islands, Guernsey, Isle of Man, Jersey and Luxembourg, to name but a few. In fact, the Jersey law firm of Voisin pioneered Islamic securitization deals with the Caravan I Sukuk.
Meanwhile, the UK is trying its level best to establish itself as the premier Western center for Islamic finance. On January 30, 2007, Economic Secretary Ed Balls announced that the UK government intends to introduce legislation to facilitate the UK issuance and trading of sukuk, as well as to provide guidance on musharka (an Islamic financial vehicle used for mortgages) and takaful (Islamic insurance). This announcement laid the groundwork for a major public and private sector high level Islamic Finance Summit on April 16, 2007. HSBC stands at the head of Western financial institutions offering Sharia’ah compliant mortgages and pension funds. In addition, in the UK, Standard Life also offers pension funds, Lloyds TSB offers shariah business accounts, and Children's Mutual offers a Shari'ah compliant Child Trust Fund.
Saleh Kamel, President of Dallah Al-Baraka Group, believes that there are now over 400 Islamic financial institutions in 75 countries, with total assets over $500 billion, growing at a rate of 15% per annum. Not bad when one considers that in 1975, there was just one Islamic financial institution in the world. Mark Hanson, CEO of Global Banking Corporation, estimates that Islamic banking is growing at a rate of between 35-40% per annum. In the space of just five years, the sukuk market has grown to $50 billion, at a rate of 40% per annum. With the project finance market in the GCC estimated at $1 trillion, an increasing number of Middle East companies are looking to Shari’ah compliant financial instruments to meet their needs. Thus, Islamic finance has become increasingly attractive to Western countries and financial institutions.

The pioneer and driving force behind modern Islamic finance is Saleh Kamel. However, he is now calling for Islamic finance to move from being Shari’ah compliant to that of being Shari’ah based. At the heart of his concern, is a belief that Islamic finance has adopted in part Western models, rather than the purely shari’ah model. Sheik Kamel sees zakat as key to the transformation from Shari’ah compliant to Shari’ah based financial products.
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Accordingly, in October 2006, Sheik Kamel called for the establishment of a single worldwide organization to collect and distribute zakat, both Zakat Al-Fitr (one of the five pillars of Islam) and Zakat Al-Mal (on wealth), from the 20,000 or so organizations that are currently involved in its collection. It is to be noted that the Zakat Al-Fitr which is collected at the end of Ramadan is estimated to be more than $2 billion. Significantly, the funds will be distributed under the supervision of a committee comprising experts from the IDB, ICCI and the OIC. On November 28, 2006, the OIC approved Kamel’s proposal. On December 4, 2006, it was announced that the International Commission for Zakat would be based in Malaysia. On April 30, 2007, 20 OIC nations, including Saudi Arabia, endorsed the International Commission for Zakat.
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It is no coincidence that the most enthusiastic supporter of the new International Commission for Zakat is Sheik Yusuf Al-Qaradawi, Chairman of the World Forum for Muslim Scholars, a supporter of Hamas and the Palestinian intifada. The Quranic basis for his position is to be found in the admonition that zakat may be given to help those who are confined for the cause of Allah (fisabillillah) (Sura 2:273). Dr. Ajeel Jassem al-Nashami, the Secretary General of the International Organization for Zakat in Kuwait, in his interpretation of Sura 9:60, observes that of the eight forms of zakat that are enumerated, four of them are designated for jihad, and the other four for the help of the needy. For Qaradawi, Islamic charities who provide support for the families of suicide bombers, represent the practical face of financial jihad.
On June 20, 2007, Saleh Kamel called for a streamlining of the Shari’ah council system which makes rulings (fatwas) on whether a financial investment or asset is according to Shari’ah law illicit (haram) or not. He proposed a central Shariah Council for issuing fatwas. Presently, Islamic financial institutions are encouraged to have their own duly constituted Shari’ah boards that make fatwas, but not all do. The goal is standardization, in order to create uniformity in fatwas. Under Shari’ah law, the charging of interest (riba) (Sura 2:275-280), investment in risky (jahala) ventures or uncertain (gharar) arrangements (Sura 2:282), gambling or games of chance (maisir) (Sura 5:91), alcohol (Sura 2:219), pornography (Sura 17:32) are deemed haram, and as such, are prohibited and must be removed from among the investments or assets of an Islamic financial institution. That being said, in order to purify the remaining investment or asset portfolio, the earnings from haram activities are to be applied as zakat. With respect to lawful investments and assets, they are subject to Zakat Al-Mal. Whilst, standardization is a laudable goal, it should not be lost on anyone that most probably the underlying school of jurisprudential interpretation (fiqh) will be hanbali. In other words, the new international shari’ah council will be wholly wahhabist, and therefore, Islamic fundamentalist.

Islamic Finance to Reduce Fiscal Deficit in India

Syed Zahid Ahmad
(aicmeu@yahoo.com)

At a time when economic recovery needs more stimuli by the Government of India (GoI), there is also an urgent need to safeguard the economy from the debt trap because the GDP growth rate fell to 6.7% in 2008-09 against 9% in 2007-08; the debt servicing reached to 58.83% of the total expenditure for the year 2008-09. It means maximum receipts are now spent for debt servicing which accounted to 15.87% of the Gross Domestic Product (GDP), while the debt receipts were 9.78% of the GDP in 2008-09. Even the interest payments were 21.39% of the total expenditures by GoI and 5.77% of the GDP in 2008-09.

In an attempt to find the actual reasons behind high fiscal deficit, it is observed that the increased debt receipts by GoI to finance infrastructure projects; increased subsidies on food, fuel and fertilizer; and rural development through schemes like NREGS, farmer’s loan waiving scheme and Sarva Shiksha Abhiyan are the three most important factor of high fiscal deficit. Since there is need of more stimuli to counter recession in the economy, it is expected that the plan expenditures may further increase whereas due to recession, the revenue receipts may decline. This decrease in revenue receipts and increase in plan expenditure may increase the fiscal deficit to an unwanted level high. Working upon different options to reduce the fiscal deficit, it is found that Islamic finance can reduce the fiscal deficit even though if revenue receipts declines and plan expenditures increases.

Islamic financial products has a great role to play in reducing fiscal deficit in emerging economies by replacing the debt based investments for infrastructure with funds mobilized through equity based Government Securities for infrastructure projects. Let’s see how Islamic finance may help us reduce our present fiscal deficit.

Revised Estimates as presented in Interim Budget for 2009-10
Income Expenditure Estimates for Union Budget 2008-09 R. E.
(in Rs. Crores)
1. Gross Tax Revenue 627,949
2. Net Tax Revenue 465,970
3. Total Non-Tax Revenue 96,203
4. Total Revenue Receipts 562,173
5. Non-debt Receipts 12,265
6. Debt Receipts to finance Fiscal Deficit 326,515
Market Loans 261,972
Market loan as % of total debt receipt 80.23%
Debt receipts as % of total receipts 36.24%
Debt receipts as % of total capital receipts 96.38%
7. Total Capital Receipts 338,780
8. Total Receipts 900,953
9. Total Revenue Non-Plan Expenditure 561,790
10. Total Capital Non-Plan Expenditure 56,206
11. Total Non-Plan Expenditure 617,996
12. Total-Revenue Plan Expenditure 241,656
13. Total Capital Plan Expenditure 41,301
14. Total – Plan Expenditure 282,957
15. Total Budget Support for Central Plan 204,128
16. Total Central Assistance for State & UT Plans 78,829
17. Total Expenditure* 900,953
DEBT SERVICING
18. Repayment of debt** 337,316
19. Total Interest Payments 192,694
20. Total debt servicing (18+19) 530,010
21. Interest Payments as Percentage to Revenue Receipts 34.30%
22. Total Debt servicing as Percentage to Revenue Receipts 94.28%
23. Non Debt receipt as % of total receipts 1.36%
24. Debt receipts as % of total receipts 36.24%
Interest payment on debts as % of total Expenditure 21.39%
Debt Servicing as % of total Expenditure 58.83%
25. Interest Payments as Percentage to Total Receipts 21.39%
26. Repayment of Debts as Percentage to Total Receipts 37.44%
27. Repayment of Debt as % to GDP 10.10%
28. Interest payment as % to GDP 5.77%
29. Total Debt Servicing as % to GDP 15.87%
* Excludes expenditure matched by receipts (Details in Annex-2 to Expenditure Budget, Volume-1, 2009-2010)
** Excludes discharge of 91 days, 182 days & 14 days intermediate Treasury bills, discharge of Ways & Means Advances including overdraft, income and expenditure of National Small Savings Fund (NSSF), investments of NSSF, Reserve Funds and Deposits not bearing interest and suspense transactions. Discharge under MSS met from the sequestered cash balances is not included.
Data source: http://indiabudget.nic.in/

