May 3, 2008
The State Bank of Pakistan, with the help of Institute of Chartered Accountants of Pakistan (ICAP), would make the implementation of Islamic Financial Accounting Standards (IFAS-2) possible to develop Islamic banking in the country.
The central bank on Monday organised a seminar on ‘Murabaha & Ijara Accounting Standards’ to develop an understanding of accounting treatment of such modes of Islamic transactions.
The forum provided an opportunity to participants to discuss the practical problems faced by them in the implementation of these standards.
It was agreed by the participants that the ICAP committee and the SBP would look into respective areas and clarifications issued in due course of time to make the implementation of Islamic Financial Accounting Standards (IFAS-2) possible.
The Accounting and Auditing Organisation for Islamic Financial Institution (AAOIFI), a Bahrain-based international body, is developing the Shariah and Accounting Standards for Islamic Financial Institutions (IFIs) to harmonise the IFIs practices throughout the world.
Securities and Exchange Commission of Pakistan (SECP) has notified Islamic Financial Accounting Standards IFAS-1 for Murabaha and IFAS-2 for Ijara, which have been prepared by ICAP Committee in line with AAOIFI Accounting Standards and tailored according to Pakistan’s needs.
Murabaha and Ijara financings constitute almost 45 and 26 per cent, respectively, of the total financing by the Islamic banks as of the quarter ending December 2007 in Pakistan.
SBP Director (Islamic Banking Department) Pervez Said stated that Islamic banking had shown a tremendous growth globally and Pakistan was no exception to this phenomenon.
The SBP had played a pivotal role in developing Islamic banking and continued to focus on doing so with very encouraging results, he added.
Ebrahim Sidat, Country Manager, Ford Rhodes Sidat Hyder & Co, who chaired the seminar, said with the ‘will and determination’ of all stake-holders, Islamic banking would grow further in Pakistan. He was optimistic about the future prospects of the industry.
Other professional bankers and leading professional accountants also delivered lectures on transaction flow and accounting treatment of Murabaha and Ijara.
Senior executives and representatives from the Securities and Exchange Commission of Pakistan, Islamic banking industry and the SBP attended the seminar.
Revtwt News Headline Animator
Sunday, August 22, 2010
ISLAMIC ACCOUNITING
August 27, 2008
images40Research Paper by Dr. Shahul Hameed bin Mohamed Ibrahim, PhD, M.A., CA (M), FCCA
Assistant Professor and Head, Department of Accounting, Kulliyah of Economics and Management Sciences, International Islamic University Malaysia
1. Introduction
To professional accountants who have been brought-up on the idea of accounting as an ‘objective’, technical and value-free discipline, the idea of attaching a religious adjective to accounting may seem to be embarrassing, unprofessional and even dangerous.
This is especially true when the adjective is Islam (Christian or Buddhist may at least sound more peaceful), which is media-hyped to be synonymous with terrorism.
On the other hand, the development of Islamic banking and finance now embraced even by ardent capitalist institutions such as Citibank, HSBC and ANZ banks may interest accountants to the possibility of new opportunities for the profession (especially in the wake of lay offs and downsizing by the big four firms).
Perhaps, the Enron affair has rekindled an interest in having a more honest profession who truly care about the public interest in addition to their pockets.
Whatever the interest or curiosity, we hope accountants will find this series of articles interesting, informative, and profitable and yes we hope it may even lead to a bit of soul searching.
In this month’s article, we try to explain what is Islamic accounting (although it will not be the final definition) together with a discussion of the main differences between Islamic and conventional accounting, provide some justifications for the addition of the world ‘Islamic’ to the word accounting, make a prima facie case for Islamic accounting and finally make the important distinction between accounting for Islamic banks and Islamic accounting, which is presently thought of by many people as synonymous.
2. Meaning of Islamic Accounting
Islamic accounting can be defined as the “accounting process” which provides appropriate information (not necessarily limited to financial data) to stakeholders of an entity which will enable them to ensure that the entity is continuously operating within the bounds of the Islamic Shari’ah and delivering on its socioeconomic objectives.
Islamic accounting is also a tool, which enables Muslims to evaluate their own accountabilities to God (in respect of inter-human/environmental transactions).
The meaning of Islamic accounting would be clearer if we compare this with the definition of “conventional” accounting. (Conventional) accounting as we know it is defined to be the identification, recording, classification, interpreting and communication economic events to permit users to make informed decisions (AAA, 1966).
From this, it can be seen that both Islamic and conventional accounting is in the business of providing information.
The differences lie in the following:
# The objectives of providing the information
# What type of information is identified, and how is it measured and valued, recorded and communicated, and
# To whom is it communicated (the users)
While conventional accounting aims to permit informed decisions whose ultimate purpose is to efficiently allocate scarce resources available to their most efficient (and profitable) uses by providing information efficiency in the market (FASB, 1978).
Apparently this is achieved by the user making the appropriate, buy, sell or hold decisions on their investments.
Islamic Accounting, on the other hand, hopes to enable users to ensure that Islamic organisations (whether business, government or NFP) abide by the principles of the Shari’ah or Islamic Law in its dealings and enables the assessment of whether the objectives of the organisation are being met.
At the very basic level, it can be said that Islamic organisations (whether business or otherwise) differ from their conventional counterparts by having to adhere to certain Shari’ah principles and rules and also try to achieve certain socio-economic objectives encouraged by Islam.
Following from the above, the type of information which Islamic accounting identifies, measures is different. Conventional accounting concentrates on identifying economic events and transactions, while Islamic accounting must identify socio-economic and religious events and transactions.
A few of us, older ones, might still remember when we did our first accounting or book-keeping courses, we had to do final accounts (i.e. balance sheet and trading, profit and loss account.
However, Americanization of the curriculum has popularised the term financial statements.
Hence, the concentration of accounting has moved from stewards manorial accounts to accounting for money (accentuated by the monetary measurement concept).
This is not to say that Islamic accounting is not concerned with money (especially when accounting for businesses).
On the contrary due to prohibition of interest-based income or expense, profit determination is more important in Islamic accounting than conventional accounting.
However, Islamic accounting must be holistic in its reporting Hence, both financial and non-financial measures regarding the economic, social, environmental and religious events and transactions are measured and reported.
Conventional accounting mainly uses historic cost (or lower) to measure and values assets and liabilities.
The profession is well aware of the limitations of the stable unit of measure assumption of the monetary unit and to its credit has tried in the past in its inflation accounting initiatives.
However, despite recommendation from its own research efforts (True blood committee?), the idea of using current values was given up due to its complexity and presumed lack of objectivity.
From an Islamic point of view, at least for the purpose of computation of Zakat, current valuation is obligatory (see for example, Clarke et al, 1996) prompting calls for a current value Balance Sheet (Baydoun and Willet, 2000).
A further difference is, Islamic accounting may require a different statement altogether to deemphasize the focus on profits by the income statement provided by conventional accounting. Baydoun and Willlet (2000) have suggested a Value Added Statement to replace the Income Statement in Islamic Corporate Reports.
They argue that this shows and encourages a cooperative environment in business as opposed to a destructive competitive environment.
The third category of differences is in the users of the information.
Although the profession has recognised various stakeholders as users of accounting information (see for example, the Corporate Report, 1975), the users which it focuses on are shareholders and creditors (i.e. Financiers – those who provide the funds).
This is obvious from the fact the FASB’s SFAC 1 dismisses a whole range of stakeholders by the term “and others”.
From recent developments in finance and financial markets, accounting seems to be serving an elite group of financiers – market players and banks and other financial institutions.
It has been accused of helping a group of rich people get richer (Gray et al., 1996) – a grave charge since the profession always justifies its monopoly on audit services by virtue of the public interest.
Islamic accounting serves the whole gamut of stakeholders recognised by the corporate report, not that each group can serve its own interest best, but society as a whole can make corporations accountable for their actions and ensure they comply with Shari’ah principles and do not harm others while making money ethically and achieve a equitable allocation and distribution of wealth among members of society especially the stakeholders of the concerned corporation.
3. Religion and accounting- an explosive mix?
Now we come to the question, is it wise to add the adjective “Islamic” to accounting?
Why not accounting for Islamic organisations or accounting from the Islamic perspective? The worry is that the addition of any religious adjective may compromise the objectivity of the discipline as religion is mostly seen as an unchanging dogma and code not subject to pragmatic or logical considerations.
We will take this matter in two stages:
a) Is conventional accounting value free and objective as it portrayed to be or is there a hidden adjective attached to it?
b) The problem of epistemology- the nature and sources of knowledge
What are the implicit assumptions behind the theory and practice of conventional accounting, in other words – what is the worldview behind conventional accounting?
Some years back, European and communist states adopted a different system of accounting. In a centrally planned or a socialist state, there is a lack of profit motive or not too much of it. Hence, the conventional accounting i.e. Profit and loss account, balance sheet did not make much sense in that economic system. This is why the accounting profession never developed in the communist countries.
It is only after liberalisation i.e. conversion to capitalism that these states are trying to catch up with the West.
A little more reflection and we come to the conclusion that the conventional accounting system in which we were educated and work in is in fact Capitalist Accounting.
The adjective ‘capitalist’ is not used before the word accounting, because it would not then appear neutral as capitalism is a philosophy and many ways a religion. Its sacred symbols of private property, the hudud (literal meaning the definitive borders) of the market and its God- wealth for the creation of which, business and finance exists.
Capitalism is not only the economic system which allows choices and opportunities but a philosophy and religion which forsakes equity for efficiency and the wants of a few for the needs of the many. It can be said to be the dominant ‘religion’ of the world (both in Muslim and Non-Muslim countries).
Hence, to call a spade, a spade, accounting should be renamed capitalist accounting, economics as capitalist economics and so forth. Hence, faculty of economics in our universities should be renamed faculty of capitalist economics. However, we do not because it is not necessary, it is assumed and implicit. Due to the non-explicitness of this assumption, we sometime forget that accounting is not objective, neutral and value-free as it is portrayed to be.
Secondly, we discuss the problem of epistemology- the nature and sources of knowledge.
Ever since the so-called ‘enlightenment’, science has gained the upper hand and has replaced religion as the authority in defining what is knowledge.
Modern research emphasises positivism i.e. what is. Knowledge is only what is perceptible through our senses through observation and experiment or what appears logical to our mind. Revelation is not considered a source of knowledge as religious truths cannot be verified by our senses.
Accounting is considered a science (many US and UK universities use MS or MSc not MA for post graduate accounting programmes) and such mixing religion with accounting may be considered unprofessional.
However, as Chapra (2000) argues science and religion deals with different levels of reality. While sciences deal with the physical universe perceptible by the senses, religion deals with a higher level of reality which is transcendental and beyond the sense of perception.
The sources of scientific knowledge are reason and its method observation and experiment. It describes and analyse ‘what is’ and tries to predict what will happen in the future (e.g. Forecast earnings from models).
When dealing with the physical universe, it is exact in its description and analysis and more accurate in its predictive power (e.g. in Physics or Chemistry). However, when it deals with human beings who do not behave in a consistent manner, unlike the revolution of the planets above, its analysis is less precise and its predictions less accurate. The recent move by the SC on insisting on 10% accuracy on profit forecasts reports by accountants has given a headache for accountants as forecasting is not an accurate science as it deals with behaviour of human beings in the marketplace.
Unlike science, religion depends on Revelation as well as reason for its knowledge. Its objective is to help transform the human condition from ‘what is’ (e.g. Enron, WorldCom) to what should be (perhaps, Johnson & Johnson under Burke). It should bring about individual and social change to conform to its worldview and values and institutions that it provides.
The ultimate objective of both science and religion is to bring about the well-being of human beings. One addresses the physical and material while the other addresses the social, mental, emotional and the spiritual. Chapra (2000) further argues that if both of these are important, then both science and religion can better serve mankind by greater cooperation and coordination between them.
Religion can help science by reminding it of its ultimate objectives and limitations, to use the power and mastery over the universe for well-being rather than destruction. Science can help religion by helping it realise ‘what ought to be’ by providing a better description of ‘what is’ , facilitating prediction and providing better technology for a more efficient use of all available resources.
It can thus be seen that rather then becoming an explosive mix, the mixing of science and religion can be fruitful and in fact serve to stabilise society from the instability of a world dominated either by science or religion alone.
4. A Prima-facie case for Islamic Accounting
Accounting is a tool to achieve certain objectives. In order to be useful, it must be relevant to its purpose. The purpose of accounting has been extended by the American Accounting Association in 1975 (presumably concerned to promote the public interest responsibility of the profession) which defined the purpose of accounting “to permit informed decisions which will enable scarce resources to be allocated efficiently thereby achieving social welfare”.
Hence, like it or not, the accounting profession is entrusted with the responsibility of helping to achieve social welfare by providing its services. It is common sense, that one must use the right tool for the right job. If one were to use a sledgehammer to crack a nut, we would get paste instead of nuts! Hence, Islamic accounting may be more appropriate to achieve the socio-economic and religions objectives of Islamic institutions and Muslim users.
The diagram below (Shahul, 2001) shows the situation of match and mismatch.
FIGURE 1: RESULT OF INCONGRUENCY BETWEEN ECONOMIC SYSTEM AND ACCOUNTING SYSTEM (SOURCE; SHAHUL, 2001)
Briefly, Islamic institutions such as Islamic banks, Tabung Haji in Malaysia etc. are established to meet the socio-economic objectives of the Shariah (Islamic Law) through the implementation of an Islamic economic system.
Hence, these institutions should logically use Islamic accounting, especially for monitoring these institutions to achieve their objectives which are different from capitalist institutions.
However, if conventional accounting which developed to meet the needs of a capitalist economy is used instead in these institutions, a mismatch is likely.
This will lead to the institutions not meeting the Shari’ate socio-economic objectives and even worse may turn these Islamic institutions into capitalist institutions by providing materialist profit-focused information instead of the holistic information provided by Islamic accounting.
It can thus be seen that it is not at all unscientific or objectionable, to use Islamic accounting and would in fact be more logical to use it as it would result in an ethical based accounting system which measures not only profits but social, environmental and religious performance.
Finally, it must be borne in mind that accounting for Islamic banks and financial institutions is not Islamic Accounting but only a subset of it. Although the efforts of AAOFI must be appreciated for developing standards for Islamic Banks, the methodology and hence the outcome is questionable. This is discussed elsewhere (see Karim, 1995).
Islamic accounting is not the just technicalities of accounting for Islamic financial instruments employed by Islamic banks but much more requiring whole new areas of performance measurement including the social, environmental, economic and the Shariate.
We will explore the reasons why conventional accounting is unsuitable for Islamic institutions as well as more details of what is the content of Islamic articles in later articles.
References:
AAA(1966), A Statement of Basic Accounting Theory, US: American Accounting Association.
Baydoun and Willet (2000), “The Islamic Corporate Report”, Abacus, Vol. 36, No. 1, 2000.
Chapra, U (2000), The Future of Economics, An Islamic Perspective, Leicester, UK: The Islamic Foundation.
Clarke F., R Craig and S. Hamid (1996), “Physical Asset Valuation and Zakat: Insights and Implications, Advances in International Accounting , vol. 9., 1996.
Corporate Report (1975), The Corporate Report, London: Accounting Standards Sterring Committee.
FASB (1978), Statement of Financial Accounting Concept 1:Objectives of Financial Reporting by Business Enterprises, Stamford, Connecticut: Financial Accounting Standards Board.
Gray, RH, Owens K and Maunders K (1996), Accounting and Accountability: Changes and Challenges in Corporate Social and Environmental Accounting, London: Prentice Hall.
Karim, RAA (1995), “The Nature and Rationale for a Conceptual Framework for Financial Reporting by Islamic Banks”, Accounting and Business Research, Vol 25, No. 100, pp285-300.
Shahul Hameed (2001), “Islamic Accounting – Accounting for the New Millenium?”, Paper presented at the Asia Pacific Conference 1, Kota Bahru, Kelantan, October 10-12, 2001.
images40Research Paper by Dr. Shahul Hameed bin Mohamed Ibrahim, PhD, M.A., CA (M), FCCA
Assistant Professor and Head, Department of Accounting, Kulliyah of Economics and Management Sciences, International Islamic University Malaysia
1. Introduction
To professional accountants who have been brought-up on the idea of accounting as an ‘objective’, technical and value-free discipline, the idea of attaching a religious adjective to accounting may seem to be embarrassing, unprofessional and even dangerous.
This is especially true when the adjective is Islam (Christian or Buddhist may at least sound more peaceful), which is media-hyped to be synonymous with terrorism.
On the other hand, the development of Islamic banking and finance now embraced even by ardent capitalist institutions such as Citibank, HSBC and ANZ banks may interest accountants to the possibility of new opportunities for the profession (especially in the wake of lay offs and downsizing by the big four firms).
Perhaps, the Enron affair has rekindled an interest in having a more honest profession who truly care about the public interest in addition to their pockets.
Whatever the interest or curiosity, we hope accountants will find this series of articles interesting, informative, and profitable and yes we hope it may even lead to a bit of soul searching.
In this month’s article, we try to explain what is Islamic accounting (although it will not be the final definition) together with a discussion of the main differences between Islamic and conventional accounting, provide some justifications for the addition of the world ‘Islamic’ to the word accounting, make a prima facie case for Islamic accounting and finally make the important distinction between accounting for Islamic banks and Islamic accounting, which is presently thought of by many people as synonymous.
2. Meaning of Islamic Accounting
Islamic accounting can be defined as the “accounting process” which provides appropriate information (not necessarily limited to financial data) to stakeholders of an entity which will enable them to ensure that the entity is continuously operating within the bounds of the Islamic Shari’ah and delivering on its socioeconomic objectives.
Islamic accounting is also a tool, which enables Muslims to evaluate their own accountabilities to God (in respect of inter-human/environmental transactions).
The meaning of Islamic accounting would be clearer if we compare this with the definition of “conventional” accounting. (Conventional) accounting as we know it is defined to be the identification, recording, classification, interpreting and communication economic events to permit users to make informed decisions (AAA, 1966).
From this, it can be seen that both Islamic and conventional accounting is in the business of providing information.
The differences lie in the following:
# The objectives of providing the information
# What type of information is identified, and how is it measured and valued, recorded and communicated, and
# To whom is it communicated (the users)
While conventional accounting aims to permit informed decisions whose ultimate purpose is to efficiently allocate scarce resources available to their most efficient (and profitable) uses by providing information efficiency in the market (FASB, 1978).
Apparently this is achieved by the user making the appropriate, buy, sell or hold decisions on their investments.
Islamic Accounting, on the other hand, hopes to enable users to ensure that Islamic organisations (whether business, government or NFP) abide by the principles of the Shari’ah or Islamic Law in its dealings and enables the assessment of whether the objectives of the organisation are being met.
At the very basic level, it can be said that Islamic organisations (whether business or otherwise) differ from their conventional counterparts by having to adhere to certain Shari’ah principles and rules and also try to achieve certain socio-economic objectives encouraged by Islam.
Following from the above, the type of information which Islamic accounting identifies, measures is different. Conventional accounting concentrates on identifying economic events and transactions, while Islamic accounting must identify socio-economic and religious events and transactions.
A few of us, older ones, might still remember when we did our first accounting or book-keeping courses, we had to do final accounts (i.e. balance sheet and trading, profit and loss account.
However, Americanization of the curriculum has popularised the term financial statements.
Hence, the concentration of accounting has moved from stewards manorial accounts to accounting for money (accentuated by the monetary measurement concept).
This is not to say that Islamic accounting is not concerned with money (especially when accounting for businesses).
On the contrary due to prohibition of interest-based income or expense, profit determination is more important in Islamic accounting than conventional accounting.
However, Islamic accounting must be holistic in its reporting Hence, both financial and non-financial measures regarding the economic, social, environmental and religious events and transactions are measured and reported.
Conventional accounting mainly uses historic cost (or lower) to measure and values assets and liabilities.
The profession is well aware of the limitations of the stable unit of measure assumption of the monetary unit and to its credit has tried in the past in its inflation accounting initiatives.
However, despite recommendation from its own research efforts (True blood committee?), the idea of using current values was given up due to its complexity and presumed lack of objectivity.
From an Islamic point of view, at least for the purpose of computation of Zakat, current valuation is obligatory (see for example, Clarke et al, 1996) prompting calls for a current value Balance Sheet (Baydoun and Willet, 2000).
A further difference is, Islamic accounting may require a different statement altogether to deemphasize the focus on profits by the income statement provided by conventional accounting. Baydoun and Willlet (2000) have suggested a Value Added Statement to replace the Income Statement in Islamic Corporate Reports.
They argue that this shows and encourages a cooperative environment in business as opposed to a destructive competitive environment.
The third category of differences is in the users of the information.
Although the profession has recognised various stakeholders as users of accounting information (see for example, the Corporate Report, 1975), the users which it focuses on are shareholders and creditors (i.e. Financiers – those who provide the funds).
This is obvious from the fact the FASB’s SFAC 1 dismisses a whole range of stakeholders by the term “and others”.
From recent developments in finance and financial markets, accounting seems to be serving an elite group of financiers – market players and banks and other financial institutions.
It has been accused of helping a group of rich people get richer (Gray et al., 1996) – a grave charge since the profession always justifies its monopoly on audit services by virtue of the public interest.
Islamic accounting serves the whole gamut of stakeholders recognised by the corporate report, not that each group can serve its own interest best, but society as a whole can make corporations accountable for their actions and ensure they comply with Shari’ah principles and do not harm others while making money ethically and achieve a equitable allocation and distribution of wealth among members of society especially the stakeholders of the concerned corporation.
3. Religion and accounting- an explosive mix?
Now we come to the question, is it wise to add the adjective “Islamic” to accounting?
Why not accounting for Islamic organisations or accounting from the Islamic perspective? The worry is that the addition of any religious adjective may compromise the objectivity of the discipline as religion is mostly seen as an unchanging dogma and code not subject to pragmatic or logical considerations.
We will take this matter in two stages:
a) Is conventional accounting value free and objective as it portrayed to be or is there a hidden adjective attached to it?
b) The problem of epistemology- the nature and sources of knowledge
What are the implicit assumptions behind the theory and practice of conventional accounting, in other words – what is the worldview behind conventional accounting?
Some years back, European and communist states adopted a different system of accounting. In a centrally planned or a socialist state, there is a lack of profit motive or not too much of it. Hence, the conventional accounting i.e. Profit and loss account, balance sheet did not make much sense in that economic system. This is why the accounting profession never developed in the communist countries.
It is only after liberalisation i.e. conversion to capitalism that these states are trying to catch up with the West.
A little more reflection and we come to the conclusion that the conventional accounting system in which we were educated and work in is in fact Capitalist Accounting.
The adjective ‘capitalist’ is not used before the word accounting, because it would not then appear neutral as capitalism is a philosophy and many ways a religion. Its sacred symbols of private property, the hudud (literal meaning the definitive borders) of the market and its God- wealth for the creation of which, business and finance exists.
Capitalism is not only the economic system which allows choices and opportunities but a philosophy and religion which forsakes equity for efficiency and the wants of a few for the needs of the many. It can be said to be the dominant ‘religion’ of the world (both in Muslim and Non-Muslim countries).
Hence, to call a spade, a spade, accounting should be renamed capitalist accounting, economics as capitalist economics and so forth. Hence, faculty of economics in our universities should be renamed faculty of capitalist economics. However, we do not because it is not necessary, it is assumed and implicit. Due to the non-explicitness of this assumption, we sometime forget that accounting is not objective, neutral and value-free as it is portrayed to be.
Secondly, we discuss the problem of epistemology- the nature and sources of knowledge.
Ever since the so-called ‘enlightenment’, science has gained the upper hand and has replaced religion as the authority in defining what is knowledge.
Modern research emphasises positivism i.e. what is. Knowledge is only what is perceptible through our senses through observation and experiment or what appears logical to our mind. Revelation is not considered a source of knowledge as religious truths cannot be verified by our senses.
Accounting is considered a science (many US and UK universities use MS or MSc not MA for post graduate accounting programmes) and such mixing religion with accounting may be considered unprofessional.
However, as Chapra (2000) argues science and religion deals with different levels of reality. While sciences deal with the physical universe perceptible by the senses, religion deals with a higher level of reality which is transcendental and beyond the sense of perception.
The sources of scientific knowledge are reason and its method observation and experiment. It describes and analyse ‘what is’ and tries to predict what will happen in the future (e.g. Forecast earnings from models).
When dealing with the physical universe, it is exact in its description and analysis and more accurate in its predictive power (e.g. in Physics or Chemistry). However, when it deals with human beings who do not behave in a consistent manner, unlike the revolution of the planets above, its analysis is less precise and its predictions less accurate. The recent move by the SC on insisting on 10% accuracy on profit forecasts reports by accountants has given a headache for accountants as forecasting is not an accurate science as it deals with behaviour of human beings in the marketplace.
Unlike science, religion depends on Revelation as well as reason for its knowledge. Its objective is to help transform the human condition from ‘what is’ (e.g. Enron, WorldCom) to what should be (perhaps, Johnson & Johnson under Burke). It should bring about individual and social change to conform to its worldview and values and institutions that it provides.
The ultimate objective of both science and religion is to bring about the well-being of human beings. One addresses the physical and material while the other addresses the social, mental, emotional and the spiritual. Chapra (2000) further argues that if both of these are important, then both science and religion can better serve mankind by greater cooperation and coordination between them.
Religion can help science by reminding it of its ultimate objectives and limitations, to use the power and mastery over the universe for well-being rather than destruction. Science can help religion by helping it realise ‘what ought to be’ by providing a better description of ‘what is’ , facilitating prediction and providing better technology for a more efficient use of all available resources.
It can thus be seen that rather then becoming an explosive mix, the mixing of science and religion can be fruitful and in fact serve to stabilise society from the instability of a world dominated either by science or religion alone.
4. A Prima-facie case for Islamic Accounting
Accounting is a tool to achieve certain objectives. In order to be useful, it must be relevant to its purpose. The purpose of accounting has been extended by the American Accounting Association in 1975 (presumably concerned to promote the public interest responsibility of the profession) which defined the purpose of accounting “to permit informed decisions which will enable scarce resources to be allocated efficiently thereby achieving social welfare”.
Hence, like it or not, the accounting profession is entrusted with the responsibility of helping to achieve social welfare by providing its services. It is common sense, that one must use the right tool for the right job. If one were to use a sledgehammer to crack a nut, we would get paste instead of nuts! Hence, Islamic accounting may be more appropriate to achieve the socio-economic and religions objectives of Islamic institutions and Muslim users.
The diagram below (Shahul, 2001) shows the situation of match and mismatch.
FIGURE 1: RESULT OF INCONGRUENCY BETWEEN ECONOMIC SYSTEM AND ACCOUNTING SYSTEM (SOURCE; SHAHUL, 2001)
Briefly, Islamic institutions such as Islamic banks, Tabung Haji in Malaysia etc. are established to meet the socio-economic objectives of the Shariah (Islamic Law) through the implementation of an Islamic economic system.
Hence, these institutions should logically use Islamic accounting, especially for monitoring these institutions to achieve their objectives which are different from capitalist institutions.
However, if conventional accounting which developed to meet the needs of a capitalist economy is used instead in these institutions, a mismatch is likely.
This will lead to the institutions not meeting the Shari’ate socio-economic objectives and even worse may turn these Islamic institutions into capitalist institutions by providing materialist profit-focused information instead of the holistic information provided by Islamic accounting.
It can thus be seen that it is not at all unscientific or objectionable, to use Islamic accounting and would in fact be more logical to use it as it would result in an ethical based accounting system which measures not only profits but social, environmental and religious performance.
Finally, it must be borne in mind that accounting for Islamic banks and financial institutions is not Islamic Accounting but only a subset of it. Although the efforts of AAOFI must be appreciated for developing standards for Islamic Banks, the methodology and hence the outcome is questionable. This is discussed elsewhere (see Karim, 1995).
Islamic accounting is not the just technicalities of accounting for Islamic financial instruments employed by Islamic banks but much more requiring whole new areas of performance measurement including the social, environmental, economic and the Shariate.
We will explore the reasons why conventional accounting is unsuitable for Islamic institutions as well as more details of what is the content of Islamic articles in later articles.
References:
AAA(1966), A Statement of Basic Accounting Theory, US: American Accounting Association.
Baydoun and Willet (2000), “The Islamic Corporate Report”, Abacus, Vol. 36, No. 1, 2000.
Chapra, U (2000), The Future of Economics, An Islamic Perspective, Leicester, UK: The Islamic Foundation.
Clarke F., R Craig and S. Hamid (1996), “Physical Asset Valuation and Zakat: Insights and Implications, Advances in International Accounting , vol. 9., 1996.
Corporate Report (1975), The Corporate Report, London: Accounting Standards Sterring Committee.
FASB (1978), Statement of Financial Accounting Concept 1:Objectives of Financial Reporting by Business Enterprises, Stamford, Connecticut: Financial Accounting Standards Board.
Gray, RH, Owens K and Maunders K (1996), Accounting and Accountability: Changes and Challenges in Corporate Social and Environmental Accounting, London: Prentice Hall.
Karim, RAA (1995), “The Nature and Rationale for a Conceptual Framework for Financial Reporting by Islamic Banks”, Accounting and Business Research, Vol 25, No. 100, pp285-300.
Shahul Hameed (2001), “Islamic Accounting – Accounting for the New Millenium?”, Paper presented at the Asia Pacific Conference 1, Kota Bahru, Kelantan, October 10-12, 2001.
The Diploma in Islamic Accounting and Compliance (DIAC)
January 21, 2009
faa030000399Association of International Accountants (AIA) uk jiontly with BIBF has introduced Diploma In Islamic Accounting And Compliance (DIAC) to cater the islamic finance market.There is an increasing demand for accountancy professionals who demonstrate a thorough understanding of Islamic Accounting and Governance Reporting requirements as set by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), while preserving compliance with International Financial Reporting Standards (IFRS). To access global markets and maintain the process of Islamic transactions, Islamic Finance professionals need to be familiar with both sets of standards as they apply to Islamic Financial Institutions. The Diploma in Islamic Accounting and Compliance (DIAC) has been designed to address this demand.
The Diploma in Islamic Accounting and Compliance (DIAC) is a professional certification jointly developed and certified by the Bahrain Institute of Banking and Finance (BIBF) and the Association of International Accountants (AIA).AIA, a premier international professional accountancy body, is responsible for setting the syllabi for the course, preparing the independently developed exam papers and appointing leading professional examiners.
The BIBF, as the premier institute for financial education and training in the Gulf, is responsible for compiling the course structure and providing its highly reputed teaching and support services. The DIAC programme seeks to develop the next generation of accounting professionals and leaders in Islamic Finance. It is specifically designed to cater to the needs of global professionals who require a qualification that enhances and certifies their knowledge and practical understanding of the multi-jurisdictional accounting systems that Islamic banks are exposed to.
faa030000399Association of International Accountants (AIA) uk jiontly with BIBF has introduced Diploma In Islamic Accounting And Compliance (DIAC) to cater the islamic finance market.There is an increasing demand for accountancy professionals who demonstrate a thorough understanding of Islamic Accounting and Governance Reporting requirements as set by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), while preserving compliance with International Financial Reporting Standards (IFRS). To access global markets and maintain the process of Islamic transactions, Islamic Finance professionals need to be familiar with both sets of standards as they apply to Islamic Financial Institutions. The Diploma in Islamic Accounting and Compliance (DIAC) has been designed to address this demand.
The Diploma in Islamic Accounting and Compliance (DIAC) is a professional certification jointly developed and certified by the Bahrain Institute of Banking and Finance (BIBF) and the Association of International Accountants (AIA).AIA, a premier international professional accountancy body, is responsible for setting the syllabi for the course, preparing the independently developed exam papers and appointing leading professional examiners.
The BIBF, as the premier institute for financial education and training in the Gulf, is responsible for compiling the course structure and providing its highly reputed teaching and support services. The DIAC programme seeks to develop the next generation of accounting professionals and leaders in Islamic Finance. It is specifically designed to cater to the needs of global professionals who require a qualification that enhances and certifies their knowledge and practical understanding of the multi-jurisdictional accounting systems that Islamic banks are exposed to.
Islamic Banking Lost in Regulatory Fog Since Crisis
June 5, 2009
Kuala Lumpur. As Western regulators stress test top banks, Islamic finance wants to broaden its regulatory approach and improve disclosure rules amid concerns that unhealthy banks may have slipped under the radar.
Few Islamic financial companies have reported headline-grabbing losses so far, but the industry’s relatively modest size and opaque framework could mask more trouble than appearances suggest, bankers and lawyers say.
Rather than stress testing individual banks as in the United States, however, Islamic bankers and lawyers say the sector needs better disclosure within stronger regulatory frameworks.
A narrow regulatory approach that examines individual companies rather than the sector and inadequate disclosure laws could have allowed weak Shariah banks to escape the authorities’ attention, potentially threatening to spark an Islamic banking crisis.
“Rather than just looking at one bank and examining the risks there, you need to look at a more macro level of the industry,” said Rifaat Ahmed Abdel Karim, who heads the Islamic Financial Services Board, a top industry body.
“We need to see who’s connected with what,” he said. “It’s not only the individual banks, but how they are connected at the macro level because then you can see who’s exposed to what.”
Since the global economic and property slump, Shariah banks’ earnings have dropped by up to 40 percent on year and companies like Investment Dar of Kuwait and Tamweel and Amlak Finance of Dubai are trying to restructure.