Debt Finances crossed the Planned Estimates:
The debt based finances for investments under 11th five year plan document was proposed to be 48.42% of total receipts for 2008-09, whereas the revised budget estimates reveals that the debt receipts were 96.38% of total capital receipts in 2008-09. This reflects our inability to mobilize targeted amount of non debt receipts, causing high fiscal deficit due to interest payments over borrowed debt receipts.
Source-wise Projected Investment for 11th Plan
(Rs crore at 2006–07 prices)
Sources 2007–08 2008–09 2009–10 2010–11 2011–12 Total 11th
Plan
1. Centre 112,608 128,305 148,545 172,123 204,041 765,622
Central Budget 29,416 33,517 38,804 44,963 53,301 200,000
Internal Generation (IEBR) 24,958 28,437 32,922 38,148 45,222 169,687
Borrowings (IEBR) 58,234 66,352 76,819 89,012 105,518 395,936
2. States 79,499 99,022 124,998 160,232 207,186 670,937
States Budgets 52,689 65,628 82,844 106,195 137,315 444,671
Internal Generation (IEBR) 8,043 10,018 12,646 16,211 20,961 67,880
Borrowings (IEBR) 18,767 23,376 29,508 37,826 48,910 158,386
3. Private 78,166 94,252 115,724 146,762 184,687 619,591
Internal Accruals/Equity 23,450 28,726 34,717 44,029 55,406 185,877
Borrowings 54,716 65,976 81,006 102,733 129,281 433,713
Borrowings as % to private 70.00% 70.00% 70.00% 70.00% 70.00% 70.00%
4. Total Projected Investment 270,273 321,579 389,266 479,117 595,913 2,056,150
Non-Debt 138,555 165,875 201,933 249,546 312,205 1,068,114
Debt 131,718 155,704 188,333 229,571 283,709 988,035
Non Debt as % of Total 51.26% 51.58% 51.88% 52.08% 52.39% 51.95%
Debt as % of Total 48.74% 48.42% 48.38% 47.92% 47.61% 48.05%
Data Source: http://planningcommission.nic.in/

Bank Loans Exceeded the Proposed Estimates:
In the 11th five year plan document it was projected that by year 2008-09, to meet the proposed investment needs around 50% debt receipts worth Rs. 63,207 crores would be mobilized as domestic banks credit. However the figures of revised budget estimates for 2008-09 states that market loans (amounting Rs. 261,972 Crores) are over 80% of total debt receipt by the GoI. These figures not only reflects the need to review the 11th five year plan projections in the light of global financial crisis and recession; but also suggests that GoI is consuming more bank credits than planned estimates; leaving Indian industries to suffer in lack of adequate and affordable credit sources from domestic banks.

Actual Debt Receipts is 210% to the planned Estimates:
Since the revised estimates on debt receipts (Rs. 326,515 Crores) is already 210% of estimated requirements of debts (Rs. 1,55,704 Crores) by year 2008-09 as projected in 11th five year plan documents, the GoI should seriously think about this increased debt receipts. The funds utilized for debt servicing (Rs. 530,010 Crores) is already 162% of debt receipts to finance fiscal deficit (Rs. 3.26.515 Crores), the GoI should revisit its budgeting. How good is it to increase the debt receipts at a time when Indian industries are looking for more affordable credits from banks to meet the challenges after the global meltdown?

Likely Sources of Debt as projected by the Planning Commission
(Rs crore at 2006–07 prices)
Likely Sources of Debts 2007–08 2008–09 2009–10 2010–11 2011–12 Total Eleventh
Plan
1 Domestic Bank Credit 49,848 63,207 80,147 101,626 128,862 423,691
As % of likely total debt resources 48.69% 49.99% 51.09% 52.00% 52.72% 51.32%
2 Non-Bank Finance Companies 23,852 31,485 41,560 54,859 72,415 224,171
3 Pension/Insurance Companies 9,077 9,984 10,983 12,081 13,289 55,414
4 External Commercial Borrowing (ECB) 19,593 21,768 24,184 26,868 29,851 122,263
5 Likely Total Debt Resources 102,370 126,444 156,874 195,435 244,416 825,539
6 Estimated Requirement of Debt 131,718 155,704 187,333 229,571 283,709 988,035
US$ Billion 32.93 38.93 46.83 57.39 70.93 247.01
7 Gap between Estimated Requirement and Likely Debt Resources (6–5) 29,348 29,260 30,460 34,136 39,292 162,496
US$ Billion 7.34 7.31 7.61 8.53 9.82 40.62
Data Source: http://planningcommission.nic.in/

In year 2008-09 the deficit budget cost an amount of Rs. 192,694 crores to GoI which was paid as interest over the debt receipts borrowed to finance the deficit budget. This may be called as loss to GoI because had there been equity based receipts against debt receipts, GoI would have saved this amount.

Fiscal Deficit is not supportive for foster and Inclusive Growth

The increased flow of subsidized bank loans to GoI for financing fiscal deficit is in fact creating problems for economic growth of the economy because it is creating hurdles for banks to increase the supply of cheaper credit to the private sector at a time when they needs it to minimize their output cost and combat recession. It is observed that beside fall in international demands, the availability of equity finance or cheaper credit sources have affected the business confidence. The equity financial sources are drying up after reversal of capital flows from stock markets due to global meltdown. External Commercial Borrowings (ECBs) and Export Credits have also declined. This all had affected the growth rate for industries.

Industry wise GDP growth trend during recent years
Industry 2006-07 2007-08
(QE) 2008-09
(RE) Percentage change over previous year
2007-08 2008-09
1. Agriculture, forestry & fishing 531,315 557,122 566,045 4.9 1.6
2. Mining & quarrying 60,038 61,999 64,244 3.3 3.6
3. Manufacturing 440,193 476,303 487,739 8.2 2.4
4. Electricity, gas & water supply 60,544 63,730 65,899 5.3 3.4
5. Construction 205,543 226,325 242,577 10.1 7.2
6. Trade, hotels, transport and communication 778,896 875,398 954,589 12.4 9.0
7. Financing, insurance, real estate & business services 409,472 457,584 493,356 11.7 7.8
8. Community, social & personal services 385,118 411,256 464,926 6.8 13.1
9. GDP at factor cost 2,871,120 3,129,717 3,339,375 9.0 6.7
Source: - CSO press release dated 29th May 2009.

Besides evaluating fall in annual growth rate of Gross Domestic Product (GDP) from 9.0% in 2007-08 to 6.7% in 2008-09, it would also be important to analyze the growth trend for different industries during last year. The Manufacturing industry employing majority of non agricultural workers observed deepest fall where annual growth rate fell to 2.4% in 2008-09 compared to 8.2% in 2007-08. Similarly the agriculture, forestry and fishing the annual growth rate fell to 1.6% in 2008-09 against 4.9% an year ago.

However the increase in annual growth rate for Community, Social and personal services has remarkably increased to 13.1% in 2008-09 as compared to 6.8% in 2007-08 reflecting the impact of fiscal stimulus provided by the Government through financing schemes like NREGS. But it would be important to notice that such stimulus has not only increased the fiscal deficit beyond estimated budget for 2009-10, only 9% Indian workforce engaged in Community, Social, and Personal services expected to be benefited through it.

Thus the excess flow of subsidized bank credits to GoI for financing deficit budget is ultimately restraining the economic growth.

Fearing for even higher fiscal deficit?
To reduce the fiscal deficit, it is simple to either cut the expenses or increase the revenues. But under present conditions, it is not possible either to increase the revenue receipts or to cut the expenditures because any increase in taxation will be disastrous at a time when recession has hit the business community and are already demanding for more stimuli for recoveries. When there is mounting pressure to increase the stimuli, the expenditure is suppose to increase further. Moreover the political promises (to provide subsidized foods and increase flagship programme expenses) by the new Parliamentarians before the election would also increase the plan expenditures. It all increases the possibility of any further increase in the current fiscal deficit.

What the Government should do now?
Considering the constraints to increase the revenue receipts and cut the plan expenditures to control fiscal deficit, the GoI needs to innovate new products for public finance. As almost 60% of total expenditures are made for debt servicing, GoI needs to substitute the debt receipts with equity funds. Since SEBI failed to protect the stock markets and NBFCs dealing in MFs and VCs are not in a position to mobilize huge long term investment funds, GoI needs to innovate Sovereign equities to mobilize adequate amount of non debt receipts for consolidation of public finance.

Considering the available options of capital sources in international market, there are chances to get Islamic funds instead of mere equity funds from the Muslim countries. The equity funds are somehow different from Islamic Funds in the manner that when equity funds are mixed with debt funds, it doesn’t remain Islamic Funds.

Islamic Bond (Sukuk) for public finance in India:
Islamic economist Dr. Shariq Nisar in his paper ‘Islamic Bonds (Sukuk): Its Introduction and Application’ writes that the recent innovations in Islamic finance have changed the dynamics of the Islamic finance industry. Specially in the area of bonds and securities the use of Sukuk or Islamic securities have become increasingly popular in the last few years, both as a means of raising government finance through sovereign issues, and as a way of companies obtaining funding through the offer of corporate Sukuk. Beginning modestly in 2000 with total 3 Sukuk worth $336 millions the total number of Sukuk by the end of 2007 has reached to 244 with over US$ 75 billion funds under management. Dr. Shariq summarizes the growth of Sukuk in following table.
Year Sukuk Size (USD million) Number of Sukuk
1990 30.00 1
2000 336.30 3
2001 780.00 4
2002 985.83 9
2003 5717.06 36
2004 7209.53 67
2005 12033.76 89
2006 48114.82 225
2007 75538.70 244
2008 32242.16 156
Total 182988.16 834

Recent studies about Sukuk at http://online.wsj.com/ indicates that although by recently the Sukuk market has managed to come back modestly, but only for higher corporate issuers. IFIS data show that so far this year, more than $7.6 billion of Sukuk have been issued. Almost all this year's fund-raisers have been governments or government-related, the overwhelming majority from Southeast Asian countries such as Indonesia. The Middle Eastern market that drove the pre-2007 boom has also sprung into life this month with a $500 million issue for the government of Bahrain, which was boosted to $750 million because of strong demand. Thus there is no harm if GoI study the feasibility of innovating Islamic products to consolidate public finance in India.