UBS has forecast Dubai house prices could fall up to 70 percent from a fourth-quarter peak. Predictions are that prices will drop more than 40 percent in 2009 and 2010 before recovering in 2011.
The slide in property markets could highlight weakness in the regulation of the Islamic banking industry.
“In certain countries where the regulations are not as tight as in some jurisdictions, we may find one or two institutions that may pass through the sieve for a while,” said Vaseehar Hassan Abdul Razack of Unicorn International Islamic Bank Malaysia, adding that Bahrain and Malaysia were well regulated.
“Many of the Islamic banks globally, and especially in the [Gulf Cooperation Council], are real estate-oriented, so this could be one risk factor,” he said.
Unlike the United States, which recently put 19 top lenders through “stress tests” to see which could survive a severe downturn, and Europe which is preparing to do the same, there have been few calls for Islamic banks to be tested to see if they need extra capital to weather heavier losses.
While the US stress test results showed all banks were solvent, regulators ordered them to raise nearly $75 billion to build a capital cushion.
“One of the biggest weaknesses in Islamic finance is that too many of the banks have gone into real estate and equities and both of these are underperforming,” said Saad Rahman, Islamic banking executive director at Calyon.
“The stress test should not be seen as a stick to be beaten under, but should be an honest assessment of where they are.”
Islamic banks are governed by national authorities, and, if they so choose, by industry bodies. The level and nature of supervision vary across markets, reflecting both the industry’s infancy and its fragmented regulatory structure.
Much depends on the will of regulators to wield the stick, and the Gulf needs a stronger push, said Alex Saleh, a partner at law firm DLA Piper Middle East.
For example, “a lot of the Islamic investment products that are sold by the investment companies are not regulated in Kuwait,” he said.
He cited the example of wakala , or agency, investments which could be structured so that an agent need not reimburse the investor the entire sum in the case of a loss.
The Islamic Financial Services Board has disclosure rules on capital adequacy and credit risks, but like other Shariah finance bodies, its regulations are not binding on the sector and compliance is voluntary.
Standard disclosure rules may offer limited protection.
“Quite often you have a lot of mezzanine products so the banks have a lot of latitude on whether to report those things under one or the other category,” said Raj Madha, an analyst for EFG-Hermes, referring to instruments with debt and equity features.
“It allows for opacity, which certainly some banks are able to take advantage of, and at least in principle, it creates the opportunity for not disclosing some losses,” Madha said. “Obviously those listed entities, particularly in the UAE, with good public disclosure policies operate to a much higher standard than that.”
source :tjgloble
Kuala Lumpur. As Western regulators stress test top banks, Islamic finance wants to broaden its regulatory approach and improve disclosure rules amid concerns that unhealthy banks may have slipped under the radar.
Few Islamic financial companies have reported headline-grabbing losses so far, but the industry’s relatively modest size and opaque framework could mask more trouble than appearances suggest, bankers and lawyers say.
Rather than stress testing individual banks as in the United States, however, Islamic bankers and lawyers say the sector needs better disclosure within stronger regulatory frameworks.
A narrow regulatory approach that examines individual companies rather than the sector and inadequate disclosure laws could have allowed weak Shariah banks to escape the authorities’ attention, potentially threatening to spark an Islamic banking crisis.
“Rather than just looking at one bank and examining the risks there, you need to look at a more macro level of the industry,” said Rifaat Ahmed Abdel Karim, who heads the Islamic Financial Services Board, a top industry body.
“We need to see who’s connected with what,” he said. “It’s not only the individual banks, but how they are connected at the macro level because then you can see who’s exposed to what.”
Since the global economic and property slump, Shariah banks’ earnings have dropped by up to 40 percent on year and companies like Investment Dar of Kuwait and Tamweel and Amlak Finance of Dubai are trying to restructure.
UBS has forecast Dubai house prices could fall up to 70 percent from a fourth-quarter peak. Predictions are that prices will drop more than 40 percent in 2009 and 2010 before recovering in 2011.
The slide in property markets could highlight weakness in the regulation of the Islamic banking industry.
“In certain countries where the regulations are not as tight as in some jurisdictions, we may find one or two institutions that may pass through the sieve for a while,” said Vaseehar Hassan Abdul Razack of Unicorn International Islamic Bank Malaysia, adding that Bahrain and Malaysia were well regulated.
“Many of the Islamic banks globally, and especially in the [Gulf Cooperation Council], are real estate-oriented, so this could be one risk factor,” he said.
Unlike the United States, which recently put 19 top lenders through “stress tests” to see which could survive a severe downturn, and Europe which is preparing to do the same, there have been few calls for Islamic banks to be tested to see if they need extra capital to weather heavier losses.
While the US stress test results showed all banks were solvent, regulators ordered them to raise nearly $75 billion to build a capital cushion.
“One of the biggest weaknesses in Islamic finance is that too many of the banks have gone into real estate and equities and both of these are underperforming,” said Saad Rahman, Islamic banking executive director at Calyon.
“The stress test should not be seen as a stick to be beaten under, but should be an honest assessment of where they are.”
Islamic banks are governed by national authorities, and, if they so choose, by industry bodies. The level and nature of supervision vary across markets, reflecting both the industry’s infancy and its fragmented regulatory structure.
Much depends on the will of regulators to wield the stick, and the Gulf needs a stronger push, said Alex Saleh, a partner at law firm DLA Piper Middle East.
For example, “a lot of the Islamic investment products that are sold by the investment companies are not regulated in Kuwait,” he said.
He cited the example of wakala , or agency, investments which could be structured so that an agent need not reimburse the investor the entire sum in the case of a loss.
The Islamic Financial Services Board has disclosure rules on capital adequacy and credit risks, but like other Shariah finance bodies, its regulations are not binding on the sector and compliance is voluntary.
Standard disclosure rules may offer limited protection.
“Quite often you have a lot of mezzanine products so the banks have a lot of latitude on whether to report those things under one or the other category,” said Raj Madha, an analyst for EFG-Hermes, referring to instruments with debt and equity features.
“It allows for opacity, which certainly some banks are able to take advantage of, and at least in principle, it creates the opportunity for not disclosing some losses,” Madha said. “Obviously those listed entities, particularly in the UAE, with good public disclosure policies operate to a much higher standard than that.”
source :tjgloble
Brunei expertise on Islamic finance accounting touted
February 1, 2010
BRUNEI is on its way to develop itself not only in conventional accounting, but also in Islamic accounting, an industry expert yesterday said. “The standard is already there because the development of Islamic banking is linked with the development of the Islamic banking infrastructure,” said Makhtar Abdullah, acting chief executive officer of the Centre of Islamic Banking, Finance and Management (CIBFM), and moderator at session of the 16th Asean Federation of Accountants (AFA) Conference.
He said that at the moment, Brunei is capable of supporting the Islamic accounting development with the local expertise available and that should the need arises to bring in foreign expertise, “Brunei has the capacity to do so too,” he said.
“The government knows who is the best to come in, but one thing good about Brunei is that in all the second tiers or levels of an organisation, be it government or private sector, they are all locals, with at least 15 years of experience, and the best part is that the Brunei government has the capacity to retain these people, for the next one or two generations, before the younger generations start to look for jobs as well,” he said.
“Brunei’s development in Islamic accounting developed quite late, but the speed is there, when you’re looking at the volume of about 400,000 people. You have a lot of professionals in Brunei, and there are mergers of the banks into bigger banks, the conversion of banks and the government’s move to start CIBFM, so these are the positive images and developments projected out from Brunei,” he said.
He added that the “support is there and the initiative comes from the government and His Majesty himself”.
“You don’t get this from other countries in other countries. In other countries it is only a political or consumer push,” he said.
He said as the volume of transactions increases, the accounting standards also expand, noting since there will be more “dos and don’ts” accountants would need guidelines on how to audit them the lawyers would need a standard documentation on how to bind parties.
He added that in terms of catching up with regional Islamic hubs such as Indonesia and Malaysia, Brunei can always adopt best practices so “the wheel doesn’t need to be reinvented”, which is a positive for the Sultanate.
“The development of the (market) volume in Islamic banking coincides with the development of infrastructure, but coming back to the fast-track of the development of products in Islamic banking, it is not as big and as fast as conventional banking, so there is less creativity in terms of Islamic products unlike conventional banking,” said Makhtar.
He said that Islamic banking, however, does have a controllable pace, where the development is there, and so is the pace so when an economic crisis occurs, the push for Islamic finance is faster and bigger, which transforms the sector faster as well.
“This will also bring good input and more guidelines and with more awareness, transparency and disclosure increases which is good,” he said.
One example that Makhtar gave was when oil prices rose to US$140 per barrel people were suddenly looking for alternative fuel. “Similarly to the economic situation, people started to see flaws in the conventional system and they start looking for best practices elsewhere and the only one available is Islamic finance, and this is linked to Islamic accounting,” he said.
BRUNEI is on its way to develop itself not only in conventional accounting, but also in Islamic accounting, an industry expert yesterday said. “The standard is already there because the development of Islamic banking is linked with the development of the Islamic banking infrastructure,” said Makhtar Abdullah, acting chief executive officer of the Centre of Islamic Banking, Finance and Management (CIBFM), and moderator at session of the 16th Asean Federation of Accountants (AFA) Conference.
He said that at the moment, Brunei is capable of supporting the Islamic accounting development with the local expertise available and that should the need arises to bring in foreign expertise, “Brunei has the capacity to do so too,” he said.
“The government knows who is the best to come in, but one thing good about Brunei is that in all the second tiers or levels of an organisation, be it government or private sector, they are all locals, with at least 15 years of experience, and the best part is that the Brunei government has the capacity to retain these people, for the next one or two generations, before the younger generations start to look for jobs as well,” he said.
“Brunei’s development in Islamic accounting developed quite late, but the speed is there, when you’re looking at the volume of about 400,000 people. You have a lot of professionals in Brunei, and there are mergers of the banks into bigger banks, the conversion of banks and the government’s move to start CIBFM, so these are the positive images and developments projected out from Brunei,” he said.
He added that the “support is there and the initiative comes from the government and His Majesty himself”.
“You don’t get this from other countries in other countries. In other countries it is only a political or consumer push,” he said.
He said as the volume of transactions increases, the accounting standards also expand, noting since there will be more “dos and don’ts” accountants would need guidelines on how to audit them the lawyers would need a standard documentation on how to bind parties.
He added that in terms of catching up with regional Islamic hubs such as Indonesia and Malaysia, Brunei can always adopt best practices so “the wheel doesn’t need to be reinvented”, which is a positive for the Sultanate.
“The development of the (market) volume in Islamic banking coincides with the development of infrastructure, but coming back to the fast-track of the development of products in Islamic banking, it is not as big and as fast as conventional banking, so there is less creativity in terms of Islamic products unlike conventional banking,” said Makhtar.
He said that Islamic banking, however, does have a controllable pace, where the development is there, and so is the pace so when an economic crisis occurs, the push for Islamic finance is faster and bigger, which transforms the sector faster as well.
“This will also bring good input and more guidelines and with more awareness, transparency and disclosure increases which is good,” he said.
One example that Makhtar gave was when oil prices rose to US$140 per barrel people were suddenly looking for alternative fuel. “Similarly to the economic situation, people started to see flaws in the conventional system and they start looking for best practices elsewhere and the only one available is Islamic finance, and this is linked to Islamic accounting,” he said.
AAOIFI’s Standards in Russian Language
February 6, 2010
Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI ), the international standard-setting organisation for Islamic finance, is cooperating with the Mufties Council of Russia to translate AAOIFI ‘s international Islamic finance standards into Russian language.
The translated standards are expected to help regulatory authorities and financial institutions in developing Islamic finance in jurisdictions that use Russian language as their official language. project for the translation is already under way with the first group of standards to be translated by end of Fepuary 2010.
Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI ), the international standard-setting organisation for Islamic finance, is cooperating with the Mufties Council of Russia to translate AAOIFI ‘s international Islamic finance standards into Russian language.
The translated standards are expected to help regulatory authorities and financial institutions in developing Islamic finance in jurisdictions that use Russian language as their official language. project for the translation is already under way with the first group of standards to be translated by end of Fepuary 2010.
Dundee University – First University in UK to offer MSc in Islamic Accounting and Finance
May 3, 2010
A SCOTTISH university is to offer the UK’s first postgraduate course in Islamic finance.
Dundee University will unveil its MSc in Islamic accounting and finance at a conference on ethical finance in Edinburgh today. The course has been created to meet increased demand from the banking sector.
Dr Rania Kamla, a lecturer in theDr Rania Kamla, a lecturer in the accountancy and finance department at Dundee who will lead the new course, said high street banks were increasingly catering for Muslims and needed knowledgeable staff.
She said Islamic banking should not invest in areas in conflict with the religion’s teachings such as pork products, alcohol, the arms trade, or pornography.
“But it is also about the deeper impact, so it would also encourage investment in communities and try to reach out to disadvantaged groups, “she added.
There is only one dedicated bank that adheres to the teachings of Sharia law, the Islamic Bank of Britain.
Dr Kamla said: “It was originally based in London and Birmingham, but has now expanded to Scotland. Up to 20 financial institutions in the UK now provide Islamic products, including HSBC. It is not allowed in Islam to charge interest, therefore they promote interest-free banking.
“Instead, they depend on profit and loss sharing, so you both share in the risk.”
The MSc course, which begins in September, is expected to take a handful of students in the first year while the university gauges demand.
Omar Shaikh of the Islamic Finance Council said: “This is a wonderful opportunity for Scottish students to study Islamic finance, in Scotland.
“Education is extremely important if we are to realise the ambition to make Scotland and UK a global gateway for Islamic finance.”
Legal firm Tods Murray, which created the first Islamic mortgage in Scotland, organised today’s conference. Partner Graham Burnside said: “The role of Islamic finance and ethical-based financial systems in today’s economy has not been fully explored, and the launch of Dundee University’s course is an important step to ensure that Scotland does not miss out on the potential it offers.”
The Islamic and Ethical Finance Conference, takes place at the Tods Murray headquarters in Edinburgh Quay, and will explore the various faces of ethical finance and Scotland’s heritage in faith-based finance.
Speakers include specialists from the Islamic finance industry and representatives from the Church of Scotland, the Co-Op Bank and the Scottish Widows Investment Partnership.
Professor Christine Helliar, dean of the school of accounting and finance at Dundee University, said of the new course: “Graduates will be able to bridge the gap between accounting and financial knowledge and how it relates to Islamic law. The programme will include an introductory element to the main issues, coverage of the most popular products and how they relate to Sharia law, and how conventional banks compare with the practices of Islamic banks.”
DIVINE PROFITS
UNDER Islamic teaching usury is not allowed therefore borrowing money must be done under special arrangements.
For example if you wanted a mortgage to buy a property, the bank would buy the house and then sell it back to you but charge you profit.
In other words the deal would be based on profit sharing by both parties rather than interest payments.
This is because profit is allowed under Sharia law while charging interest on debt is considered immoral.
Islam also precludes banking which invests in businesses which go against the teachings of the religion.
So for example, it would be un-Islamic to invest in the arms trade or pornography.
But it would also not be seen as ethical to gain profit out of firms that are involved with pork products or alcohol which are also barred by the religion.
A SCOTTISH university is to offer the UK’s first postgraduate course in Islamic finance.
Dundee University will unveil its MSc in Islamic accounting and finance at a conference on ethical finance in Edinburgh today. The course has been created to meet increased demand from the banking sector.
Dr Rania Kamla, a lecturer in theDr Rania Kamla, a lecturer in the accountancy and finance department at Dundee who will lead the new course, said high street banks were increasingly catering for Muslims and needed knowledgeable staff.
She said Islamic banking should not invest in areas in conflict with the religion’s teachings such as pork products, alcohol, the arms trade, or pornography.
“But it is also about the deeper impact, so it would also encourage investment in communities and try to reach out to disadvantaged groups, “she added.
There is only one dedicated bank that adheres to the teachings of Sharia law, the Islamic Bank of Britain.
Dr Kamla said: “It was originally based in London and Birmingham, but has now expanded to Scotland. Up to 20 financial institutions in the UK now provide Islamic products, including HSBC. It is not allowed in Islam to charge interest, therefore they promote interest-free banking.
“Instead, they depend on profit and loss sharing, so you both share in the risk.”
The MSc course, which begins in September, is expected to take a handful of students in the first year while the university gauges demand.
Omar Shaikh of the Islamic Finance Council said: “This is a wonderful opportunity for Scottish students to study Islamic finance, in Scotland.
“Education is extremely important if we are to realise the ambition to make Scotland and UK a global gateway for Islamic finance.”
Legal firm Tods Murray, which created the first Islamic mortgage in Scotland, organised today’s conference. Partner Graham Burnside said: “The role of Islamic finance and ethical-based financial systems in today’s economy has not been fully explored, and the launch of Dundee University’s course is an important step to ensure that Scotland does not miss out on the potential it offers.”
The Islamic and Ethical Finance Conference, takes place at the Tods Murray headquarters in Edinburgh Quay, and will explore the various faces of ethical finance and Scotland’s heritage in faith-based finance.
Speakers include specialists from the Islamic finance industry and representatives from the Church of Scotland, the Co-Op Bank and the Scottish Widows Investment Partnership.
Professor Christine Helliar, dean of the school of accounting and finance at Dundee University, said of the new course: “Graduates will be able to bridge the gap between accounting and financial knowledge and how it relates to Islamic law. The programme will include an introductory element to the main issues, coverage of the most popular products and how they relate to Sharia law, and how conventional banks compare with the practices of Islamic banks.”
DIVINE PROFITS
UNDER Islamic teaching usury is not allowed therefore borrowing money must be done under special arrangements.
For example if you wanted a mortgage to buy a property, the bank would buy the house and then sell it back to you but charge you profit.
In other words the deal would be based on profit sharing by both parties rather than interest payments.
This is because profit is allowed under Sharia law while charging interest on debt is considered immoral.
Islam also precludes banking which invests in businesses which go against the teachings of the religion.
So for example, it would be un-Islamic to invest in the arms trade or pornography.
But it would also not be seen as ethical to gain profit out of firms that are involved with pork products or alcohol which are also barred by the religion.
Should financial reporting for Islamic finance be different?
June 29, 2010
a6fa3e5b3359be4eSYARIAH-BASED financial transactions, more commonly known as Islamic finance, have grown in strength and are being accepted beyond their traditional Muslim market. The originally niche solutions to cater for Muslims who wish to participate only in financial transactions which comply with syariah principles are now being offered by traditional financial institutions as far as Europe.
There is no doubt that Islamic finance is growing, moved by promoters in a number of epicentres, Malaysia included. The establishment of the Islamic Financial Services Board, which issues global prudential standards and guiding principles for the Islamic finance industry which includes banking, capital market and insurance sectors, demonstrates the maturity of the industry.
As Islamic finance products become more globalised, the issue whether they should be reported using conventional accounting standards or using a specialised “syariah-compliant” accounting standards becomes something that needs quick resolution.
In 1991 the Accounting and Auditing Organisation for Islamic Financial Institutions or AAOIFI was established to develop accounting and auditing standards for this sector. The thinking behind this was that due to the difference in concepts between Islamic finance and conventional finance, financial transactions based on syariah need to be accounted in such a way to reflect the principles, in harmony with traditional accounting standards. Since AAOIFI was established before convergence became the main stream mantra in accounting standards setting, such an approach was considered appropriate by market participants.
With the establishment of the International Accounting Standards Board (IASB) in 2001 carrying the mission of developing a single high-quality standard for the world, there seems to be some issues pertaining to financial reporting for Islamic finance.
Given that convergence in accounting standards is gaining momentum and the world is looking forward towards having the International Financial Reporting Standards (IFRS) as the ultimate set of standards, should the standards developed by AAOIFI be abandoned and should IFRS be adopted wholesale by institutions offering Islamic finance products for the sake of convergence?
Before contemplating the answer to this question, let us consider some differences between the principles of the financing models.
Essentially, Islam prohibits interests on loan and speculative trading.
The parties in syariah-based financial transactions are supposed to take risks and share profit or loss in transactions backed by productive assets. Due to this, Islamic finance products create different relationship structures between the provider of funds and the user of funds compared to lender and borrower relationship in conventional financing.
All Islamic financial products must go through a validation process by syariah advisers of the institutions intending to issue the products. This is then translated into legal agreements between financial institutions, customers and other related parties, structured based on the types of financing.
Since IFRS is supposed to be free of any ideology (except for the belief that market is always perfect), transactions including Islamic finance would be reported based on the contracts. Additionally, the principle of substance over form has always been applied in conventional accounting. AAOIFI accounting standards provide accounting treatments based on the financial products and additional disclosures deemed necessary in line with Islamic principles. This is perhaps where the risks of divergence between IFRS and AAOIFI standards could appear.
It is quite interesting that IASB and the Financial Accounting Standards Board of the United States (FASB) are in the process of developing a common conceptual framework for financial reporting. This process is ongoing.
If the proponents of Islamic finance sincerely believe Islamic finance should be in the mainstream rather than remaining as a niche sector, the opportunity of being seriously involved in the development of the financial reporting framework should be taken seriously.
Since AAOIFI has done a lot of good work in the area of accounting for Islamic finance, it could engage IASB and argue for Islamic finance to be accommodated in the newly minted framework. The IFSB working model with the Basel Committee on Banking Supervision could be considered by AAOIFI.
What could be the options for the accounting profession and other players in Islamic finance in Malaysia?
Given the competitive environment, Malaysia has to start its own initiative in promoting and positioning Islamic finance into the mainstream of global financial reporting framework.
We have well-established institutions which can be leveraged upon to enhance the understanding and knowledge on financial reporting for syariah-based financial transactions. The International Centre for Education in Islamic Finance (INCEIF) and its sister organisation, the International Syariah Research Academy for Islamic Finance (ISRA), together with universities in Malaysia with Islamic finance interests could be the knowledge-base that could be used by the accounting profession for this purpose.
The Malaysian Accounting Standards Board (MASB) could continue to be the link to IASB while regulators such as Bank Negara Malaysia and the Securities Commission would continue to provide the regulator perspectives on accounting for Islamic finance transactions.
Initiatives similar to the Financial Reporting Standards Implementation Committee (FRSIC) initiated by the Malaysian Institute of Accountants (MIA) can also be considered in moving this forward. This FRSIC-like committee could anchor the work using the IFRS platform and leverage on the resources and input from the institutions mentioned above in determining the way forward and providing input to IASB.
It would also be natural for accounting firms and professional accounting bodies to support such an initiative.
Written by Nik Mohd Hasyudeen Yusoff
a6fa3e5b3359be4eSYARIAH-BASED financial transactions, more commonly known as Islamic finance, have grown in strength and are being accepted beyond their traditional Muslim market. The originally niche solutions to cater for Muslims who wish to participate only in financial transactions which comply with syariah principles are now being offered by traditional financial institutions as far as Europe.
There is no doubt that Islamic finance is growing, moved by promoters in a number of epicentres, Malaysia included. The establishment of the Islamic Financial Services Board, which issues global prudential standards and guiding principles for the Islamic finance industry which includes banking, capital market and insurance sectors, demonstrates the maturity of the industry.
As Islamic finance products become more globalised, the issue whether they should be reported using conventional accounting standards or using a specialised “syariah-compliant” accounting standards becomes something that needs quick resolution.
In 1991 the Accounting and Auditing Organisation for Islamic Financial Institutions or AAOIFI was established to develop accounting and auditing standards for this sector. The thinking behind this was that due to the difference in concepts between Islamic finance and conventional finance, financial transactions based on syariah need to be accounted in such a way to reflect the principles, in harmony with traditional accounting standards. Since AAOIFI was established before convergence became the main stream mantra in accounting standards setting, such an approach was considered appropriate by market participants.
With the establishment of the International Accounting Standards Board (IASB) in 2001 carrying the mission of developing a single high-quality standard for the world, there seems to be some issues pertaining to financial reporting for Islamic finance.
Given that convergence in accounting standards is gaining momentum and the world is looking forward towards having the International Financial Reporting Standards (IFRS) as the ultimate set of standards, should the standards developed by AAOIFI be abandoned and should IFRS be adopted wholesale by institutions offering Islamic finance products for the sake of convergence?
Before contemplating the answer to this question, let us consider some differences between the principles of the financing models.
Essentially, Islam prohibits interests on loan and speculative trading.
The parties in syariah-based financial transactions are supposed to take risks and share profit or loss in transactions backed by productive assets. Due to this, Islamic finance products create different relationship structures between the provider of funds and the user of funds compared to lender and borrower relationship in conventional financing.
All Islamic financial products must go through a validation process by syariah advisers of the institutions intending to issue the products. This is then translated into legal agreements between financial institutions, customers and other related parties, structured based on the types of financing.
Since IFRS is supposed to be free of any ideology (except for the belief that market is always perfect), transactions including Islamic finance would be reported based on the contracts. Additionally, the principle of substance over form has always been applied in conventional accounting. AAOIFI accounting standards provide accounting treatments based on the financial products and additional disclosures deemed necessary in line with Islamic principles. This is perhaps where the risks of divergence between IFRS and AAOIFI standards could appear.
It is quite interesting that IASB and the Financial Accounting Standards Board of the United States (FASB) are in the process of developing a common conceptual framework for financial reporting. This process is ongoing.
If the proponents of Islamic finance sincerely believe Islamic finance should be in the mainstream rather than remaining as a niche sector, the opportunity of being seriously involved in the development of the financial reporting framework should be taken seriously.
Since AAOIFI has done a lot of good work in the area of accounting for Islamic finance, it could engage IASB and argue for Islamic finance to be accommodated in the newly minted framework. The IFSB working model with the Basel Committee on Banking Supervision could be considered by AAOIFI.
What could be the options for the accounting profession and other players in Islamic finance in Malaysia?
Given the competitive environment, Malaysia has to start its own initiative in promoting and positioning Islamic finance into the mainstream of global financial reporting framework.
We have well-established institutions which can be leveraged upon to enhance the understanding and knowledge on financial reporting for syariah-based financial transactions. The International Centre for Education in Islamic Finance (INCEIF) and its sister organisation, the International Syariah Research Academy for Islamic Finance (ISRA), together with universities in Malaysia with Islamic finance interests could be the knowledge-base that could be used by the accounting profession for this purpose.
The Malaysian Accounting Standards Board (MASB) could continue to be the link to IASB while regulators such as Bank Negara Malaysia and the Securities Commission would continue to provide the regulator perspectives on accounting for Islamic finance transactions.
Initiatives similar to the Financial Reporting Standards Implementation Committee (FRSIC) initiated by the Malaysian Institute of Accountants (MIA) can also be considered in moving this forward. This FRSIC-like committee could anchor the work using the IFRS platform and leverage on the resources and input from the institutions mentioned above in determining the way forward and providing input to IASB.
It would also be natural for accounting firms and professional accounting bodies to support such an initiative.
Written by Nik Mohd Hasyudeen Yusoff
ADIB named “Best Islamic Bank in the Middle East – 2010″
July 18, 2010
Abu Dhabi Islamic Bank, a top-tier Islamic financial services group, announced today that it has been named “The Best Islamic Bank” in the Middle East at the Banker Middle East Industry Awards 2010.
This tribute underscores ADIB’s leadership position in the growing Islamic Finance Sector. ADIB was chosen among fierce competition from the biggest financial institutions at a gala ceremony held in Dubai in the presence of 300 senior and well known members of the regional banking industry. The award was presented to Tirad Mahmoud, CEO of ADIB.
Commenting on the award, Tirad Mahmoud, CEO, Abu Dhabi Islamic Bank said: “This is recognition of the significant developments that ADIB has brought about in all facets of its product and service delivery and its customer focus during the last two years. We have already been recognised as last year’s most improved bank in customer service by a regional benchmark study. The award today encourages us to work harder towards being a top-tier global Islamic financial services group and to provide Islamic financial solutions for the global community.
Earlier this year, ADIB also won the HRD award from Emirates Institute Of Banking ‘&’ Financial Studies and the Best Savings Account award at the Banker Middle East Product Awards 2010.
The annual Banker Middle East Industry Awards are designed to recognise banks and financial institutions that are pioneers in finance and have witnessed growth through these turbulent times. The award showcases institutions that are truly innovative and pioneering in their respective areas of finance and are helping to shape the future of finance in the region.
Abu Dhabi Islamic Bank, a top-tier Islamic financial services group, announced today that it has been named “The Best Islamic Bank” in the Middle East at the Banker Middle East Industry Awards 2010.
This tribute underscores ADIB’s leadership position in the growing Islamic Finance Sector. ADIB was chosen among fierce competition from the biggest financial institutions at a gala ceremony held in Dubai in the presence of 300 senior and well known members of the regional banking industry. The award was presented to Tirad Mahmoud, CEO of ADIB.
Commenting on the award, Tirad Mahmoud, CEO, Abu Dhabi Islamic Bank said: “This is recognition of the significant developments that ADIB has brought about in all facets of its product and service delivery and its customer focus during the last two years. We have already been recognised as last year’s most improved bank in customer service by a regional benchmark study. The award today encourages us to work harder towards being a top-tier global Islamic financial services group and to provide Islamic financial solutions for the global community.
Earlier this year, ADIB also won the HRD award from Emirates Institute Of Banking ‘&’ Financial Studies and the Best Savings Account award at the Banker Middle East Product Awards 2010.
The annual Banker Middle East Industry Awards are designed to recognise banks and financial institutions that are pioneers in finance and have witnessed growth through these turbulent times. The award showcases institutions that are truly innovative and pioneering in their respective areas of finance and are helping to shape the future of finance in the region.
Courting Islamic finance : Many hurdles remain
July 20, 2010
By Megan Harman
The Canadian financial services industry is still a long way from meeting the specific demands of Canada’s growing Muslim population. But some Canadian firms are taking steps to address this potentially lucrative market.
Although previous forays into Islamic investment products have failed, new efforts to develop other financial services for the Muslim population are showing promise.
Islam-based financial products are consistent with Shariah principles, which govern all aspects of a Muslim person’s life. From a financial perspective, Shariah prohibits numerous conventional practices, such as the payment and acceptance of interest fees, speculative transactions, highly leveraged investing and investing in sectors such as alcohol, gambling and financial services.
Financial services that satisfy these requirements already represent a US$1-trillion industry worldwide, with Moody’s Investors Service Inc. recently estimating that it could eventually reach US$5 trillion.
“We have a growing Muslim community in Canada that is prominent and increasingly well heeled, and seems to be interested in adopting Islamic finance,” says Jeffrey Graham, a partner with the Toronto office of law firm Borden Ladner Gervais LLP, who heads the firm’s Islamic finance focus group.
Indeed, the one million-strong Muslim population in Canada has roughly doubled in size over the past decade — and financial services firms are eager to tap into that market. A number of firms turned up at the inaugural conference of the Usury-Free Association of North America, an organization committed to promoting Islamic finance.
Centennial College in Toronto launched a certification course on Islamic finance this spring. The first session of the course was filled to capacity with financial services industry employees.
And representatives from several major financial services institutions — including three of the Big Five banks — are participating in an Islamic finance working group of the Toronto Financial Services Alliance, which is working to position Toronto as a North American hub for Islamic finance, among its other goals.
“It is an untapped market that has huge potential,” says Omar Kalair, member of the working group and president of UM Finan-cial, a Toronto-based firm specializing in Islamic finance.
Despite the widespread interest, however, efforts to promote Islamic finance face a variety of challenges, including regulatory and taxation uncertainties and a general lack of knowledge of the issues.
Indeed, managed Shariah-compliant products in Canada have a dismal track record so far. In April, one of only two managers of Shariah-compliant equity mutual funds in Canada announced that it was terminating the only remaining fund in its lineup — frontierAlt Oasis Canada Fund. That fund, launched in early 2006, had assets under management of less than $900,000 at the end of 2009.
In 2004, Toronto-based Royal Bank of Canada launched a Shariah-compliant equity-linked note that was later terminated due to a lack of market interest. And Toronto-based Dynamic Funds Ltd. terminated its Shariah-compliant Dynamic SAMI Fund in 2006.
These failures have raised questions about whether enough demand exists to sustain a larger Islamic banking sector in Canada. But Kalair insists there is plenty of demand for Islamic banking products in Canada. In a survey of Muslim Canadians commissioned by UM Financial last year, about half of respondents said they would embrace Shariah-compliant financial products.
UM Financial plans to launch Canada’s first Shariah-compliant exchange-traded fund this year, in partnership with Jovian Capital Corp.
Glenn Moore, vice president of Richmond Hill, Ont.-based Global Prosperata Funds Inc. , which manages Global Iman Fund — the only remaining Shariah-compliant equity mutual fund in Canada — says there is strong potential for these types of products.
Global Iman Fund, which was launched in March 2009, is an actively managed portfolio of securities listed on the Dow Jones Islamic market index. The fund has accumulated more than $3.4 million in AUM and continues to attract interest from dealers and advisors, according to Moore: “We have new dealers coming on board all the time.”
Demand for Shariah-compliant products is not limited to the Muslim community. Global Iman Fund has attracted interest from non-Muslim investors seeking socially responsible investments or less volatile holdings.
Other financial services firms are closely monitoring the market, too. Although RBC’s last attempt to enter the sector was unsuccessful, it continues to watch for opportunities, says Camon Mak, RBC’s senior manager of multicultural markets: “Islamic banking is still an area that is of great interest to RBC. And it is a market that we intend to explore in the coming year.”