Scope of Islamic Bond in India:
Since India houses second largest Muslim population of the world, it is expected that at least 20% Indian Muslims who are economically better off and desperately looking for real Islamic investments would accept it with enthusiasm. Unfortunately so far India has yet to launch any real Islamic bond or Mutual fund because somehow all the so called ethical mutual fund have been mixing equity funds with debts. Moreover unofficial sources indicates that considering the higher growth rate of India, some larger Islamic banks and financial institutions like Islamic Development Bank, Dubai Islamic Bank and others desire to invest in Indian infrastructure but do not find suitable opportunities. So, we find the scope to study the prospects of Islamic Bond (Sukuk) from GoI to finance infrastructures.

Sector-wise Projected Investment for the Eleventh Plan
(Rs crore at 2006–07 prices)
Sectors Projected investment for 11th five year Plan
Rs. crore Shares (%)
1. Electricity (incl. NCE) 666,525 32.42
2. Roads and Bridges 314,152 15.28
3. Telecommunication 258,439 12.57
4. Railways (incl. MRTS) 261,808 12.73
5. Irrigation (incl. Watershed) 253,301 12.32
6. Water Supply and Sanitation 143,730 6.99
7. Ports 87,995 4.28
8. Airports 30,968 1.51
9. Storage 22,378 1.09
10. Gas 16,855 0.82
Total (Rs crore) 2,056,150 100
Data Source: http://planningcommission.nic.in/

Fiscal deficits can be reduced by the Sukuk funds:
Since returns to Sukuk holders comes from the actual returns from the project there is no chance of any interest burden on the economy. In case there is any loss in the specified project that will also be duly shared by the Sukuk holders. Thus Sukuk finance negates any possibility of interest burden on the economy and removes the chances of fiscal deficit due to interest payments on borrowed debts to finance infrastructural needs of the economy.

We have more of revenue receipts than total revenue expenditure. The problem is with capital expenditure which needs introduction of Sukuk by Indian Government because at present if revenue receipts are 63% of the total receipts; only debt serving are around 60% of total expenditure.

financing the deficit through more of subsidized bank loans is creating problems for the banks to reduce lending rates for private sector; as a result the private sector are getting lower amount of credits at higher costs. Besides the recent global recession, this hardening credit supply is adversely affecting the growth rate of agriculture and manufacturing industry by witnessing negative growth rates in during last 6 months. Thus deficit finance is not helping majority of Indian workforce as agriculture and manufacturing collectively provide livelihood to around 63% workers. So, to ensure foster and inclusive growth by way of providing sufficient and affordable credits to private sector, the increased flow of subsidized bank loans to GoI should be reduced otherwise private sector will continue to suffer and we may not be able to attain desirable growth rate even by increasing the fiscal deficits to stimulate the economy.


Since Sukuk is bounded with religious faith, the economic rationality is secondary aspect in decision making by the investors. The top priorities for Sukuk holders are to ensure that –

1. The returns are Halal (legal according to Islamic ethics) and investments will be used for building potential infrastructures for national development, thus the investments and returns may draw tax incentives as well which may stand as compensation against lower rate of returns.
2. The investments are meant for legal share (proportionate ownership) in the infrastructure.
3. There would not be any fraud or cheating by the fund managers and the investments would not be spent for promoting unethical and unlawful activities (as prohibited by Islamic ethics).
4. The investments will be in safe hands to carefully develop the assets and not manipulate it.
5. Even if the rate of returns are low as compared to market returns on other investments, the advantage of earning Halal income, tax incentives on investments upon national infrastructure would be some compensatory advantages to the Sukuk holders.

Since all sorts of returns on Sukuk are free from interest and does not exceed to the actual asset value, whatever is paid as returns to Sukuk holders is to pay from the actual earnings from the asset created by that particular investment. There is no need to borrow any debt to pay Sukuk returns or repay the whole Shukuk funds because all the Shukuk holders collectively own the asset. They will thus proportionately gain or loose according to appreciation or decline in the value of that particular asset.

Indian Institute of Islamic Infrastructure Funds (IIIIF):
It is desirable that the GoI set an autonomous financial corporation as ‘Indian Institute of Islamic Infrastructure Funds’ (IIIIF) to grab the national and international market of Shariah Funds and mobilize adequate funds for the infrastructural investments in India. If IIIIF succeeds soliciting cooperation with leading Islamic investment and development banks around the world, hopefully we may not need debt based receipts for deficit finance especially to meet the infrastructural requirements in India. The services of such banks may be solicited through GoI securities with assured lease rent after completion of particular infrastructure projects. Once India manages to mobilize project based Islamic Infrastructure funds, with such funds specific borrowed debts may be repaid to reduce the debt burdens. After repayments of all borrowed debts the cost of payable interest over debt receipts may considerably reduced. Thus IIIIF may help GoI to reduce the fiscal deficit even in case of any decline in its revenue receipts and further increase in its plan expenditures.

Based on the projection by the Planning Commission of India, the estimated requirements of infrastructure investment is Rs. 20,56,150 crores. Considering the commercial aspects of different sectors, it is expected that IIIIF may help us arrange 93% of the total requirements amounting Rs. 19,12,420 crores for 11th five year plan’s infrastructural needs. Only the investment need of water supply and sanitation amounting Rs. 1,43,730 may not be sellable otherwise infrastructure projects of all other sectors seems sellable through equity based Government securities by IIIIF upon which any specific amount as % of investment could be assured as returns in terms of lease rents after completion of the projects. IIIIF along with RBI and Ministry of Finance may design such equity based Government Securities (Sukuk). Further such securities may be traded in open market as RBI has recently framed policy for stripping and reconstitution of Government securities to enhance the trading scope of securities. However for Sukuk, there could be assured lease rents as rate of returns instead of interest rates.

Conclusion:
Islamic Finance in terms of Sukuk may help India raise required infrastructure investment funds for the Government and the corporate sector. It may solve the most threatening challenge of our economy by providing equity funds for infrastructure against Government Securities enabling GoI reduce its fiscal deficit after repaying debts through equity funds; and also by arranging equities for the corporate sector. Wish the proposed IIIIF may reduce the fiscal deficit allowing India attain foster and inclusive growth as it carries following promising advantageous features –

1. Reduce the fiscal deficit of India even if our revenue receipts declines and we need to increase the plan expenditures to stimulate the economy.
2. Help India save amount up to 6% of our GDP we pay as interest over debt receipts.
3. Enable GoI to repay debt receipts borrowed for financing the infrastructure investments.
4. Provide desirable equity fund for the corporate sector at a time when external financial resources are dried up and the cost of domestic bank credits are not affordable.
5. Once GoI succeeds arranging sufficient infrastructure funds through Sukuk and repays debt receipts, it would reduce the load of public finance on domestic banks thus enable them to reduce the cost on credits specified under PSA or for private sector enterprises.

There could be many more significances of IIIIF if we resolve it without any prejudice for the sake of national interest.

Introductory Remarks at The Islamic Finance 101 Seminar

John B. Taylor
Under Secretary of Treasury for International Affairs

U.S. Treasury Department
Washington, D.C.
April 26, 2002

Welcome to Islamic Finance 101! As the Under Secretary for International Affairs at the Department of Treasury, I want to thank you all for joining us at this seminar on the fundamentals of Islamic Finance.

Today's event is a result of a collaborative effort between the Treasury Department and the Harvard Islamic Finance Information Program (HIFIP). HIFIP helped us design this program and enabled us to invite prominent Islamic financial experts to speak today. We truly appreciate HIFIP's assistance in making this event possible.

We are very grateful that this diverse panel is here today to share their knowledge with us. They have joined us from great distances - travelling from Bahrain, Houston, Boston, and New York to share their expertise with us. Though I'm saving the introductions of our speakers to Thomas Mullins, Executive Director of HIFIP and Associate Director of the Center for Middle Eastern Studies at Harvard University, I do want to say that our speakers have impressive backgrounds.

I'm particularly pleased to be at this event, surrounded by a number of academics, it brings me back to my days Stanford University where I was a professor for many years.

Treasury's Office of International Affairs implements the U.S. government's international finance and economic development policies and develops U.S. policy towards the World Bank and IMF. We have had a growing interest Islamic finance because of its rapid growth and significant presence in many partners of the United States such as Bahrain, Egypt, Indonesia, Kuwait, Malaysia and Pakistan.

Following the events of September 11, President Bush made a top priority of combating the financing of terrorism. Lawful and legitimate institutions such as conventional banks, Islamic banks, money transfer services, hawalas and charities must not be abused by terrorists. We are working with the international community to ensure just that. We need to understand how these legitimate institutions operate so that we can help strengthen them and prevent terrorists from abusing these institutions. From my exposure so far, I've observed that the economic principles of Islamic finance and conventional finance are the same, though the structure of Islamic financial transactions can be different.

Today's seminar was inspired by a roundtable that Secretary O'Neill attended last month in Bahrain. At the roundtable, hosted by Citibank Bahrain's Islamic Investment Bank, the participants described the philosophy behind Islamic finance; they went into the nitty-gritty of an Islamic financial transaction; and they discussed the accounting and supervisory issues related to Islamic banking. I'm pleased that one of the speakers from that roundtable has joined us on today's panel Dr. Rifaat Abdel Karim, the head of the Accounting and Auditing Organization for Islamic Financial Institutions. We left the roundtable with a sense of what Islamic finance really is - the Secretary wanted to make sure that we hosted a similar event in the United States to "demystify" Islamic banking for our colleagues in Washington who may not have exposure to this topic.

I thought you might also be interested to know about the increasing international effort being made to understand Islamic finance. We recently held a meeting of G-7 Finance Ministers and invited other world leaders to participate. At this meeting, the Central Bank Governor of Malaysia, Dr. Zeti Akhtar Aziz gave us an informative short presentation on Islamic finance and led us in a discussion.