Despite the hurdles, supporters say Islamic financing products continue to show strong potential, as very few Shariah-compliant loans and mortgages are available in the Canadian marketplace. Kalair estimates that less than 1% of the Muslim population has access to this type of financing, which must be structured in a way that does not involve the payment of interest, which is prohibited under Shariah.
For instance, Shariah-compliant mortgage products are often structured as equity partnerships, whereby a financial services institution purchases a property and then resells it to the consumer at a fixed profit, which the consumer pays in instalments.
UM Financial is one of the few Canadian financial services institutions to offer Islamic financing products. It has arranged Shariah-compliant mortgages for 500 households under a funding facility of $120 million from Vancouver-based Central 1 Credit Union. Since that funding has run out, UM Financial has generated a waiting list of another 6,000 households seeking this type of mortgage.
Regulatory issues have been another obstacle. A recent report by the alliance’s Islamic finance working group has identified a number of concerns regarding the regulation and taxation of Shariah-compliant products and services. For example, the financial structures designed to avoid mortgage interest often include two sales — the first to the lender and the second to the buyer at a higher price — so what is essentially one transaction generates two sets of sales taxes.
“Sharia-compliant products generally do not fit within the definitions that currently govern conventional financial products, despite their similar economic features,” a report from the alliance says. “Obtaining clarification on the income and indirect tax treatment of Islamic finance products will be important to the development of Islamic finance in Canada.”
Progress in this area was made in January, when a study commissioned by Canada Mortgage and Housing Corp. concluded that Islamic financing products can be accommodated under Canadian legal and accounting rules. But legal experts say that more clarification from the regulators is necessary.
“I don’t think there’s any question that the Canadian system needs to be tweaked to truly accommodate Islamic finance,” says Graham. “There certainly are obstacles, barriers and limitations.” IE
By Megan Harman
The Canadian financial services industry is still a long way from meeting the specific demands of Canada’s growing Muslim population. But some Canadian firms are taking steps to address this potentially lucrative market.
Although previous forays into Islamic investment products have failed, new efforts to develop other financial services for the Muslim population are showing promise.
Islam-based financial products are consistent with Shariah principles, which govern all aspects of a Muslim person’s life. From a financial perspective, Shariah prohibits numerous conventional practices, such as the payment and acceptance of interest fees, speculative transactions, highly leveraged investing and investing in sectors such as alcohol, gambling and financial services.
Financial services that satisfy these requirements already represent a US$1-trillion industry worldwide, with Moody’s Investors Service Inc. recently estimating that it could eventually reach US$5 trillion.
“We have a growing Muslim community in Canada that is prominent and increasingly well heeled, and seems to be interested in adopting Islamic finance,” says Jeffrey Graham, a partner with the Toronto office of law firm Borden Ladner Gervais LLP, who heads the firm’s Islamic finance focus group.
Indeed, the one million-strong Muslim population in Canada has roughly doubled in size over the past decade — and financial services firms are eager to tap into that market. A number of firms turned up at the inaugural conference of the Usury-Free Association of North America, an organization committed to promoting Islamic finance.
Centennial College in Toronto launched a certification course on Islamic finance this spring. The first session of the course was filled to capacity with financial services industry employees.
And representatives from several major financial services institutions — including three of the Big Five banks — are participating in an Islamic finance working group of the Toronto Financial Services Alliance, which is working to position Toronto as a North American hub for Islamic finance, among its other goals.
“It is an untapped market that has huge potential,” says Omar Kalair, member of the working group and president of UM Finan-cial, a Toronto-based firm specializing in Islamic finance.
Despite the widespread interest, however, efforts to promote Islamic finance face a variety of challenges, including regulatory and taxation uncertainties and a general lack of knowledge of the issues.
Indeed, managed Shariah-compliant products in Canada have a dismal track record so far. In April, one of only two managers of Shariah-compliant equity mutual funds in Canada announced that it was terminating the only remaining fund in its lineup — frontierAlt Oasis Canada Fund. That fund, launched in early 2006, had assets under management of less than $900,000 at the end of 2009.
In 2004, Toronto-based Royal Bank of Canada launched a Shariah-compliant equity-linked note that was later terminated due to a lack of market interest. And Toronto-based Dynamic Funds Ltd. terminated its Shariah-compliant Dynamic SAMI Fund in 2006.
These failures have raised questions about whether enough demand exists to sustain a larger Islamic banking sector in Canada. But Kalair insists there is plenty of demand for Islamic banking products in Canada. In a survey of Muslim Canadians commissioned by UM Financial last year, about half of respondents said they would embrace Shariah-compliant financial products.
UM Financial plans to launch Canada’s first Shariah-compliant exchange-traded fund this year, in partnership with Jovian Capital Corp.
Glenn Moore, vice president of Richmond Hill, Ont.-based Global Prosperata Funds Inc. , which manages Global Iman Fund — the only remaining Shariah-compliant equity mutual fund in Canada — says there is strong potential for these types of products.
Global Iman Fund, which was launched in March 2009, is an actively managed portfolio of securities listed on the Dow Jones Islamic market index. The fund has accumulated more than $3.4 million in AUM and continues to attract interest from dealers and advisors, according to Moore: “We have new dealers coming on board all the time.”
Demand for Shariah-compliant products is not limited to the Muslim community. Global Iman Fund has attracted interest from non-Muslim investors seeking socially responsible investments or less volatile holdings.
Other financial services firms are closely monitoring the market, too. Although RBC’s last attempt to enter the sector was unsuccessful, it continues to watch for opportunities, says Camon Mak, RBC’s senior manager of multicultural markets: “Islamic banking is still an area that is of great interest to RBC. And it is a market that we intend to explore in the coming year.”
Despite the hurdles, supporters say Islamic financing products continue to show strong potential, as very few Shariah-compliant loans and mortgages are available in the Canadian marketplace. Kalair estimates that less than 1% of the Muslim population has access to this type of financing, which must be structured in a way that does not involve the payment of interest, which is prohibited under Shariah.
For instance, Shariah-compliant mortgage products are often structured as equity partnerships, whereby a financial services institution purchases a property and then resells it to the consumer at a fixed profit, which the consumer pays in instalments.
UM Financial is one of the few Canadian financial services institutions to offer Islamic financing products. It has arranged Shariah-compliant mortgages for 500 households under a funding facility of $120 million from Vancouver-based Central 1 Credit Union. Since that funding has run out, UM Financial has generated a waiting list of another 6,000 households seeking this type of mortgage.
Regulatory issues have been another obstacle. A recent report by the alliance’s Islamic finance working group has identified a number of concerns regarding the regulation and taxation of Shariah-compliant products and services. For example, the financial structures designed to avoid mortgage interest often include two sales — the first to the lender and the second to the buyer at a higher price — so what is essentially one transaction generates two sets of sales taxes.
“Sharia-compliant products generally do not fit within the definitions that currently govern conventional financial products, despite their similar economic features,” a report from the alliance says. “Obtaining clarification on the income and indirect tax treatment of Islamic finance products will be important to the development of Islamic finance in Canada.”
Progress in this area was made in January, when a study commissioned by Canada Mortgage and Housing Corp. concluded that Islamic financing products can be accommodated under Canadian legal and accounting rules. But legal experts say that more clarification from the regulators is necessary.
“I don’t think there’s any question that the Canadian system needs to be tweaked to truly accommodate Islamic finance,” says Graham. “There certainly are obstacles, barriers and limitations.” IE
Justice Krishna Iyer backs Islamic banking in India
July 27, 2010
A major campaign to introduce Islamic banking and finance into India was kicked off in the Kerala city of Kochi on Friday with Justice Krishna Iyer taking the lead. “I welcome Islamic finance in India,” said Iyer, a former Supreme Court judge.
“Islamic finance has proven successful in poverty alleviation and promoting sustainable growth in many countries, including the United States, and it is very relevant in our country where 20 million people are starving,” Iyer said.
The justice made this statement while proclaiming the plan to hold an international seminar in Kochi on Oct. 4-6 on the prospects of introducing Islamic finance in India. He said Islamic finance, which is based on humane principles, was good for all of humanity.
“Those who support humanism should welcome Islamic banking and finance in India,” Iyer told the gathering, which was attended by a large number of prominent personalities including TPM Ibrahim Khan, additional solicitor general of India.
The seminar is organized by the Islamic University in Shanthapuram in cooperation with the Jeddah-based Islamic Research & Training Institute (IRTI) of Islamic Development Bank. International speakers include Bambang Brodjonegoro (Indonesia), Omar Chapra (Saudi Arabia), Mohammed Obaidullah (IRTI), Monzir Kahf (USA), Nazim Ali (Harvard University), Ali Quradagi (Qatar), Hussain Hamid Hassan (UAE) and Nizam Yakuby (Bahrain).
Iyer criticized those who oppose Islamic finance on religious grounds. “The interest-free Islamic finance is a better option for countries like India. People may doubt whether this system can survive without taking interest. But I can tell you that a system that supports social development will never fail,” he said.
T. Arifali, chairman of the Islamic University’s council, delivered the keynote speech and said Islamic finance would contribute to further strengthening the Indian economy.
“India is a pluralistic society. There is nothing wrong in introducing Islamic finance in the country if it is good for our country and its people,” he said. “If we can accept cultural pluralism, why don’t we try economic pluralism?” he said, adding that all religions have prohibited usury.
Arifali said he believed the introduction of Islamic banking would encourage millions of Muslims in the country to pump their funds into the economy. A substantial number of India’s nearly 200 million Muslims do not like to deal with interest-based banking because of religious objections.
Brodjonegoro, director general of IRTI, pledged his organization’s support to the seminar to spread awareness about Islamic banking and finance in India. “I am quite happy to learn that India is actively considering introduction of the interest-free banking system,” he said in a statement on the occasion.
The three-day seminar is titled “Islamic Finance in India: Products, Institutions, and Regulations.” It will be attended by representatives from regulatory bodies, professional organizations, business firms and foreign and Indian financial institutions as well as university students and social activists.
“The seminar will discuss regulatory and Shariah issues in implementing Islamic finance in India,” said H. Abdur Raqeeb, chairman of the organizing committee, who has been spearheading the campaign to introduce Islamic banking in the country.
Papers to be presented at the seminar will deal with various products and structures of Islamic banking and finance that fit to India. Matters relating to commercial banking, insurance, investment funds, microfinance, Zakat and endowments will also be discussed.
The seminar comes at a time when Islamic finance has become a hot topic for discussion across the world, especially since the global economic crisis. Leading economists and financial experts have recognized Islamic finance as a sustainable alternative to the interest-based conventional financial system.
Many non-Muslim countries such as the UK, US, Singapore, France and Australia are competing with one another to become Islamic finance hubs. Raqeeb urged India to join the bandwagon to benefit from the development-oriented system.
Abdussalam Ahmed, director of the Islamic University and general convener of the seminar, thanked the IDB and IRTI for their support to the event. He described IDB as the most successful institution under the Organization of the Islamic Conference. IDB has financed several educational and health projects in India.
Justice Iyer is the seminar’s chief patron while businessmen Gulfar Mohammed Ali and P.V. Abdul Wahab are patrons. The organizing committee includes Justice Abdul Gafoor, M.D. Nalapat, Justice P.K. Shamsudheen, Mohammed Babu Sait and T. Balakrishnan.
A major campaign to introduce Islamic banking and finance into India was kicked off in the Kerala city of Kochi on Friday with Justice Krishna Iyer taking the lead. “I welcome Islamic finance in India,” said Iyer, a former Supreme Court judge.
“Islamic finance has proven successful in poverty alleviation and promoting sustainable growth in many countries, including the United States, and it is very relevant in our country where 20 million people are starving,” Iyer said.
The justice made this statement while proclaiming the plan to hold an international seminar in Kochi on Oct. 4-6 on the prospects of introducing Islamic finance in India. He said Islamic finance, which is based on humane principles, was good for all of humanity.
“Those who support humanism should welcome Islamic banking and finance in India,” Iyer told the gathering, which was attended by a large number of prominent personalities including TPM Ibrahim Khan, additional solicitor general of India.
The seminar is organized by the Islamic University in Shanthapuram in cooperation with the Jeddah-based Islamic Research & Training Institute (IRTI) of Islamic Development Bank. International speakers include Bambang Brodjonegoro (Indonesia), Omar Chapra (Saudi Arabia), Mohammed Obaidullah (IRTI), Monzir Kahf (USA), Nazim Ali (Harvard University), Ali Quradagi (Qatar), Hussain Hamid Hassan (UAE) and Nizam Yakuby (Bahrain).
Iyer criticized those who oppose Islamic finance on religious grounds. “The interest-free Islamic finance is a better option for countries like India. People may doubt whether this system can survive without taking interest. But I can tell you that a system that supports social development will never fail,” he said.
T. Arifali, chairman of the Islamic University’s council, delivered the keynote speech and said Islamic finance would contribute to further strengthening the Indian economy.
“India is a pluralistic society. There is nothing wrong in introducing Islamic finance in the country if it is good for our country and its people,” he said. “If we can accept cultural pluralism, why don’t we try economic pluralism?” he said, adding that all religions have prohibited usury.
Arifali said he believed the introduction of Islamic banking would encourage millions of Muslims in the country to pump their funds into the economy. A substantial number of India’s nearly 200 million Muslims do not like to deal with interest-based banking because of religious objections.
Brodjonegoro, director general of IRTI, pledged his organization’s support to the seminar to spread awareness about Islamic banking and finance in India. “I am quite happy to learn that India is actively considering introduction of the interest-free banking system,” he said in a statement on the occasion.
The three-day seminar is titled “Islamic Finance in India: Products, Institutions, and Regulations.” It will be attended by representatives from regulatory bodies, professional organizations, business firms and foreign and Indian financial institutions as well as university students and social activists.
“The seminar will discuss regulatory and Shariah issues in implementing Islamic finance in India,” said H. Abdur Raqeeb, chairman of the organizing committee, who has been spearheading the campaign to introduce Islamic banking in the country.
Papers to be presented at the seminar will deal with various products and structures of Islamic banking and finance that fit to India. Matters relating to commercial banking, insurance, investment funds, microfinance, Zakat and endowments will also be discussed.
The seminar comes at a time when Islamic finance has become a hot topic for discussion across the world, especially since the global economic crisis. Leading economists and financial experts have recognized Islamic finance as a sustainable alternative to the interest-based conventional financial system.
Many non-Muslim countries such as the UK, US, Singapore, France and Australia are competing with one another to become Islamic finance hubs. Raqeeb urged India to join the bandwagon to benefit from the development-oriented system.
Abdussalam Ahmed, director of the Islamic University and general convener of the seminar, thanked the IDB and IRTI for their support to the event. He described IDB as the most successful institution under the Organization of the Islamic Conference. IDB has financed several educational and health projects in India.
Justice Iyer is the seminar’s chief patron while businessmen Gulfar Mohammed Ali and P.V. Abdul Wahab are patrons. The organizing committee includes Justice Abdul Gafoor, M.D. Nalapat, Justice P.K. Shamsudheen, Mohammed Babu Sait and T. Balakrishnan.
Japanese institutions go for Islamic financing
July 28, 2010
After a hiatus of over three years largely due to inertia from regulators and head offices, Japanese institutions are finally going to the market to raise millions of dollars in Islamic financing. The good news is for Malaysia because much of this activity is centered in or out of Kuala Lumpur.
Over the last two weeks Nomura Holdings, Inc. appointed Kuwait Finance House (Malaysia) as the mandated lead arranger for its debut $100 million Sukuk Al-Ijara. The two-year issuance will be the first US dollar denominated issue by a Japanese corporation out of Malaysia.
Similarly Sumitomo Corporation, according to Malaysian banking sources, plans to go one step further by issuing the first yen-denominated Shariah-compliant paper in Japan. The paper will not be a classical Sukuk because Japanese regulations and tax laws do not facilitate the issuance of Sukuk currently, but may mirror an asset-backed Islamic bond type structure.
These developments follow the successful closure of Nomura’s $70 million syndicated commodity murabaha facility, which was lead, arranged by ABC Islamic Bank, the Islamic finance subsidiary of Arab Banking Corporation. Due to increased demand for both short-term investments and for investment grade Japanese risk, the issuance was increased from the original target of $50 million.
The Nomura issuance however is bound to set the pace for increased Japanese involvement in the Islamic finance industry. Not that Japanese institutions have been absent from the sector. Several Japanese sogo soshos have in the past accessed the odd commodity Murabaha structured primarily through London banks. Nomura itself was the fund manager for Al-Tawfeek Investment Company’s Islamic Japanese Equity Fund. Daiwa Securities two years ago launched an Islamic ETF (exchange-traded fund) which is listed on the Singapore Stock Exchange and which tracks the FTSE Asia Shariah 100 Index. In the Takaful sector, Tokyo Marine & Fire Insurance Company has a thriving joint venture in Malaysia with Hong Leong Islamic Bank and has a regional company in Dubai serving the GCC markets.