I hope that today we will have an open dialogue about Islamic finance end encourage you to feel free to ask questions and make comments. We have a wide array of audience members including commercial bankers, investors, banking regulators, economists, policymakers, Congressional staffers, researchers, lawyers, consultants as well as Islamic banking practitioners. I look forward to hearing the questions that you pose during the Q & A session as I expect that they will reflect your wide-ranging experiences and interests.

Thank you all again and let me turn this over to Tom Mullins.

Shariah Boards and Modern Islamic Finance: From the Jurisprudence of Revival and Recovery to the Jurisprudence of Transformation and Adaptation Over

IFSB Conference Presentation: London: May 2004: Yusuf Talal DeLorenzo



If there is a success story to be associated with Islamic jurisprudence in modern times, that story will certainly include mention of modern Islamic Finance. From little more than a concept in the first decades after most Muslim countries regained their independence following the Second World War, modern Islamic Finance took the form of Islamic banks and investment houses in the 1970s and 1980s, and a growing body of scholarship was generated by the practical needs of those institutions as they began to proliferate. Then, as deposits accumulated, and demands for product diversity grew more insistent, Islamic jurisprudence and a new generation of Muslim jurists were faced with a significant challenge. Indeed, without the juristic expertise required to achieve Shariah compliance, Islamic banks would never have become feasible or profitable. It is as much a testament to qualified and informed Shariah scholarship as it is to dedicated management and visionary entrepreneurship that our modern Islamic banks, funds, home finance companies, takaful companies, and investment houses are now well on their way to success.

No legal system can remain viable without a subject, without an object for its application. In recent centuries, throughout much of the Muslim world, the only significant finance available to Muslims was what Western commercial banks had to offer. Without active commerce, the Shariah rules for transacting would become no more than a subject of academic concern, like a dead language. Without renewal, without constant attention on the part of qualified jurists to changing circumstances and realities, those rules, like any other system, would atrophy and eventually lose relevance.

Even so, given the inherent depth and breadth of classical Islamic commercial law, modern jurists found a veritable ocean of practical and theoretical jurisprudence from which to draw upon while confronting the challenges of the modern marketplace. Then, while it might be possible to characterize the first few decades of modern Islamic Finance as a period of revival, the last decade might better be understood as a period of significant innovation. Using the nominate contracts for trade and exchange as their building blocks, modern Muslim jurists have provided Shariah-compliant solutions to an ever-expanding spectrum of needs.



Foundations of Islamic Commercial Law
“The Lawful is self evident and the Unlawful is self evident,” the Prophet said to his followers some fourteen centuries ago. Then he added, “Yet between the two are matters that may give rise to confusion; not well understood by many people.”

In making this statement, the Prophet of Islam (upon him be peace) laid the foundations for the legal system of Islam, generally known as the Shariah. Since that time, generations of jurists throughout the Muslim world have applied themselves to the explication and interpretation of Shariah rules. The role of the jurist in Islam has been to focus attention on what is less than self evident, the gray areas between what is clearly lawful or unlawful, or, as the Prophet put it, “the sort of matters that may give rise to confusion; those not well understood by many people.”

The Shariah may be said to govern every aspect of a Muslim's life and, as such, it is also concerned with social justice. In the marketplace, the role of the Shariah is a prominent one because the business of earning of a living is one that concerns everyone, as individuals, as groups within society, and as citizens of nations and the world. The logic of Islamic teachings on the subject is that when people earn their livings in a wholesome and lawful manner, everyone will benefit; and that social stability is supported by commercial society. Thus, at the core of Islamic finance are religious precepts governing what is good and permitted, or lawful, and what is harmful and forbidden, or unlawful. It is the responsibility of the jurist to help distinguish the one from the other. As markets grow in sophistication, and transactions become increasingly more complex, that responsibility becomes more and more challenging.

The Shariah, literally “the way”, is the Muslim’s “way of life”, the rules by which Muslims conduct the business of their lives. When Islam is understood to mean “commitment,” that means that a life lived in accordance with Islamic norms is a life of commitment; and the Shariah may be said to be the divine delineation of the life of commitment. Then, if one is truly to live that life, one must come to terms with how that life is actually delineated by the Divine. It is precisely that “coming to terms” that is known in classical Muslim scholarship as “fiqh” or Islamic jurisprudence.

It may also be helpful to think of the Shariah as a “shared endeavor”. It is shared, in the first place, between God and humankind. God is the Lawgiver and humans have the responsibility to receive, understand, and observe the Divine Law. They are also responsible for preserving it, and for endowing it with renewed relevance in changing times and in a variety of settings. So, in this wise, the Shariah is an endeavor shared between jurists and the texts of revelation, through their understanding and interpretation of their meanings. The same endeavor is then shared by jurists among themselves, whether through applying themselves collectively for the solution to a particular problem, or whether through their reference to the works of distinguished jurists, both past and present. In the world of modern finance it is shared with authorities and experts from the business world, with lawyers from numerous practice areas (often several for a single project), with regulators and their authorities, and, finally, with the investing public.

Islamic Commercial Law in Modern Times
No legal system can remain viable without a subject, without an object for its application. In recent centuries, over much of the Muslim world, the Shariah of Islam was marginalized when Islam’s social and economic institutions were displaced by Western models. For example, in the Indian subcontinent the British imported their own legal system; leaving little more than what amounted to “marrying and burying” as the legitimate concerns of what they termed Muhammadan Law. Under those circumstances it is hardly surprising that a century or two later, when Muslims finally gained independence, their own Islamic legal institutions were woefully unprepared to deal with twentieth century realities. The same was true of Islamic political, educational, and economic institutions. Thus, during the decades and even centuries in which Islam’s institutions were marginalized by colonial and other powers, it is not surprising that Islamic jurisprudence, with no place to apply its dynamic of ijtihad, was relegated to a long confinement in exclusively academic settings. In order for it to break out of the confines of academia it required a real subject, a practical and living application, and practitioners who were not only conversant with the classical discipline but who, in addition, were cognizant and appreciative of the changes the world had undergone in the intervening centuries.

It was perhaps the wealth generated by oil that provided the real impetus for the revival of Islamic jurisprudence on the subject of commercial law. In the decades of the 50’s and 60’s, at a time when newly-independent Muslim states were attempting to come to terms with their cultural and religious identities, a handful of Muslim thinkers began speculating on the theoretical foundations of an Islamic economic system, often as an afterthought to their musings about an ideal Islamic state. The state banks of a few Muslim countries held conferences to discuss the subject, a few scholars published papers in journals and, in general, the interest in the subject was academic. But with the wealth from oil, the petrodollars of the 70’s, a number of banks and investment houses were established with the clear mandate to operate in accordance with Shariah. This is what marks the beginnings of modern Islamic Finance.

At the time, to be candid, there was little that was clear in regard to banking operations conducted in accordance with the Shariah; in fact, the two, Shariah and banking, seemed particularly unsuited to any sort of collaboration. The Quranic prohibition of riba, equating in a general sense to interest and predicated on the understanding that money is a measure of value and possesses no intrinsic value of its own, precluded any sort of dealing with banks and banking. Indeed, throughout the Muslim world, the common understanding was that there was nothing lawful about banks. Even employment in banks was shunned in religious circles.

When the new Islamic banks were established, the first matter for consideration was deposits and saving accounts. How might these operate if no interest was to be paid? And, on the other side of the balance sheet, how would the Islamic banks invest and earn returns, if no interest was to be earned? … if interest was not even a part of earnings? How, finally, could the Islamic banks become profitable?

The Jurisprudence of Revival and Recovery
It was then that the new Islamic banks called upon scholars of the Shariah for answers. In those early days, there were not many scholars with knowledge of finance and banking. The handful of scholars that had published on related subjects were without practical experience, having had no exposure whatsoever to modern banks and financial markets. In many cases, the scholars were brought in by the banks on the basis of their reputations alone, reputations as authors and authorities on Islamic subjects in general; not as experts or authors of works on finance! Thus, as in any fledgling industry, there was a period of adjustment and learning. The process was a rewarding one, however, and though there were difficulties, a good deal of progress was achieved. I believe that it is possible, and not unfair, to characterize the jurisprudence of this early period, perhaps the first two decades, as the jurisprudence of revival and recovery. During this period, scholars looked to the past and reestablished meaningful connections between the Shariah and the practical world of modern commerce and trade. In this undertaking they turned to the vast body of legal literature created by earlier generations, to the rules of commerce in the legal handbooks and glosses, and to the digests of case law or fatwa literature. In many cases, the sources they referenced were of their own particular legal schools of thought madhahib, though there appears to have been, early in this process, a general understanding among most scholars that consideration would have to be given to the opinions and methodologies of at least the four major legal schools.

At this time, too, perhaps owing to the extraordinary demands placed upon individual scholars hired as advisors, and partially in order to bring in a wider range of legal opinion representing each of the four major schools of classical legal thought, as well as regional and cultural trends, Islamic banks began to establish Shariah supervisory boards, often with as many as six or eight members. The interesting thing is that such a collective and inclusive approach was not new to Islamic Law, ever a shared endeavor. In fact, the classical schools of legal thought themselves grew out of academies. The Hanafi school, for example, though named for an individual, Abu Hanifah, was developed over several decades during which regular assemblies in the city of Kufah were attended by a core group of about forty scholars from a variety of disciplines. Much the same process took place in Madinah, where Imam Malik presided; in Bagdad and then Cairo where Imam Shafii led similar groups of the learned; and again in Bagdad, over a half century later, where Imam Ahmad ibn Hanbal became the focal point of still another such academy.