Japanese government agencies such as the Institute of Developing Economies have for the last two decades been studying Islamic finance and collating research on the industry. More recently the Islamic Financial Services Board (IFSB) organized the first Islamic banking seminars in Tokyo. Since then several have been held in Japan.
The Japan Bank for International Cooperation (JBIC) seriously raised expectations in 2007 when it announced that it plans to issue a debut Sukuk in Malaysian ringgit to fund its activities in Malaysia and the ASEAN region. JBIC appointed lead arrangers CIMB and Citigroup with the hope of attracting investors from both Asia and the GCC markets. Unfortunately, the proposed issuance was dragged out due to differences between the two lead arrangers over the appropriate Sukuk structure. Then the credit crunch and financial crisis set in which put paid to any JIBIC issuance.
However, privately, JBIC managers keen on tapping the Islamic finance market have been frustrated by the lack of Japanese government involvement and facilitation of Islamic finance in Japan and the lack of enthusiasm shown by the powers that be at JBIC itself. Because of Japan’s complex system of government, it seems that only the ruling prime minister can initiate changes in primary legislation to facilitate say the introduction of Sukuk and other Islamic finance products.
In the meantime, the Japanese Ministry of Finance in cooperation with the Bank of Japan, the central bank, did amend last year some of the provisions relating to the foreign subsidiaries of Japanese financial institutions, which are now allowed to conduct certain activities in the Islamic finance sector including the issuance of Sukuk in local currencies and the launching of investment funds.
With the global sukuk market now getting a second wind in the wake of the financial crisis and with Asia leading the way, does it mean that JBIC will also change its strategy, especially after the Nomura sukuk issuance and the planned one by Sumitomo?
Takumi Shibata, deputy president and chief operating officer of Nomura Holdings, could not be more to the point, stressing that “with this landmark transaction, Nomura has further diversified its funding sources and tapped the large and growing Islamic finance market for the first time. This issuance is part of Nomura’s ongoing push to diversify its funding sources to drive growth. Islamic investors and Islamic finance are a very important and rapidly growing sector globally and this transaction is highly significant for Nomura and for corporate Japan.”
The book for the issuance was opened on July 5 and closed the next day, according to Jamelah Jamaluddin, CEO, KFH (Malaysia). But Jamaluddin, a controversial doyen of the Malaysian Islamic finance sector and the first woman to head an Islamic bank in the world, RHB Islamic Bank, also threw down the gauntlet to other potential Japanese issuers: “I am pleased to inform you that this sukuk marks Nomura’s first step in diversifying its funding sources to include Islamic financial solutions. It involves financing the purchase of two aircrafts. I hope that Nomura’s sukuk will pave the way for more discerning Japanese clients, as well as other international corporations, to consider migrating or co-opting Islamic finance products in meeting their investment and financing requirements.”
The Nomura Sukuk is also listed on Bursa Malaysia, just becoming the second foreign listing on the bourse and the first sukuk listing by an Asian and a Japanese international entity. At the listing signing ceremony, Yusli Mohamed Yusoff, chief executive officer of Bursa Malaysia, explained that “Malaysia remains the world’s single most active corporate Sukuk market at present. We certainly have made great strides in the sukuk market and the listing of Nomura’s sukuk is a further demonstration of foreign players’ confidence toward Islamic securities and instruments issued out of Malaysia. The sukuk listing from Nomura will further strengthen Bursa Malaysia as a preferred Sukuk listing destination, elevating the overall position of Malaysia as an international Islamic financial hub.”
With this listing, Bursa Malaysia’s total Sukuk listings amount to $20.9 billion comprising 15 sukuk listed by 13 issuers, of which two are international issuers.
Nomura is of course elated by the investor demand to its two forays into the Islamic market this month — the sukuk and the Murabaha facility. According to Takuya Furuya, chairman of Nomura Middle East and Africa, “It reflects the strength of the Nomura brand and its reputation in the region. The issuance is part of Nomura’s strategy to diversify funding both geographically and by product and comes at a time when we have simultaneously launched a Sukuk in Malaysia. This Murabaha facility marks the first Islamic funding exercise by a Japanese corporate in the region and we hope that it will strengthen the financial ties between the Far East and the Middle East.”
The Murabaha facility has a three-year tenor and offers a profit margin of 175 basis points per annum. The facility will be used for general liquidity management purposes. Participants in the syndication included ABC Islamic Bank, Islamic Development Bank (IDB), Samba Financial Group, Sumitomo Mitsui Banking Corporation Europe Limited and Ahli United Bank.
After a hiatus of over three years largely due to inertia from regulators and head offices, Japanese institutions are finally going to the market to raise millions of dollars in Islamic financing. The good news is for Malaysia because much of this activity is centered in or out of Kuala Lumpur.
Over the last two weeks Nomura Holdings, Inc. appointed Kuwait Finance House (Malaysia) as the mandated lead arranger for its debut $100 million Sukuk Al-Ijara. The two-year issuance will be the first US dollar denominated issue by a Japanese corporation out of Malaysia.
Similarly Sumitomo Corporation, according to Malaysian banking sources, plans to go one step further by issuing the first yen-denominated Shariah-compliant paper in Japan. The paper will not be a classical Sukuk because Japanese regulations and tax laws do not facilitate the issuance of Sukuk currently, but may mirror an asset-backed Islamic bond type structure.
These developments follow the successful closure of Nomura’s $70 million syndicated commodity murabaha facility, which was lead, arranged by ABC Islamic Bank, the Islamic finance subsidiary of Arab Banking Corporation. Due to increased demand for both short-term investments and for investment grade Japanese risk, the issuance was increased from the original target of $50 million.
The Nomura issuance however is bound to set the pace for increased Japanese involvement in the Islamic finance industry. Not that Japanese institutions have been absent from the sector. Several Japanese sogo soshos have in the past accessed the odd commodity Murabaha structured primarily through London banks. Nomura itself was the fund manager for Al-Tawfeek Investment Company’s Islamic Japanese Equity Fund. Daiwa Securities two years ago launched an Islamic ETF (exchange-traded fund) which is listed on the Singapore Stock Exchange and which tracks the FTSE Asia Shariah 100 Index. In the Takaful sector, Tokyo Marine & Fire Insurance Company has a thriving joint venture in Malaysia with Hong Leong Islamic Bank and has a regional company in Dubai serving the GCC markets.
Japanese government agencies such as the Institute of Developing Economies have for the last two decades been studying Islamic finance and collating research on the industry. More recently the Islamic Financial Services Board (IFSB) organized the first Islamic banking seminars in Tokyo. Since then several have been held in Japan.
The Japan Bank for International Cooperation (JBIC) seriously raised expectations in 2007 when it announced that it plans to issue a debut Sukuk in Malaysian ringgit to fund its activities in Malaysia and the ASEAN region. JBIC appointed lead arrangers CIMB and Citigroup with the hope of attracting investors from both Asia and the GCC markets. Unfortunately, the proposed issuance was dragged out due to differences between the two lead arrangers over the appropriate Sukuk structure. Then the credit crunch and financial crisis set in which put paid to any JIBIC issuance.
However, privately, JBIC managers keen on tapping the Islamic finance market have been frustrated by the lack of Japanese government involvement and facilitation of Islamic finance in Japan and the lack of enthusiasm shown by the powers that be at JBIC itself. Because of Japan’s complex system of government, it seems that only the ruling prime minister can initiate changes in primary legislation to facilitate say the introduction of Sukuk and other Islamic finance products.
In the meantime, the Japanese Ministry of Finance in cooperation with the Bank of Japan, the central bank, did amend last year some of the provisions relating to the foreign subsidiaries of Japanese financial institutions, which are now allowed to conduct certain activities in the Islamic finance sector including the issuance of Sukuk in local currencies and the launching of investment funds.
With the global sukuk market now getting a second wind in the wake of the financial crisis and with Asia leading the way, does it mean that JBIC will also change its strategy, especially after the Nomura sukuk issuance and the planned one by Sumitomo?
Takumi Shibata, deputy president and chief operating officer of Nomura Holdings, could not be more to the point, stressing that “with this landmark transaction, Nomura has further diversified its funding sources and tapped the large and growing Islamic finance market for the first time. This issuance is part of Nomura’s ongoing push to diversify its funding sources to drive growth. Islamic investors and Islamic finance are a very important and rapidly growing sector globally and this transaction is highly significant for Nomura and for corporate Japan.”
The book for the issuance was opened on July 5 and closed the next day, according to Jamelah Jamaluddin, CEO, KFH (Malaysia). But Jamaluddin, a controversial doyen of the Malaysian Islamic finance sector and the first woman to head an Islamic bank in the world, RHB Islamic Bank, also threw down the gauntlet to other potential Japanese issuers: “I am pleased to inform you that this sukuk marks Nomura’s first step in diversifying its funding sources to include Islamic financial solutions. It involves financing the purchase of two aircrafts. I hope that Nomura’s sukuk will pave the way for more discerning Japanese clients, as well as other international corporations, to consider migrating or co-opting Islamic finance products in meeting their investment and financing requirements.”
The Nomura Sukuk is also listed on Bursa Malaysia, just becoming the second foreign listing on the bourse and the first sukuk listing by an Asian and a Japanese international entity. At the listing signing ceremony, Yusli Mohamed Yusoff, chief executive officer of Bursa Malaysia, explained that “Malaysia remains the world’s single most active corporate Sukuk market at present. We certainly have made great strides in the sukuk market and the listing of Nomura’s sukuk is a further demonstration of foreign players’ confidence toward Islamic securities and instruments issued out of Malaysia. The sukuk listing from Nomura will further strengthen Bursa Malaysia as a preferred Sukuk listing destination, elevating the overall position of Malaysia as an international Islamic financial hub.”
With this listing, Bursa Malaysia’s total Sukuk listings amount to $20.9 billion comprising 15 sukuk listed by 13 issuers, of which two are international issuers.
Nomura is of course elated by the investor demand to its two forays into the Islamic market this month — the sukuk and the Murabaha facility. According to Takuya Furuya, chairman of Nomura Middle East and Africa, “It reflects the strength of the Nomura brand and its reputation in the region. The issuance is part of Nomura’s strategy to diversify funding both geographically and by product and comes at a time when we have simultaneously launched a Sukuk in Malaysia. This Murabaha facility marks the first Islamic funding exercise by a Japanese corporate in the region and we hope that it will strengthen the financial ties between the Far East and the Middle East.”
The Murabaha facility has a three-year tenor and offers a profit margin of 175 basis points per annum. The facility will be used for general liquidity management purposes. Participants in the syndication included ABC Islamic Bank, Islamic Development Bank (IDB), Samba Financial Group, Sumitomo Mitsui Banking Corporation Europe Limited and Ahli United Bank.
Sri Lanka Amana Bank eyes Gulf money, infrastructure lending
July 29, 2010
A start-up Sri Lankan bank that has just raised 3.2 billion rupees in capital through a private placement wants to lure Middle Eastern funds and lend for infrastructure projects, an official said.
Amana Bank is part of Sri Lanka’s Amana Islamic finance group that already has insurance and merchant banking units and wants to get into commercial banking with a post-war economic boom anticipated in the island.Amana Bank Limited said it had raised 3.2 billion in capital through a private placement by selling 631.9 million 5.00 rupee shares from both foreign and local investors.
A company spokesman said the Amana group has a deposit base of seven billion rupees and a lending portfolio of three billion.
The bank, which will start operations after getting a formal banking license from the central bank, will use the Amana group’s network of 14 branches.
“Amana Bank will be the first fully-fledged (Islamic finance) commercial bank to operate on the Sharia principal,” said Riyaz Mihular, partner and head of advisory services at KPMG Ford, Rhodes, Thornton & Co, financial advisors and placement agents for the private placement.
“All other Islamic finance operations are windows of normal commercial banks or financial institutions.”
Islamic finance, where formal interest is not charged and instead lending is structured on a profit-sharing, asset-backed basis, is a growing form of alternative financing.Mihular said Amana Bank wants to attract funds from the cash-rich Middle East which is looking for investments for its surplus cash generated from oil and to fund badly needed infrastructure projects in the island.
Sri Lanka’s 30-year ethnic war ended in May 2009 resulting in an immediate economic revival with growth forecast at seven percent this year.
“Amana Bank intends going heavily into infrastructure financing,” Mihular said. “In the next few years we’ll have to rebuild and modernise our infrastructure.
“Amana Bank hopes to tap Middle East investment flows whose avenues of investment are limited; for examples hotels without liquor, no gambling, and they are not allowed to buy stock derivatives. So infrastructure lending is preferable,” he said.
“There’s lots of money sitting in the Gulf with which Sri Lanka has very good ties.”
Mihular said Islamic financing is ideally suited for infrastructure financing which generally involves a long-term gestation period with around five years before a project starts generating cash flows.
“In conventional finance you might be given a moratorium on the repayment of capital but you pay interest from day one.
“In Islamic finance, all lending is asset-backed, so you won’t find bubbles like in the West. And you don’t begin repaying until you start generating cash flows. Lending is based on profit and loss which can sometimes be more expensive than conventional lending, and linked to cash flows and profitability.”
Mihular said that in Islamic finance borrowers don’t have to pay overdue interest or penal interest on late payments.
A start-up Sri Lankan bank that has just raised 3.2 billion rupees in capital through a private placement wants to lure Middle Eastern funds and lend for infrastructure projects, an official said.
Amana Bank is part of Sri Lanka’s Amana Islamic finance group that already has insurance and merchant banking units and wants to get into commercial banking with a post-war economic boom anticipated in the island.Amana Bank Limited said it had raised 3.2 billion in capital through a private placement by selling 631.9 million 5.00 rupee shares from both foreign and local investors.
A company spokesman said the Amana group has a deposit base of seven billion rupees and a lending portfolio of three billion.
The bank, which will start operations after getting a formal banking license from the central bank, will use the Amana group’s network of 14 branches.
“Amana Bank will be the first fully-fledged (Islamic finance) commercial bank to operate on the Sharia principal,” said Riyaz Mihular, partner and head of advisory services at KPMG Ford, Rhodes, Thornton & Co, financial advisors and placement agents for the private placement.
“All other Islamic finance operations are windows of normal commercial banks or financial institutions.”
Islamic finance, where formal interest is not charged and instead lending is structured on a profit-sharing, asset-backed basis, is a growing form of alternative financing.Mihular said Amana Bank wants to attract funds from the cash-rich Middle East which is looking for investments for its surplus cash generated from oil and to fund badly needed infrastructure projects in the island.
Sri Lanka’s 30-year ethnic war ended in May 2009 resulting in an immediate economic revival with growth forecast at seven percent this year.
“Amana Bank intends going heavily into infrastructure financing,” Mihular said. “In the next few years we’ll have to rebuild and modernise our infrastructure.
“Amana Bank hopes to tap Middle East investment flows whose avenues of investment are limited; for examples hotels without liquor, no gambling, and they are not allowed to buy stock derivatives. So infrastructure lending is preferable,” he said.
“There’s lots of money sitting in the Gulf with which Sri Lanka has very good ties.”
Mihular said Islamic financing is ideally suited for infrastructure financing which generally involves a long-term gestation period with around five years before a project starts generating cash flows.
“In conventional finance you might be given a moratorium on the repayment of capital but you pay interest from day one.
“In Islamic finance, all lending is asset-backed, so you won’t find bubbles like in the West. And you don’t begin repaying until you start generating cash flows. Lending is based on profit and loss which can sometimes be more expensive than conventional lending, and linked to cash flows and profitability.”
Mihular said that in Islamic finance borrowers don’t have to pay overdue interest or penal interest on late payments.
State Bank of Pakistan : prods Islamic banks to diversify products
August 11, 2010
Acting Governor State Bank of Pakistan Yaseen Anwar says Islamic Financial System has potential to provide better banking and financial services than conventional system provided it capitalizes on its own inherent strengths and avoids following conventional system.
Inaugurating Islamic Financial News Roadshow on Islamic Banking Thursday at SBP, he said current Islamic banking paradigm, both in Pakistan and elsewhere, is based on replication of conventional banking products. ‘’While replication of conventional products to make them Shariah compliant does pass Shariah permissibility test, it is insufficient to achieve larger objectives of Islamic financial system, particularly broad-based and equitable distribution of economic gains.’’ He said total reliance of Islamic banks on debt-based fixed income products and minimizing risks to almost close to those of conventional system is not only blurring distinction between Islamic and conventional finance but also making Islamic banks relatively less efficient than their conventional counterparts.
To sustain growth momentum, industry will have to diversify its products mix by focusing on areas where it has comparative advantage rather than blindly following conventional system, he observed.
Anwar said 67pc of Islamic banks financing in Pakistan is concentrated in corporate sector through Murabaha, Ijarah, Diminishing Musharaka. With most of corporates having banking relationships with conventional banks, Islamic banks have to offer significant price discounts to attract corporate clients. While this improves quality of their financing portfolio, it reduces profit margins and inhibits their ability to offer better returns to depositors, he emphasized. It also restricts access to finance to well established businesses and corporates, leaves SMEs and start up businesses financially excluded. This is contrary to natural business model of Islamic finance, which promotes risk and reward sharing and encourages financing to promising start ups that is critically important for promoting entrepreneurial culture, he added.
SBP Acting Governor said present scope of Islamic banks business model is confined to that of conventional banks which generally caters to short term financing needs of real economy through interest bearing instruments, facilities. While this scope is in line with business model and deposit streams of conventional banks, it is not sufficient for Islamic banks which were originally conceived for catering to genuine financing needs of real economy through risk and reward sharing instruments.
Acting Governor State Bank of Pakistan Yaseen Anwar says Islamic Financial System has potential to provide better banking and financial services than conventional system provided it capitalizes on its own inherent strengths and avoids following conventional system.
Inaugurating Islamic Financial News Roadshow on Islamic Banking Thursday at SBP, he said current Islamic banking paradigm, both in Pakistan and elsewhere, is based on replication of conventional banking products. ‘’While replication of conventional products to make them Shariah compliant does pass Shariah permissibility test, it is insufficient to achieve larger objectives of Islamic financial system, particularly broad-based and equitable distribution of economic gains.’’ He said total reliance of Islamic banks on debt-based fixed income products and minimizing risks to almost close to those of conventional system is not only blurring distinction between Islamic and conventional finance but also making Islamic banks relatively less efficient than their conventional counterparts.
To sustain growth momentum, industry will have to diversify its products mix by focusing on areas where it has comparative advantage rather than blindly following conventional system, he observed.
Anwar said 67pc of Islamic banks financing in Pakistan is concentrated in corporate sector through Murabaha, Ijarah, Diminishing Musharaka. With most of corporates having banking relationships with conventional banks, Islamic banks have to offer significant price discounts to attract corporate clients. While this improves quality of their financing portfolio, it reduces profit margins and inhibits their ability to offer better returns to depositors, he emphasized. It also restricts access to finance to well established businesses and corporates, leaves SMEs and start up businesses financially excluded. This is contrary to natural business model of Islamic finance, which promotes risk and reward sharing and encourages financing to promising start ups that is critically important for promoting entrepreneurial culture, he added.
SBP Acting Governor said present scope of Islamic banks business model is confined to that of conventional banks which generally caters to short term financing needs of real economy through interest bearing instruments, facilities. While this scope is in line with business model and deposit streams of conventional banks, it is not sufficient for Islamic banks which were originally conceived for catering to genuine financing needs of real economy through risk and reward sharing instruments.
Islamic finance system can serve better than conventional banking: SBP
August 12, 2010
The Islamic financial system has potential to serve better than conventional banking system, a top official of the central bank said on Thursday.
Addressing the inaugural session of the Islamic financial news road-show on Islamic banking, State Bank of Pakistan Acting Governor Yaseen Anwar said that the Islamic financial system has the potential to provide better banking and financial services than the conventional system provided it capitalises on its own inherent strengths and avoids following the conventional system.
Anwar said that the current Islamic banking paradigm, both in Pakistan and elsewhere in the world, is based on replication of conventional banking products.
“While the replication of conventional products to make them Shariah compliant does pass the Shariah permissibility test, it is insufficient to achieve the larger objectives of the Islamic financial system, particularly the broad-based and equitable distribution of economic gains,” he said.
The acting governor said that reliance of Islamic banks on debt-based fixed income products and minimising the risks to almost close to those of the conventional system is not only blurring the distinction between Islamic and conventional finance, but also making Islamic banks relatively less efficient than their conventional counterparts.
“Thus, to sustain the growth momentum, the industry will have to diversify its products mix by focusing on the areas where it has comparative advantage rather than blindly following the conventional system,” he said.
He said that 67 percent of the Islamic banks’ financing in the country is concentrated in the corporate sector through Murabaha, Ijarah, and diminishing Musharaka. With most of the corporate entities having banking relationships with conventional banks, the Islamic banks have to offer significant price discounts to attract corporate clients, he said.
“This improves the quality of their financing portfolio, reduces their profit margins and inhibits their ability to offer better returns to the depositors,” the SBP acting governor said.
It also restricts the access to finance to the well-established businesses and corporates and leaves the small and medium enterprises (SMEs) and start-up businesses financially excluded, he said.
“This is contrary to the natural business model of Islamic finance, which promotes risks and reward sharing and encourages financing to promising start-ups that is critically important for promoting entrepreneurial culture,” said Anwar.
He said that the present scope of Islamic banks’ business model is confined to that of conventional banks, which generally caters to the short-term financing needs of the real economy through interest bearing instruments and facilities.
“While this scope is in line with the business model and deposit streams of conventional banks, it is not sufficient for the Islamic banks, which were originally conceived for catering to the genuine financing needs of the real economy through risks and reward sharing instruments,” he said.
“Islamic banks with this narrow scope will find it difficult to compete with the conventional banks, which are giants as compared with the Islamic banks and are highly efficient and flexible in catering to such financing needs of the real economy,” he said and reiterated that the Islamic banks will have to expand their scope to offer both commercial and investment banking services to be financed by different streams of deposits.
Anwar said that there are numerous areas and sectors, which could be explored to sustain and even accelerate the growth momentum of the Islamic banking industry.
Agriculture is strategically an important sector of Pakistan’s economy with 20 percent share in the GDP and a major source of livelihood for 65 percent of the country’s population living in rural areas, he said.
ìThe sector is also largely un-served or under-served by banks as less than 20 percent of about seven million farm households in the country have access to bank credit,” he said.
He suggested that the Islamic banks can capture a sizeable proportion of this market by reaching out to the growers either directly or through the non-governmental organisations (NGOs) or microfinance institutions.
“The Islamic banking institutions are likely to have better acceptance in the rural areas as the rural population is believed to be relatively more faith sensitive,” he said.
At present, Islamic banking institutions largely concentrate in large urban centres and they would need to expand their outreach to smaller towns and rural and semi-rural areas and optimally leverage the technology to serve the rural markets, he said.
Similarly, he said, there is also a great potential in the SME sector, while Islamic banks can also have partnership with the federal and provincial governments in developing and building low-cost housing projects, which are on the priority agenda of the federal and provincial governments.
Anwar said that the central bank fully recognises and appreciates the potential of Islamic banking in increasing the depth and breadth of the banking system and making it more diverse and stable.
“It is an important component of the SBP’s strategic goals and we are actively engaged with the industry as the regulator-cum-partner to catalyse and facilitate development of the industry on sound footings,” he said.
“We have plans to further improve our legal and regulatory framework to provide the necessary support and flexibility to this budding industry and enhance its commercial viability. There are additional plans to strengthen the Shariah compliance framework to improve the Shariah compliance levels in the industry and give comfort to the masses about the Shariah permissibility of Islamic banks’ operations,” he added.
The Islamic financial system has potential to serve better than conventional banking system, a top official of the central bank said on Thursday.
Addressing the inaugural session of the Islamic financial news road-show on Islamic banking, State Bank of Pakistan Acting Governor Yaseen Anwar said that the Islamic financial system has the potential to provide better banking and financial services than the conventional system provided it capitalises on its own inherent strengths and avoids following the conventional system.
Anwar said that the current Islamic banking paradigm, both in Pakistan and elsewhere in the world, is based on replication of conventional banking products.
“While the replication of conventional products to make them Shariah compliant does pass the Shariah permissibility test, it is insufficient to achieve the larger objectives of the Islamic financial system, particularly the broad-based and equitable distribution of economic gains,” he said.
The acting governor said that reliance of Islamic banks on debt-based fixed income products and minimising the risks to almost close to those of the conventional system is not only blurring the distinction between Islamic and conventional finance, but also making Islamic banks relatively less efficient than their conventional counterparts.
“Thus, to sustain the growth momentum, the industry will have to diversify its products mix by focusing on the areas where it has comparative advantage rather than blindly following the conventional system,” he said.
He said that 67 percent of the Islamic banks’ financing in the country is concentrated in the corporate sector through Murabaha, Ijarah, and diminishing Musharaka. With most of the corporate entities having banking relationships with conventional banks, the Islamic banks have to offer significant price discounts to attract corporate clients, he said.
“This improves the quality of their financing portfolio, reduces their profit margins and inhibits their ability to offer better returns to the depositors,” the SBP acting governor said.
It also restricts the access to finance to the well-established businesses and corporates and leaves the small and medium enterprises (SMEs) and start-up businesses financially excluded, he said.
“This is contrary to the natural business model of Islamic finance, which promotes risks and reward sharing and encourages financing to promising start-ups that is critically important for promoting entrepreneurial culture,” said Anwar.
He said that the present scope of Islamic banks’ business model is confined to that of conventional banks, which generally caters to the short-term financing needs of the real economy through interest bearing instruments and facilities.
“While this scope is in line with the business model and deposit streams of conventional banks, it is not sufficient for the Islamic banks, which were originally conceived for catering to the genuine financing needs of the real economy through risks and reward sharing instruments,” he said.
“Islamic banks with this narrow scope will find it difficult to compete with the conventional banks, which are giants as compared with the Islamic banks and are highly efficient and flexible in catering to such financing needs of the real economy,” he said and reiterated that the Islamic banks will have to expand their scope to offer both commercial and investment banking services to be financed by different streams of deposits.
Anwar said that there are numerous areas and sectors, which could be explored to sustain and even accelerate the growth momentum of the Islamic banking industry.
Agriculture is strategically an important sector of Pakistan’s economy with 20 percent share in the GDP and a major source of livelihood for 65 percent of the country’s population living in rural areas, he said.
ìThe sector is also largely un-served or under-served by banks as less than 20 percent of about seven million farm households in the country have access to bank credit,” he said.
He suggested that the Islamic banks can capture a sizeable proportion of this market by reaching out to the growers either directly or through the non-governmental organisations (NGOs) or microfinance institutions.
“The Islamic banking institutions are likely to have better acceptance in the rural areas as the rural population is believed to be relatively more faith sensitive,” he said.
At present, Islamic banking institutions largely concentrate in large urban centres and they would need to expand their outreach to smaller towns and rural and semi-rural areas and optimally leverage the technology to serve the rural markets, he said.
Similarly, he said, there is also a great potential in the SME sector, while Islamic banks can also have partnership with the federal and provincial governments in developing and building low-cost housing projects, which are on the priority agenda of the federal and provincial governments.
Anwar said that the central bank fully recognises and appreciates the potential of Islamic banking in increasing the depth and breadth of the banking system and making it more diverse and stable.
“It is an important component of the SBP’s strategic goals and we are actively engaged with the industry as the regulator-cum-partner to catalyse and facilitate development of the industry on sound footings,” he said.
“We have plans to further improve our legal and regulatory framework to provide the necessary support and flexibility to this budding industry and enhance its commercial viability. There are additional plans to strengthen the Shariah compliance framework to improve the Shariah compliance levels in the industry and give comfort to the masses about the Shariah permissibility of Islamic banks’ operations,” he added.
Bahrain: A changing model
August 13, 2010
Bahrain’s finance industry, both Islamic and conventional, has long been a lynchpin of the economy. Perhaps unsurprisingly, though, in the post-economic crisis environment and given the increasingly competitive regional market, changes are under way.
Combined, the Islamic and conventional finance segments represent around 26% of Bahrain’s GDP. In its annual economic review for 2010, the Bahrain Economic Development Board (EDB) said that while country’s economy had managed to expand in the preceding year, the financial sector had contracted slightly in 2009, with output shrinking by 1% – a result that would have been warmly welcomed in many Western markets.
The EDB report, released on July 19, said that despite the slight contraction in 2009, the finance industry had survived the global slowdown relatively well, although it also noted that there will be changes on the horizon for the sharia-compliant and conventional segments.
“Going forward, however, it is evident that the development model for the Bahrain finance sector, which has depended heavily on the rapid growth of offshore wholesale banking, will change,” the report said.
According to the EDB report, some 90% of wholesale banks’ assets and liabilities originate offshore. Though not setting out what specifically they will be, the report did note that, “there will be big changes in the pattern of expansion”.
The report also said that growth in the Islamic finance sector would be somewhat constrained for the immediate future due to the fact that the real estate market remained sluggish. With the Islamic banking sector depending on property transactions for much of its activity, and construction and real estate representing around one-third of all banking loans, the expected weaker demand and downturn in prices is expected to have an impact on Bahraini lenders for the rest of this year and into 2011 and beyond.
While banking slowed in 2009, there was one segment of the finance industry that recorded strong growth last year, with the insurance market expanding by 6%. Though only nine of the 169 onshore insurance firms currently operating in Bahrain offer sharia-compliant products, there are suggestions that takaful, or Islamic insurance, is starting to gain a more widespread acceptance.
While the insurance sector overall grew by 6%, the seven takaful companies in the market say their gross contributions rose by 22% last year, totaling BD32.7m ($86.4m). The two retakaful, or sharia-compliant reinsurance firms, posted and even better result, seeing their combined premiums increase from BD15.9m ($42m) in 2008 to BD50.5m ($133.5m) last year, representing 217% growth.
The growing strength of the local takaful sector and the role of the Central Bank of Bahrain (CBB) as industry regulator were acknowledged at the International Takaful Summit, held in London in mid-July, where Bahrain and its central bank were named as the Best Financial Centre for 2010, the third time in a row the bank has been so recognised.
According to Nader Al Mandeel, the director of insurance supervision at the CBB, the sound regulatory infrastructure and the active dialogues undertaken by the CBB with the takaful industry have been recognised as key drivers in the expansion of the sector.
“The unique structure of takaful companies requires a clear understanding of the various insurance risks and, through the years, the CBB has been at the forefront of ensuring the sound development of its regulatory framework in this regard,” he said at the International Takaful Summit on July 17. “The CBB does recognise that consistent application of takaful rules is a key feature in ensuring the continued growth of this industry.”
Though Bahrain’s Islamic insurance and banking sector has performed well over the past decade, and managed to successfully ride out the global economic crisis, it is facing a number of challenges. One of these, which is by no means unique to Bahrain, is the need for the international sharia-compliant finance industry to adopt a universal set of standards for Islamic financial instruments. The lack of such a set of regulations has to date held back the broader growth of the industry, says CBB governor Rasheed Al Maraj.
“The result has been that Islamic financial institutions have had a predominantly domestic focus and have not been able to achieve the scale economies that might make them viable competitors to conventional institutions which do enjoy these benefits,” he told delegates attending the first Annual World Islamic Banking Conference Asia Summit, held in Singapore in June.
Bahrain has been a strong advocate of internationally accepted standards for the Islamic financial sector, along with better risk management practices, holding up the model it has developed as an example.
However, not all are prepared to accept that model, which is part of another of the challenges – increasing competition and rivalry in the industry. Though seen as the first and leading proponent of Islamic finance, Bahrain now has stiff competition as a sharia-compliant banking centre.
John Sfakianakis, the chief economist at Banque Saudi Fransi, said that Bahrain is fighting to maintain its position at the centre of Islamic finance. “Islamic banking is under a lot of competition from the regional competitors such as Dubai, Qatar, Kuwait and Saudi Arabia,” he said in an interview with the Bloomberg news agency on July 19.
Having long established itself as a leading innovator in the finance industry, Bahrain certainly has experience on its side, a fact which bodes well in terms of its ability to compete in a rapidly changing landscape.
Bahrain’s finance industry, both Islamic and conventional, has long been a lynchpin of the economy. Perhaps unsurprisingly, though, in the post-economic crisis environment and given the increasingly competitive regional market, changes are under way.
Combined, the Islamic and conventional finance segments represent around 26% of Bahrain’s GDP. In its annual economic review for 2010, the Bahrain Economic Development Board (EDB) said that while country’s economy had managed to expand in the preceding year, the financial sector had contracted slightly in 2009, with output shrinking by 1% – a result that would have been warmly welcomed in many Western markets.
The EDB report, released on July 19, said that despite the slight contraction in 2009, the finance industry had survived the global slowdown relatively well, although it also noted that there will be changes on the horizon for the sharia-compliant and conventional segments.
“Going forward, however, it is evident that the development model for the Bahrain finance sector, which has depended heavily on the rapid growth of offshore wholesale banking, will change,” the report said.
According to the EDB report, some 90% of wholesale banks’ assets and liabilities originate offshore. Though not setting out what specifically they will be, the report did note that, “there will be big changes in the pattern of expansion”.