Then, throughout the formative period of the 70s and 80s, Shariah deliberations on issues related to modern banking were carried out collectively by formally constituted Shariah boards. Papers were written and discussed, both internally among Shariah supervisory boards and externally at conferences and seminars. The most important factor in everything that took place at the time, however, was that the jurisprudence had a real subject with which to deal and interact. The deliberations of Shariah boards were more than speculation, or theoretical musings, or academic exercises. Real issues were involved and, perhaps more importantly, real peoples’ money. For, from the day the Islamic banks opened for business they have attracted deposits from average Muslim consumers, in addition to their high net worth and institutional clientele. For Muslims, the Islamic banks have come as a godsend, allowing them the opportunity to invest and transact in ways that leave their consciences clear. This has come as a great relief to Muslims the world over; and the numbers speak for themselves.

Another factor was at work at the time the Islamic banks opened their doors for business. Shariah scholarship on matters of finance had found a patron. Up until that time if scholars were actively engaged in the jurisprudence of finance, they did so on their own and generally within the context of academic pursuits. A growing industry, however, cannot progress if it has to rely on the random output of a scattered and unassociated number of scholars. Orientalists like Schacht, Udovitch and Goitein made significant contributions on the subject of Islamic commercial law (and, in particular, on the classical nominate contracts) in the two decades after WWII, and their work motivated and guided a handful of Muslim university students and professors who followed. Yet the demands of Islamic banks were specific, and time sensitive, and could not be allowed to depend on the personal schedules and agendas of academics. Through the establishment of formal Shariah Supervisory Boards, whose members were compensated for their efforts, the Islamic banks brought scholarship to bear directly upon the issues of greatest concern to them and, by doing so, enabled a new generation of jurists to acquire expertise on the subjects of modern banking and finance through research and scholarly exchange.

Then, as a collectivity with incentives, the Shariah boards of the first Islamic banks set about the work of developing ways and means to facilitate the unique and novel operations of those banks. In doing so their first concern was, and remains, with the issue of compliance, Shariah compliance. However, without a process in place for their deliberations, their beginnings were tentative at best as the problems before them were complex and challenging.

Adjusting to Modern Trade and Commerce
To begin with, there was the fact that conventional Western finance had advanced considerably during the centuries while Islamic jurisprudence had remained marginalized and inert. There were no ready solutions to be had from the classical legal literature because, for the most part, the classics never dealt with the sorts of issues facing the modern Islamic banks. Advances in technology facilitated commercial activity, like cross border investing and correspondent banking on unprecedented scales, while regulatory environments and tax laws made it far more complex. The volume of commerce and the rapidity with which it may be accomplished were to have profound effects on legal systems worldwide. The same was true of modern phenomena like the industrial revolution, the rise of consumerism, the proliferation of debt financing and unsecured lending, and the abandonment of the gold standard. When the modern Islamic banks opened their doors for business in the 70s, the financial community worldwide had already passed through several stages of legislation aimed at regulation of the industry and, ultimately, the protection of the consumer/investor. Modern reforms in US law (and especially in regard to finance and business), for example, included matters restricting the nearly unlimited contracting power of the sort envisioned in the classical law of contract known as the “duties of the common calling”. Likewise, modern law has introduced relational torts and expanded our understanding of bad faith breach. The complexities of today’s financial engineering, as exemplified in over-the-counter (OTC) derivatives are such that securities law is often found lagging. Thus, if modern conventional finance is moving more quickly than the law, it should come as no surprise that modern Muslim jurists discovered themselves confronted by a very steep learning curve when attempting to make sense of the new commercial practices proposed to them by the management of the new Islamic banks in the decades of the 70’s and the 80’s.

In addition, there was no code, not even an outdated one, toward which modern Shariah boards might turn. The one exception, however, was the Ottoman code known as al-Majallah; but it was limited to only one school of jurisprudence. It is the nature of Islamic jurisprudence itself to insist on the freedom of qualified jurists to formulate and hold their own opinions. In fact, the inner dynamic for renewal known as ijtihad ensures the relevance of Islamic law to changing circumstances by empowering jurists to constantly revisit points of law and to improve upon them when and where necessary. What all this means is that there was no uniform code of Islamic Commercial or Transactional Law for Shariah boards to turn to when they first began to take on the issues of modern banking and finance. However, while there was no uniform code, there was also no restriction like stare decisis or the requirement to stand on legal precedent. Indeed, Islamic law resembles in many ways the British and American legal systems based on judicial law or the interpretations of judges as individual jurists. Thus, while Shariah board members found themselves in the midst of new and uncharted legal territory, they at least had the freedom to think for themselves. I believe that this is quite a significant point, and one that has been ignored by many academics and others. For, despite everything else, the fact remains that scholarship on the Shariah and its various sciences and disciplines continued to thrive in Muslim lands, despite its marginalization. Thus, when the time came to apply serious scholarship to the problems of banking, trading, and transacting in accordance with the Shariah, there was no shortage of scholars with the ability and the training to take up the challenge.

Without a requirement to adhere to a defined set of precedents, if these could be found, and without a uniform code of commercial law to turn to, the early Shariah boards sought help in the classical system of nominate contracts (‘uqud musammat). These are contracts that are widely known by specific names, like murabaha, mudaraba, wakala, ijara, and the like. Debates on the provenance of these contracts aside, it is well known that trade and commerce were highly developed in the Arabian peninsula before the advent of Islam. Then, even if the nominate contracts were based on earlier models, their real value was that they were widely known and accepted. By insisting that Muslims transact by means of a specific set of well-defined contracts, the Shariah ensures that all parties have every opportunity to understand what they are getting themselves into when they transact. The classical Islamic system of mu`amalat (transactions) is so highly articulated for precisely this reason. While the scriptural foundations of that system may be abbreviated, owing to their delineation of principles rather than specifics, the dynamic of ijtihad inherent to fiqh has ensured that Muslim jurists, and especially Shariah boards continue to comment and build upon the theoretical constructs.
The Significance of Contracts
There is a further aspect to the nominate contracts that is of importance, and that is as a means for the management of risk. In order to understand this point, think of a contract as a device for stabilizing the uncertainty of the future, risk, by connecting that future to the stability of a known past.
"… the past and the future are to the economy what warf and woof are to a fabric. We make no decision without reference to a past that we understand with some degree of certainty and to a future about which we have no certain knowledge. Contracts and liquidity protect us from unwelcome consequences…"
Relatively speaking, it may be asserted that the contracts defined by Islamic law represent very solid ground. Indeed, it may also be asserted that the reason the institution of banking did not develop in Muslim lands is that it was simply not needed. The nominate contracts prescribed for trade and business by the Shariah were recognized and, most importantly, upheld by Islamic courts from Spain to China and the Phillipines. Thus, within the framework of the Islamic legal system, held together as it were by a set of prescribed contracts, an Islamic system of finance and economics flourished in the Islamic East for centuries. To quote from the work of Dr. Nelly Hanna:

One aspect of trade in the Middle East that has often been emphasized is that there was no system for advancing funds to merchants—that is, there was no equivalent to the European banking system on which European merchants were heavily dependent—and the lack of such a system supposedly handicapped merchants of the Middle East. … but the functions of this institution were in part fulfilled through the legal system, which provided a legal framework for the advancing of funds.

Thus, the contracts upon which transacting in Islam is based function both to stabilize and to promote. By their very nature, all of these contracts act as a hedge against uncertainty. In addition, the circumstance of their standardization contributed significantly to the comfort level of investors and entrepreneurs, and allowed Muslims to finance huge projects and international trade without the need for intermediaries like banks.

The variety of purposes to which these contracts were put to use is worthy of special attention especially in view of the fact that so much has been written about the rigidity of Islamic law and its inability to adapt to various kinds of situations. The experience of seventeenth century merchants who carried out a significant portion of their trade within the framework of the judiciary system gives an entirely different perspective on this matter. Rather than a rigid set of imposed laws that were supposed to have suffocated business, the commercial documents show a legal system that was adaptable to various kinds of situations.

The Nominate Contracts
Even though the classical system of Islamic Finance fell into at least partial disuse during the colonial period, the foundations of that system, the nominate contracts upon which it was predicated remained very well defined. Thus, it was to these that the Shariah boards of the new Islamic banks turned for guidance. The corpus of classical legal literature on the subject of transactions, and particularly the nominate contracts, is immense. The published literature in Arabic alone runs into several thousands of volumes, and educated estimates gauge the size of the unpublished works preserved as manuscripts in libraries around the world as at least three to four times the size of the published works. It is impossible to know how much has been lost over the centuries. In any case, the important thing is that Shariah boards were able to reference hundreds of titles, and many thousands of fatwas, from earlier centuries. This is the direction that facilitated the jurisprudence of revival and recovery alluded to earlier as characterizing the early period of Islamic banking and finance during the decades of the 1970’s and 80’s.

Another result of the extended hiatus endured by Islamic jurisprudence in regard to the subject of finance is that it lost contact with custom and usage. In the classical system, custom (‘urf) played an important role. The legal maxim that “all transactions are to be considered lawful as long as they include nothing that is prohibited“ went hand in hand with custom and mercantile practice in clearing the way for innovation in trade and commerce. However, when the Shariah boards of the modern Islamic banks began their work in the 70’s, there was no significant Shariah-compliant trade taking place, and thus no customary practice in regard to it. Secondly, members of the Shariah boards, with no more than minimal exposure to modern finance, had little understanding of what was customary among modern financial practitioners. Thus, this all-important factor, too, was missing from the equation.
Academic and Linguistic Factors
The early work of the Shariah boards was tentative and, in keeping with the universal bias among jurists toward prudence, clearly conservative. Moreover, as the majority of the Shariah boards’ membership was drawn from the ranks of academics, their work tended toward the academic. Under the circumstances, this was for the best. Seminars and conferences were organized, and papers were presented and debated. Professors directed a handful of graduate students to write on subjects related to Shariah as it pertained to banking, finance, and commerce. Indeed, in the late seventies, a team of primarily Egyptian academics began work on the production of a five volume encyclopedia of Islamic Banks that served as an important introduction to the field in general for the next decade. The work undertaken at this time, like the scholarly exchanges, was almost exclusively conducted in the Arabic language. The language factor was and remains a significant one, and its consequences are discussed later in this paper.

During this initial period of recovery and revival, it is significant that scholars began to reacquaint themselves with the workings of the nominate contracts. The significance of this focus was two-fold. Firstly, the nominate contracts, even in their classical forms (and in the forms they had attained before their development was interrupted) provided immediate solutions to several of the banks’ most pressing needs. Secondly, as scholars and bankers became more familiar with these contracts (or specified ways of transacting), they began coming to terms with how these might be applied in novel ways. Indeed, their facility with the nominate contracts was the key to the next stage of development in modern Islamic Finance. Of course, there were other factors. But this single factor (facility with the nominate contracts), through regular exposure to the day to day business of the Islamic banks, is what provided the tools for the breakthroughs that would occur in the decade of the nineties, and that continue until today.

Before discussing this breakthrough, let us consider for a moment the issue of language and what it has meant to Islamic Finance. There is no denying the merits of the Arabic language or the virtues of those who speak it. Even so, from the day the first Islamic banks opened their doors for business, much of that business was conducted in English. After all, as the language of international trade and commerce, it was only natural that English be used in the Islamic banks. However, while management conversed with correspondent banks, counter parties, trading partners, regulators, and legal counsel in English, Shariah supervision in the initial period conversed almost exclusively in Arabic. In several of the early fatwas issued by Shariah boards, it is clear that the board had given its opinion on the basis of representations made by management. In other words, the Shariah board members themselves did not read the documentation, but relied upon summaries presented to them in translation. The reason for this situation was that Shariah board members, with a very few exceptions, did not know English. To a degree, this remains a problem even today. Even so, the important thing is that in some cases at least Shariah boards were simply unable to see, and therefore to comment upon, every detail of every transaction.

On the other hand, those business and legal professionals who did not speak Arabic had perforce to go to secondary sources to learn about Islamic Finance and, in particular, to the jurisprudence of Islamic Finance. This circumstance was particularly inhibiting. For business professionals, even for those working in the Islamic banks themselves, like non-Arabic speaking, ex-pats, the lack of access to authoritative opinions would clearly have been difficult to deal with, with the result that initiatives toward innovation and improvement were slow to come. Product development and process improvement, under such circumstances, became onerous and cumbersome tasks. For legal professionals, too, the same was true. Without direct access to the Shariah boards, legal counsel needed to rely on management to translate and summarize their work. Feedback from the Shariah boards under those circumstances was little better than hit or miss. None of this was conducive to progress. Instead, the Islamic banks appeared to most western professionals, even to western academics, to work behind a veil of mystery. If the fundamental principles were understood, the details were not. In fact, until books on the subject began to appear in English and other languages, even the fundamentals were incomprehensible to many but the most dedicated and determined individuals.

A New Stage in the Jurisprudence of Islamic Finance
Near the end of the decade of the eighties, however, these situations had begun to change. By this time, Islamic Banking and Finance had grown far beyond the expectations of even the most fervent among its early supporters. In fact, Islamic Finance was now recognized as something of a growth industry; and a number of multinational banks and asset management companies were taking an interest in its development. Internally too, within the industry itself, significant developments were afoot. One of the major reasons for these developments was the progress made by Muslim jurisprudents in understanding the business of commerce and finance and in applying Shariah principles and precepts to it. Another reason was the facility developed by Shariah boards with the nominate contracts, such that they began to feel comfortable with novel configurations. Other reasons for development were the growing discourse on Islamic Finance in the English language and the entry of global asset managers. Finally, the academic discourse on the subject had achieved the equivalent of critical mass and many issues were moving toward consensus, the all important ijma` or general acceptance of the juristic community considered a binding adjudicator (or indicator, dalil) in Islamic law.

Undoubtedly, big players with their human and capital resources did much to spur the development of Islamic Finance. Their influence on the jurisprudence of Islamic Finance, however, has been far more subtle. Then, before discussing the innovations made by scholars with respect to the nominate contracts, it will be well to begin with a discussion of how the multinationals and global asset managers helped the jurisprudence of Islamic Finance to move into a significant new stage of creativity. Certainly a part of this involved the growing facility of Shariah scholars with English. To a degree, these two factors went hand in hand. Clearly it is true in any profession that it is one thing to acquire experience, and quite another to have exposure to the top echelons of that profession. As Shariah scholars began working closely with Wall Street insiders, with some of the most knowledgeable and talented individuals in the business, it was then that the exchange of ideas began in earnest. In some cases, a single member of a Shariah board would take part in such exchanges and then report back, formally or figuratively, to his peers on the board. Exchanges of this nature provided Shariah scholars with valuable, and often key, insights into business procedures and practices that might otherwise have remained obscure and therefore suspect. Nor was this process of exchange a one way street. On the contrary, as their own understanding of modern business concepts and practices increased, Shariah scholars were emboldened to make comments of their own, often pointing out parallels that exist between fundamental Shariah concepts of transacting and modern commercial law; and then moving on to extrapolate shared concepts and to consider their possible applications in modern situations. Through such exchanges many scholars acquired an insiders’ grasp for the context of modern commerce. Clearly, such exposure added perspective and depth to the deliberations of Shariah boards on the jurisprudence of modern Islamic Finance. Finally, while it may be difficult if not impossible to quantify or point directly to such intangibles, it is equally as difficult to deny their influence.
The Jurisprudence of Transformation and Adaptation
The most important factor in the transition from the jurisprudence of recovery and revival to a more proactive and participatory jurisprudence of transformation and adaptation was the reconfiguration of the nominate contracts or, perhaps more exactly, the concept that the nominate contracts may be thought of as building blocks that may be constituted and constructed creatively for the achievement of all manner of objectives. From the very beginnings of the Islamic banks in the 70’s it was apparent that a certain degree of adaptation was required for the successful application of the nominate contracts in modern finance. For example, in order to make the murabaha contract effective in the business of inventory or short term trade financing, it was necessary to depart somewhat from the classical model by combining a promise to buy on the part of a client with the actual purchase by the bank of goods from third party suppliers. Then, in addition to the actual murabaha contract, a further transaction is appended; the promise to purchase that is made by the client or prospective buyer. This arrangement, however innocent in appearance, actually brought up a host of issues for the early Shariah boards. Nonetheless, as the needs of modern trade were such that a Shariah-compliant alternative to trade financing by means of conventional, interest-based financing was required, the classical murabaha was transformed into the modern Murabaha li’l-Amir bi’sh-Shira, murabaha with an order to purchase that has now become commonplace to Islamic banking.

Following the success of this experience, Shariah boards went on to engineer and approve a host of hybrid nominates, using a single nominate like murabaha in different configurations like parallel murabaha, reverse murabaha, back to back murabaha and reverse parallel murabaha contracts; or using a plurality of nominate contracts in combination with one another. In this wise, the nominate mainstays of classical Islamic commercial law, musharaka, ijara, salam, istisna’ mudaraba and others were transformed and adapted in a variety of ways to modern needs and circumstances. In some cases, these were applied to bring about interest-free alternatives to conventional mortgages for the financing of homes; in other cases, these became key elements in investment funds, project finance and, most recently, in sukuk. In fact, the contracts for the financing of homes by one US company have recently been securitized and converted to sukuk issued by Freddie Mac with all the qualities of US government secured paper. It would be interesting, as a case study from a purely academic perspective, to follow and analyze the transformation and adaptation of all the different nominates applied in that one instrument, as it includes the creative application of many disparate elements.

As alluded to earlier, one of the factors in the development of a modern jurisprudence of Islamic Finance has been the ability of scholars to communicate their ideas among themselves and, through debate and discussion with colleagues and peers and, to an extent, through demonstrating by means of actual business applications, to bring about general agreement and approval throughout the scholarly community. The importance of this point, of this process itself, cannot be over emphasized because the concept of ijma` as a legal indicator, dalil, carries very nearly the same authority as the revelational sources themselves. Then, whatever questions, reservations, or doubts the critics of modern scholarship on this subject may have, the fact that Shariah boards have been able to achieve consensus on so many key issues suffices to establish the legitimacy of modern Islamic Finance and, what is more important from a practical perspective, sets the stage for the establishment of industry standards which may, in turn, provide the impetus for real industry growth. Through the efforts of the various academies, especially those with international and regional representation, like the OIC Fiqh Academy, and through the regular exchanges by scholars at seminars and conferences, particularly those like the annual Albaraka seminars in Jeddah, a serious process has been ongoing since the 1970s. Finally, with the establishment of the Auditing and Accounting Organization for Islamic Financial Institutions in the early 1980s, the process for bringing scholarly attention to focus on particular issues was streamlined, with the result that consensus could be brought about through an institution, and then regular standards for a wide spectrum of Shariah-related issues could be approved and implemented. The transparency, thoroughness and inclusiveness of the process employed by AAOIFI have contributed in so many different ways to the growth of this industry that it would require a separate paper to do justice to each. Finally, the newly established Islamic Financial Services Board, IFSB, ensures that the efforts of Shariah scholars for the achievement of consensus and standardization will find a place in legal and regulatory systems worldwide.

In the brief span of a few decades, Shariah scholars across the world have worked together and with others to bring about the revival of one of Islam’s most important institutions, its finance. In the process, Islamic jurisprudence has undergone significant development. Moreover, the revival of Islamic commercial energies has led to an expansion of cooperation and mutually beneficial exchanges between Muslims and the other peoples of the world. This can only lead to a better and a brighter future for all.

TRY THE BVI FOR YOUR NEXT MUSHARAKAH

Conyers Dill & Pearman
www.conyersdillandpearman.com


Fawaz Elmalki – March 2009

While to date the British Virgin Islands (“BVI”) have not enjoyed the same visibility as the Cayman Islands for Islamic finance transactions, BVI business companies are increasingly used by managers of Shariah compliant funds and by financial institutions and investors for this purpose. In fact, the BVI is the most popular offshore jurisdiction in the world and has the same attributes which have made the Cayman Islands such a success. This article highlights some of the features common to both the Cayman Islands and the BVI and describes some of the specific advantages of the BVI as a domicile for a joint-venture Musharakah.

Common Features
Like the Cayman Islands, the BVI is an internally self-governing British Territory and offers all the security and stability traditionally associated with the British flag. It enjoys an independent legal and judicial system based on English common law, with a right of final appeal to the Privy Council of the House of Lords in England. The BVI also has a sophisticated infrastructure, an established financial services sector and a long history of accommodating international businesses. In each of the Cayman Islands and the BVI, the government and business community have traditionally worked together to ensure that the reputation and integrity of the respective jurisdictions are preserved without the need for overly burdensome regulation.

Both the Cayman Islands and the BVI enjoy tax neutral regimes. There are no income, profit or capital gains taxes in the BVI. In addition, the absence of withholding taxes in the BVI is attractive to a BVI company's shareholders. There are no restrictions on a BVI company's ability to transfer funds in and out of the BVI or on paying dividends or distributions to shareholders. The Cayman Islands and the BVI have robust anti-money laundering and know your client legislation. Such legislation ensures that both jurisdictions are only used for legitimate transactions. Finally, the names and details of members and directors of both Cayman Islands and BVI companies are confidential and there is no requirement to publicly file financial information relating to companies in these jurisdictions.

British Virgin Islands Joint Ventures
BVI joint venture vehicles are popular with both non-Muslim and Muslim investors worldwide, particularly in Asia and, more recently, the Middle East, Russia and South America. Interestingly, Chinese government statistics show that the BVI is the second largest investor in China. A typical joint venture company will have two shareholders, each holding 50% of the shares of the company. A shareholders’ agreement will structure the relationship between the parties, and the memorandum and articles of association of the joint venture company should reflect the terms of the shareholders’ agreement. Often, the joint venture company is a holding company which holds the shares of an operating company which carries out the business in question. Taking the example of investors from United States and a Gulf Cooperation Council (GCC) State such as the United Arab Emirates, an American company (often a large multi-national) will wish to enter into a joint venture with a United Arab Emirates partner to manufacture or market a product in the GCC or North Africa. The question will arise as to where to locate the joint venture company. Neither party wants the joint venture company to be incorporated in the other party’s jurisdiction, as it gives that party “homefield” advantage. A neutral jurisdiction must be chosen which is acceptable to both sides. The BVI is the typical choice for both the reasons explained above and the following.

Modern Corporate Law Legislation
BVI companies are incorporated under the BVI Business Companies Act 2004. This is a modern piece of legislation which is based on the Delaware corporate statute, although anglicized to take into account the fact that the BVI is an English common law jurisdiction. Major international banks and multinationals are comfortable with the legal features of a BVI company. The versatility of the BVI Business Companies Act appeals to international investors and offers numerous benefits including the ability of the parties to incorporate tailored management, administration and corporate governance provisions into the memorandum and articles of association of the BVI company and any shareholders’ agreement.

Unique Joint Venture Provisions ]
Directors of a joint venture company are generally nominated or appointed by the shareholders who wish to police their investment. Of course, directors of a BVI company have the usual responsibilities to act honestly and in good faith and in what they believe to be the best interests of the company, just as is the case in most other common law jurisdictions. However, there will be occasions where the joint venture company’s interests will not necessarily be the same as those of the joint venture shareholders. A director nominated by a shareholder (who will often be a senior employee in the shareholder’s organisation) can sometimes be faced with a tricky dilemma, where the shareholder’s interest dictates one course of action for the joint venture company but the joint venture company’s best interest dictates another. The latter must prevail, according to well-established case law, but this can cause business and operational difficulties for the shareholder and divided loyalties for the director.

As further evidence of the modern and up to date approach of the BVI legislature, the BVI Business Companies Act introduces a valuable element of latitude for joint venture company directors when compared with the common law and corporate law rules of other offshore jurisdictions. The BVI Business Companies Act allows a director of a joint venture company to act in a manner which he believes is in the best interest of one or all of the shareholders rather than in the best interest of the company.

Flexible Distributions
A major attraction of a BVI company to joint venture parties is the ease in which profits can be released from the company. The directors of a BVI company may, by resolution, authorize a distribution to shareholders at such time and of such an amount as they think fit if they are satisfied, on reasonable grounds, that the company will, immediately after the distribution, satisfy a statutory solvency test. Such test is satisfied if the value of the company’s assets exceeds its liabilities, and it is able to pay its debts as they fall due. This test relates to any type of distribution including the payment of dividends, without the application of distributable profits tests or further constraints. This test provides considerable flexibility, with the focus being on solvency rather than capital requirement rules.

Domicile of Choice
As evidence of its success, the BVI is the largest and most successful offshore incorporation jurisdiction in the world, with over 462,000 companies. Most of these companies are special purpose vehicles such as holding companies established to acquire securities, real estate, aircrafts, ships, yachts and other investment assets and joint venture companies. Moreover, BVI companies are increasingly recognized for listing on many of the key exchanges around the world including NASDAQ, the New York Stock Exchange, the Singapore Stock Exchange and the London Stock Exchange. Approximately 10% of all international companies listed on London’s Alternative Investment Market (AIM) are BVI companies. BVI companies have been used for Islamic finance transactions such as the Purple Island Corporation sukuk, a US$267 million five-year fixed coupon Mudarabah Sukuk raised by the Saudi Binladin Group, which won Islamic Finance News’ Mudarabah deal of the year in 2008. One of the world’s largest hedge fund managers, Permal, has also chosen the BVI as the domicile for its offering of Shariah compliant funds.

Ease and low cost of incorporation
The incorporation of a BVI company is simple and can be completed within 24 hours by the filing of the company’s memorandum and articles of association with the Registrar of Corporate Affairs (the “Registrar”), together with a document in the approved form signed by the first registered agent signifying its consent to act in that capacity. There is no requirement to publicize an intention to incorporate, nor is there any pre-approval by any BVI regulatory body. The registered agent is required to perform a due diligence review on the promoters of the company. Having been satisfied that all of the BVI Business Companies Act’s incorporation requirements have been met, the Registrar will register the memorandum and articles of association and issue a certificate of incorporation certifying that the company is incorporated on that date. The fee payable to the BVI Financial Services Commission for the incorporation of a standard BVI company authorised to issue a maximum of 50,000 shares is US$350. The fee increases to US$1,100 for companies authorised to issue more than 50,000 shares.

Conclusion
Offshore structures have a meaningful role to play in international business and in Islamic finance transactions. A BVI business company, because of its simplicity and flexibility, is being increasingly used by Islamic asset managers, financial institutions and investors. Its proven record in facilitating joint-ventures coupled with the progressive provisions in the BVI Business Companies Act also makes it a natural choice for Musharakas.

This article is not intended to be a substitute for legal advice or a legal opinion. It deals in broad terms only and is
intended to merely provide a brief overview and give general information.

Notes to Editors
Conyers Dill & Pearman has pioneered the field of offshore law since its establishment in 1928. It is the first law firm to have established an office outside of its home jurisdiction, setting up shop in Guernsey in 1982 as a base for servicing European clients (superceded by the London office in 1998). It is also the first to have expanded into Asia, with the opening of its Hong Kong office in 1985, and the first to establish a presence in Singapore in 2001. The firm continued in this vein in 2008, becoming the first offshore law firm to have a Russian presence with the launch of its Moscow office in March, and the first offshore law firm to have a physical presence in Brazil with the establishment of its São Paulo office. With a current complement in excess of 550 staff, with over 150 lawyers, Conyers Dill & Pearman advises on the laws of Anguilla, Bermuda, British Virgin Islands, Cayman Islands and Mauritius from those islands and from Dubai, Hong Kong, London, Moscow, São Paulo and Singapore. The firm has earned clients’ trust, loyalty and respect by consistently providing responsive, timely and thorough advice on all aspects of offshore corporate, company and commercial law, commercial litigation and private client matters.

Affiliated companies (Codan) provide registered agent, registered office, corporate director and secretarial services, as well as specialised company management services. An affiliated global network of licensed trust companies undertakes a broad range of trust establishment and administration services. These services range from the administration of family trusts for private clients to the structuring of highly complex and innovative corporate ventures including special purpose trusts for ownership of securitization structures.

For further information please contact:
Naomi J. Little
Tel: +1 441 298 7828
Fax: +1 441 299 4987
e-mail: naomi.little@conyersdillandpearman.com
web: www.conyersdillandpearman.com

International Islamic Financial Market

LABUAN LECTURE SERIES 2000
23-24 November 2000
International Islamic Financial Market
By
Dato' Dr. Syed Jaafar Aznan ~ Vice President
Islamic Development Bank, Jeddah, Saudi Arabia

Bismillahir Rahman Nir Rahim
AssaIamuaIaikum Warahmatutlahi Wabarakatuh.

I would like to thank the Labuan Offshore Financial Services Authority (LOFSA) for inviting me to this Conference which has brought together such a distinguished group of scholars, policy makers and market practitioners in Islamic banking and finance. Hopefully, together we would be able to address the many challenges facing the development of the International Islamic Financial Market in the context of Islamic banking.

2. Islamic banking is not a new idea. However, its growth had accelerated only in the last few decades. The Islamic Development Bank was established in 1 975 and since then had vigorously promoted the application of Islamic banking in the conduct of businesses. We have to date made great strides, and Islamic financial institutions have been set up in all parts of the world, and are continuously being established until this day.

3. Islamic banking provides a choice to consumers and monetary authorities It provides for an alternative financial system that has begun to gain worldwide recognition. Indeed, the initial reaction of some consumers and bankers towards Islamic banking and finance was skepticism. Today, it is received with significant interest. Major international banking institutions with a significant amount of assets under their management have also established Islamic window offering Islamic financial products and services. With about USD170 billion of funds managed by more than 170 Islamic financial institutions, including in countries such as the United Kingdom and the United States, Islamic banking has proven itself and survived. Rising interest and preference among consumers all over the world to conduct business based on Shariah principles and growing awareness of the virtues and value-oriented system of Islamic banking have contributed to this positive development.

4. Although the amount of funds managed through Islamic banking is only a fraction of the total assets of the international financial system, it represents that portion of financial activities that is truly supported by underlying productive capacity that generates growth of nations across continents. It is this form of financial activities that we should encourage, as opposed to speculative financial flows that are not only unproductive but also destabilising and Destructive as has been seen to have occurred during the last financial crisis.

5. Despite the remarkable achievements of Islamic banking and finance, a considerable amount of funds from Islamic countries are still invested in conventional markets. The flow of financial resources from Muslim countries to the conventional financial markets is because a viable global Islamic financial system as an alternative 4o the conventional system is not yet well established. This deficiency is now being addressed by many and effectively presented as the challenge facing the Muslim Ummah in the new millennium.

6. Towards this end, I wish to congratulate Malaysia, through the Labuan Offshore Financial Services Authority or LOFSA for initiating and spearheading the effort to establish an International Islamic Financial Market, or IIFM, as a mechanism to match the surplus and deficit units of funds, in terms of region and institutions. I would also like to record my appreciation to the other countries and financial institutions around the world that have participated and cooperated in the development of IIFM. I would now like to share with you some insights into the development of the IIFM.

Ladies and Gentlemen!

7. The dearth of Islamic financial instruments has led to serious liquidity management problems for Islamic financial institutions, and has curtailed the development of a global Islamic financial market. Thus, the establishment of the IIFM is not only necessary but needs to be implemented on an urgent basis. The market will provide an avenue for an efficient management of Islamic assets and liabilities at the international level.

8. In light of the above, I am indeed pleased to inform this gathering that the initiative to develop the IIFM has received strong support and interest from a number of Islamic countries. The 1DB is committed to the project. Five parties have signed Memorandum of Understanding, namely 1DB, LOFSA, Bahrain, Indonesia and Sudan, giving their commitment to extend resources and expertise to implement the project. Major players from the private sector are also actively involved. A Working Group comprising 1DB, LOFSA, Bahrain Indonesia, Sudan and Brunei has also been formed to implement the project.

9. The working group has made commendable progress through the meetings that have been held in Bahrain, Labuan, Jeddah and Brunei. A common working model for the IIFM has been worked out, and 1DB has agreed to be the coordinator for the project. Yesterday, the Working Group held its meeting here in Labuan, and I am delighted to inform you that the implementation process of the IIFM will now be on a faster track. LOFSA and Bahrain have agreed to lead separate action teams on the implementation aspects of the IIFM and this will further accelerate the implementation of the IIFM. The target now is to make the IIFM operational by the middle of 2001. lnsya Allah with fullest support from all Islamic nation, this project will be a success.

Ladies and Gentlemen,

10. Basically, the IIFM will help achieve three major objectives:

i) Firstly, it will provide Islamic countries a more efficient and cost-effective financial intermediation. It should facilitate capital inflows to Islamic countries that are necessary for development. More importantly, the IIFM will provide the catalyst for the development and promotion of a larger supply of Shariah compatible financial products and this should also help to meet the growing demands from private and institutional investors, especially those from the Islamic countries, thereby enhancing investment opportunities. At the same time, the market will also generate spin-offs for other services and activities such as custodial services, broking, funds, advisory and treasury activities.

ii) Secondly, the IIFM will create an interactive framework for cooperation worldwide among different market players with varying needs to help deepen the global financial market, particularly that of Islamic countries. It will also contribute to strengthening the architecture of the international financial system as participation in the market will be opened to all, including the conventional banks. The IIFM can enhance liquidity of the Islamic financial institutions who will be able to manage their assets and liabilities more effectively, while abiding by Shariah principles, through the sale and purchase of universally acceptable Islamic financial instruments and direct placements under Mudharabah inter-bank investments.

iii) Thirdly, the IIFM will promote better business environment in Islamic countries and foster the establishment and regulation of regional and national financial markets. In the process, market regulation will evolve in a developmental manner and non-restrictive way, where nonetheless strict Shariah compliance should remained observed at all times creating expedient shortcuts to Shariah compliance would inevitably undermine customer trust and institutional credibility. Indeed, it is important to maintain trust and confidence both for the market and for its future development.

11. At the core of the market, is an institution called the Market Management Centre or MMC. The roles of the MMQ which will be pivotal to the operation of the market are to endorse the issuance of Islamic financial instruments for the market; to set guidelines and procedures for the market and to facilitate Shariah approval and rating of instruments introduced for the market. Another important element of the IIFM structure is the creation of a series of Liquidity Management Centres (LMCs). The LMC will help manage country liquidities, serve as regional hubs or centres and enhance the efficiency of the IIFM operations. The operation of the IIFM will be quite unique when compared to the conventional one because it may be possible to operate 7 days a week due to the difference of public holidays in Islamic countries. While the holidays in gulf countries are on Thursdays and Fridays, that in the Far East are Saturdays and Sundays, hence the 7 days a week concept.


12. Once implemented, the IIFM will serve the needs of all participants willing to deal in Shariah compatible instruments of banking and finance. It will not be limited to Islamic institutions and market forces will determine the growth patterns of Islamic products, roles of institutions and their market shares within the IIFM.

13. The IIFM will also help Islamic financial institutions to manage their assets and liabilities in a more efficient and cost-effective manner while abiding by Shariah principles and serving the economic development of the Islamic countries. The liquidity surpluses and deficits of participating financial institutions can be matched by:

i) One, sale and purchase of Islamic financial instruments; and
ii) Two, direct placements under the Mudharabah Inter bank investment. In this case, the yield could be based on expected rate of return and adjusted in actual terms at maturity to remain in full compliance with Shariah requirements. The availability of the direct placements is crucial to the operations of the financial market.


14. Indeed, the structured mechanism of the IIFM will enhance greater liquidity and efficiency in the system and accelerate the trend towards securitization and growth of liquid Islamic financial instruments and trade financing.

Ladies and Gentlemen,

15. The critical success factors in developing the IIFM are, one to have a broad number of players, and two a wide range of financial instruments. Without these two elements, there is' no market. Hence, the support of the governments and multi-lateral institutions is very critical to provide the push for more players to join the market. It is strongly encouraged that Islamic countries who have not participated yet, to get involved to add more breadth and depth to the market. It is for this reason also, members of the Working Group will be organising a promotional program to selected Islamic countries

16. In the area of developing financial instruments, again the catalyst will probably come from the governments and large corporations to issue sukuks to help kick-start the market. Strategically, it makes very good sense for a corporation to diversify its source of financial funding to ensure that it can remain liquid in times of critical needs. The recent Asian financial crisis has shown that relying on just the conventional financial markets is simply not enough. Hence, the development of the IIFM will provide the alternative for organisations to diversify their source of funding.

1 7. As for the liquidity in the Secondary Market, the IIFM will create an environment that will encourage both the Islamic based and conventional financial institutions to be active players to ensure that there will be market makers and sufficient liquidity for the Islamic Securities. To be successful and viable, Islamic financial instruments should be targeted at broad range of players and investors, both Islamic and conventional.

Ladies and Gentlemen,

18. The IIFM project clearly shows that cooperation among Islamic Financial Institutions can provide tangible results that will enhance the level of economic activities among countries. Insya Allah, the success of this endeavor should spur the formation of more cooperative economic framework of such nature. Such cooperation is very important as we operate in an environment that is becoming more and more challenging.

19. As you are aware, Islamic banking and finance is conceptually and fundamentally different from conventional finance and is increasingly being used worldwide. There is, therefore, a need for proper standards and supervisory regulations to be put in place. The Islamic Development Bank (IDB) has together with some financial institutions established some time ago the Accounting and Auditing Organization for Islamic Financial Institutions (MOIFI) which is based in Bahrain. This body has issued numerous recognized standards in its fields that are being used by Islamic financial institutions. The 1DB has also, together with other Islamic banks and financial institutions agreed on the establishment of a rating agency, the International Islamic Rating Agency (INRA) which will soon be registered in Bahrain. The INRA will provide rating services for the benefit of Islamic financial institutions. In addition, IDB is also coordinating with the International Monetary Fund (IMF) and other monetary authorities and financial institutions to create an Islamic Financial Services Board (IFSB) which will be in charge of issuing prudential and supervisory regulations and guidelines to be applied on an international level on all institutions that provide Islamic banking and financial services. All these institutions will complement and support the creation of the IIFM and will enable the IIFM to promote further the development of Islamic banking for the benefit of the Ummah.

20. In conclusion, I wish to reiterate the full support and unwavering commitment of the 1DB in the establishment of the IIFM. I am very glad that the project will now move at a faster pace and will soon be operational.

With that, I once again would like thank the organisers for inviting me to this conference.

Assalamualaikum Warahmatuhlahi Wabarakatuh.