The report also said that growth in the Islamic finance sector would be somewhat constrained for the immediate future due to the fact that the real estate market remained sluggish. With the Islamic banking sector depending on property transactions for much of its activity, and construction and real estate representing around one-third of all banking loans, the expected weaker demand and downturn in prices is expected to have an impact on Bahraini lenders for the rest of this year and into 2011 and beyond.
While banking slowed in 2009, there was one segment of the finance industry that recorded strong growth last year, with the insurance market expanding by 6%. Though only nine of the 169 onshore insurance firms currently operating in Bahrain offer sharia-compliant products, there are suggestions that takaful, or Islamic insurance, is starting to gain a more widespread acceptance.
While the insurance sector overall grew by 6%, the seven takaful companies in the market say their gross contributions rose by 22% last year, totaling BD32.7m ($86.4m). The two retakaful, or sharia-compliant reinsurance firms, posted and even better result, seeing their combined premiums increase from BD15.9m ($42m) in 2008 to BD50.5m ($133.5m) last year, representing 217% growth.
The growing strength of the local takaful sector and the role of the Central Bank of Bahrain (CBB) as industry regulator were acknowledged at the International Takaful Summit, held in London in mid-July, where Bahrain and its central bank were named as the Best Financial Centre for 2010, the third time in a row the bank has been so recognised.
According to Nader Al Mandeel, the director of insurance supervision at the CBB, the sound regulatory infrastructure and the active dialogues undertaken by the CBB with the takaful industry have been recognised as key drivers in the expansion of the sector.
“The unique structure of takaful companies requires a clear understanding of the various insurance risks and, through the years, the CBB has been at the forefront of ensuring the sound development of its regulatory framework in this regard,” he said at the International Takaful Summit on July 17. “The CBB does recognise that consistent application of takaful rules is a key feature in ensuring the continued growth of this industry.”
Though Bahrain’s Islamic insurance and banking sector has performed well over the past decade, and managed to successfully ride out the global economic crisis, it is facing a number of challenges. One of these, which is by no means unique to Bahrain, is the need for the international sharia-compliant finance industry to adopt a universal set of standards for Islamic financial instruments. The lack of such a set of regulations has to date held back the broader growth of the industry, says CBB governor Rasheed Al Maraj.
“The result has been that Islamic financial institutions have had a predominantly domestic focus and have not been able to achieve the scale economies that might make them viable competitors to conventional institutions which do enjoy these benefits,” he told delegates attending the first Annual World Islamic Banking Conference Asia Summit, held in Singapore in June.
Bahrain has been a strong advocate of internationally accepted standards for the Islamic financial sector, along with better risk management practices, holding up the model it has developed as an example.
However, not all are prepared to accept that model, which is part of another of the challenges – increasing competition and rivalry in the industry. Though seen as the first and leading proponent of Islamic finance, Bahrain now has stiff competition as a sharia-compliant banking centre.
John Sfakianakis, the chief economist at Banque Saudi Fransi, said that Bahrain is fighting to maintain its position at the centre of Islamic finance. “Islamic banking is under a lot of competition from the regional competitors such as Dubai, Qatar, Kuwait and Saudi Arabia,” he said in an interview with the Bloomberg news agency on July 19.
Having long established itself as a leading innovator in the finance industry, Bahrain certainly has experience on its side, a fact which bodes well in terms of its ability to compete in a rapidly changing landscape.
Popularity of Islami banking
August 18, 2010
ISLAMI banking is gaining popularity across the world as the global financial turmoil seems to have had limited impact on it, according to recent media reports. The Islami banking system is based on Islamic Sharia’ah and not on ‘predictions’ which give it the advantage of having less external shocks like the recent global financial meltdown. The total GDP of the world is around $30 trillion where as the total credit market is $64 trillion. The gap is ‘prediction’. Islami finance industry has been in an expansionary phase in recent years and even the Vatican says banks should look at the rules of Islami finance to restore confidence among their clients at the time of global economic crisis.
As reported by AFP news agency from Singapore, assets held by the world’s 100 biggest Islami banks grew 86 per cent in 2008 from the previous year despite the financial turmoil that clobbered mainstream lenders. The Asian Banker, a magazine for financial professionals, has reported that the top 100 Islamic banks held assets totaling 580 billion US dollars last year, sharply up from 350 billion US dollars in 2007. In the same period, Asia’s 300 biggest banks saw their assets rise by a much slower 13.4 per cent rate.
‘Despite the financial turmoil in late 2008 that crippled so many large Western institutions, Islami banks have continued to grow in prominence and size’, the press report quoting the magazine said. Islamic finance has seen ‘an incredible surge in popularity’, based on stronger regulatory regimes and a better international understanding of its dynamics. Even two Islami banks in Britain made assets to the top 100. Islami banking fuses principles of Shari’ah or Islamic law and modern banking, and its funds are not investing in companies associated with tobacco, alcohol and gambling.
ISLAMI banking is gaining popularity across the world as the global financial turmoil seems to have had limited impact on it, according to recent media reports. The Islami banking system is based on Islamic Sharia’ah and not on ‘predictions’ which give it the advantage of having less external shocks like the recent global financial meltdown. The total GDP of the world is around $30 trillion where as the total credit market is $64 trillion. The gap is ‘prediction’. Islami finance industry has been in an expansionary phase in recent years and even the Vatican says banks should look at the rules of Islami finance to restore confidence among their clients at the time of global economic crisis.
As reported by AFP news agency from Singapore, assets held by the world’s 100 biggest Islami banks grew 86 per cent in 2008 from the previous year despite the financial turmoil that clobbered mainstream lenders. The Asian Banker, a magazine for financial professionals, has reported that the top 100 Islamic banks held assets totaling 580 billion US dollars last year, sharply up from 350 billion US dollars in 2007. In the same period, Asia’s 300 biggest banks saw their assets rise by a much slower 13.4 per cent rate.
‘Despite the financial turmoil in late 2008 that crippled so many large Western institutions, Islami banks have continued to grow in prominence and size’, the press report quoting the magazine said. Islamic finance has seen ‘an incredible surge in popularity’, based on stronger regulatory regimes and a better international understanding of its dynamics. Even two Islami banks in Britain made assets to the top 100. Islami banking fuses principles of Shari’ah or Islamic law and modern banking, and its funds are not investing in companies associated with tobacco, alcohol and gambling.
Islamic banking – what is at the backend?
August 22, 2010
Muhammad Nadeem
Like other basic requirements of Islam, finance or financial transactions need to comply with Islamic modes. Riba was soon after discontinued in the newly-formed Islamic society of Medina. Later, religious scholars derived a number of modes of financing to carry out financial transactions in line with Islamic Shariah.
The essence of the Islamic financial system is to prohibit Riba and make available financial products in line with Shariah. In today’s Islamic banking philosophy, even though Islamic banks are offering financial products free from Riba, the elimination of interest from society is still a dream.
In Pakistan, conventional banking has got a new lease of life with the advent of consumerism. However, international commercial banks, after realising the potential of High Net Worth Individuals (HNWI) or Ultra High Net Worth Individuals (UHNWI) among Muslim societies, have opened Islamic banking windows within their commercial operations, without any need of Riba elimination.
Riba-free banking is running parallel to interest-based banking under the same roof and this approach is accepted by many religious scholars as a “transitional phase” to achieve some evolution of Islamic banking through famous brands.
Foreign and local commercial banks have formed Shariah boards, offering Islamic products to Muslim customers. But criticism is voiced especially over mixed institutions with questions how they are financing their Islamic banking window – whether through lending from conventional banking channel.
Another aspect in today’s technological world is banking for your comfort at home. Branchless banking is gaining ground where electronic channels such as phones, internet, short messages or mobile phones are used heavily for banking, making it simply impossible to segregate Islamic or non-Islamic customers reaching the call centre of the bank having both modes of operations.
So banks running conventional operation and having an Islamic window too, are servicing two opposite customers through a single source.
Another issue is tapping human resources jointly. Primarily, the Islamic banking industry, in Pakistan since 1979, is based on conventional banking resources. So the trained professionals have their initial mindset based on interest-based banking. Even though this risk has been minimised with the presence of Shariah board, segregation of the resources and their utilisation is still not looked into.
An organisation solely dedicated to Islamic mode of banking would not have this issue, however, those having an Islamic window are inclined towards that risk unintentionally. This not only covers human resources function but also the resources rotation within the same organisation to other departments, even in conventional banking areas.
The division of society into conservative, progressive, less-moderate and hardcore religious segments has affected the outcome of Islamic finance too. A historic judgment against Riba by the Shariat Appellate bench and then by Supreme Court made the distinction line more visible when one of the conventional banks, backed by the then government, approached the Supreme Court for the reversal of the judgment and getting stayed out of that deadline of implementation.
They achieved that. A number of progressive Muslims now ask “what is wrong in having bank interest especially on savings?”
In 2004, when in the National Assembly one of the non-Muslim members told the house that “bank interest is not under the definition of Riba, as per the verdict of Al Azhar’s main scholars”, it caused pandemonium and members of the religious parties’ alliance staged a walkout. However, any detailed document from religious authorities is yet to be finalised that contradicts Al Azhar’s version of Riba or the definition of saving account interest.
Religious interpretations might impact the development of Islamic financial products. These interpretational differences are visible between financial products of Malaysian model and products derived in the Middle East by Islamic banks.
the writer is a former Citibank, staffers
Muhammad Nadeem
Like other basic requirements of Islam, finance or financial transactions need to comply with Islamic modes. Riba was soon after discontinued in the newly-formed Islamic society of Medina. Later, religious scholars derived a number of modes of financing to carry out financial transactions in line with Islamic Shariah.
The essence of the Islamic financial system is to prohibit Riba and make available financial products in line with Shariah. In today’s Islamic banking philosophy, even though Islamic banks are offering financial products free from Riba, the elimination of interest from society is still a dream.
In Pakistan, conventional banking has got a new lease of life with the advent of consumerism. However, international commercial banks, after realising the potential of High Net Worth Individuals (HNWI) or Ultra High Net Worth Individuals (UHNWI) among Muslim societies, have opened Islamic banking windows within their commercial operations, without any need of Riba elimination.
Riba-free banking is running parallel to interest-based banking under the same roof and this approach is accepted by many religious scholars as a “transitional phase” to achieve some evolution of Islamic banking through famous brands.
Foreign and local commercial banks have formed Shariah boards, offering Islamic products to Muslim customers. But criticism is voiced especially over mixed institutions with questions how they are financing their Islamic banking window – whether through lending from conventional banking channel.
Another aspect in today’s technological world is banking for your comfort at home. Branchless banking is gaining ground where electronic channels such as phones, internet, short messages or mobile phones are used heavily for banking, making it simply impossible to segregate Islamic or non-Islamic customers reaching the call centre of the bank having both modes of operations.
So banks running conventional operation and having an Islamic window too, are servicing two opposite customers through a single source.
Another issue is tapping human resources jointly. Primarily, the Islamic banking industry, in Pakistan since 1979, is based on conventional banking resources. So the trained professionals have their initial mindset based on interest-based banking. Even though this risk has been minimised with the presence of Shariah board, segregation of the resources and their utilisation is still not looked into.
An organisation solely dedicated to Islamic mode of banking would not have this issue, however, those having an Islamic window are inclined towards that risk unintentionally. This not only covers human resources function but also the resources rotation within the same organisation to other departments, even in conventional banking areas.
The division of society into conservative, progressive, less-moderate and hardcore religious segments has affected the outcome of Islamic finance too. A historic judgment against Riba by the Shariat Appellate bench and then by Supreme Court made the distinction line more visible when one of the conventional banks, backed by the then government, approached the Supreme Court for the reversal of the judgment and getting stayed out of that deadline of implementation.
They achieved that. A number of progressive Muslims now ask “what is wrong in having bank interest especially on savings?”
In 2004, when in the National Assembly one of the non-Muslim members told the house that “bank interest is not under the definition of Riba, as per the verdict of Al Azhar’s main scholars”, it caused pandemonium and members of the religious parties’ alliance staged a walkout. However, any detailed document from religious authorities is yet to be finalised that contradicts Al Azhar’s version of Riba or the definition of saving account interest.
Religious interpretations might impact the development of Islamic financial products. These interpretational differences are visible between financial products of Malaysian model and products derived in the Middle East by Islamic banks.
the writer is a former Citibank, staffers
Takaful and Education plan for children
January 18, 2010
EVERY parents expect the best for their children, whether from the point of use, nutrition, especially matters related to their education. Have proper education is among the factors to build a happy life.
Education is one of the important agenda in the development of the country to produce a society that is truly knowledgeable.
The current situation, many of outstanding students discontinues their studies due to financial factors such as not sufficient funds and do not get help, whether in the form of scholarships or loans from any institution
These students expect hundred 100 percent loans or scholarships from the institutions involved, but due to failure borrowers before lending describes their education, resulting in generation of students today fail to get loans to start their studies.
Parents indeed have a great responsibility to ensure their children get proper education. Given the cost of education is increasing from year to year, parents need financial planning, especially related to education since the early birth of their children so that children are able to obtain the proper education. When parents can plan, for sure education-related loans is not reappear.
In fact, the concept plan and manage financial risks faced by prospective contained in God’s word, which means: He said: “That you bertanam seven years (ever) as normal, so what you taken shall let you save a little on the stalks to eat. Then after that will come seven hard years, which spend what you save for that (the hard) but less than (wheat seed) that will save you.” (Yusuf: 47 and 48).
Human reminded to always be vigilant and ready to face difficulties lay in the future, especially related to financial management. The 1,400 years, the concept is still relevant to the lives of Muslims today.
To reduce the burden of parents who had to bear the high cost of education, among other instruments that can be used as an alternative to loans and scholarships education is to participate in takaful. Takaful operators not only provide protection plan and investment alone, but there are also education plan so that parents can provide funds or education savings to their children in the future later. Plans such as this will help students continue their education, whether educated in the public or private institutions.
However, people are still less understand the importance of takaful protection awareness, particularly future children such as education. Various parties should play a role to ensure that protection needs to be an important agenda of education in the management of family and concern by parents.
In financial planning, parents need to know what actually needs to their families and ensure that priority is given to the needs of the really urgent needs such as children’s education. If parents are sensitive to the needs and requirements of education when, inevitably they will be planning and financial expenditure and to take the takaful fund education for their children’s education in the future.
Takaful operators that also offer other products such education. So, there is no reason for parents to provide education funds for their children as early as possible.
Imam Al-Ghazali Rahimahullah mentioned, “Our children are gem.” So our job as parents is lustrous jewels is to always shine by providing appropriate education to them. If children are left with sufficient funding, are sure they will be able to continue their studies and enhance the level of education. In addition, the goal of producing human knowledge as specified natural National Philosophy of Education did not realized.
EVERY parents expect the best for their children, whether from the point of use, nutrition, especially matters related to their education. Have proper education is among the factors to build a happy life.
Education is one of the important agenda in the development of the country to produce a society that is truly knowledgeable.
The current situation, many of outstanding students discontinues their studies due to financial factors such as not sufficient funds and do not get help, whether in the form of scholarships or loans from any institution
These students expect hundred 100 percent loans or scholarships from the institutions involved, but due to failure borrowers before lending describes their education, resulting in generation of students today fail to get loans to start their studies.
Parents indeed have a great responsibility to ensure their children get proper education. Given the cost of education is increasing from year to year, parents need financial planning, especially related to education since the early birth of their children so that children are able to obtain the proper education. When parents can plan, for sure education-related loans is not reappear.
In fact, the concept plan and manage financial risks faced by prospective contained in God’s word, which means: He said: “That you bertanam seven years (ever) as normal, so what you taken shall let you save a little on the stalks to eat. Then after that will come seven hard years, which spend what you save for that (the hard) but less than (wheat seed) that will save you.” (Yusuf: 47 and 48).
Human reminded to always be vigilant and ready to face difficulties lay in the future, especially related to financial management. The 1,400 years, the concept is still relevant to the lives of Muslims today.
To reduce the burden of parents who had to bear the high cost of education, among other instruments that can be used as an alternative to loans and scholarships education is to participate in takaful. Takaful operators not only provide protection plan and investment alone, but there are also education plan so that parents can provide funds or education savings to their children in the future later. Plans such as this will help students continue their education, whether educated in the public or private institutions.
However, people are still less understand the importance of takaful protection awareness, particularly future children such as education. Various parties should play a role to ensure that protection needs to be an important agenda of education in the management of family and concern by parents.
In financial planning, parents need to know what actually needs to their families and ensure that priority is given to the needs of the really urgent needs such as children’s education. If parents are sensitive to the needs and requirements of education when, inevitably they will be planning and financial expenditure and to take the takaful fund education for their children’s education in the future.
Takaful operators that also offer other products such education. So, there is no reason for parents to provide education funds for their children as early as possible.
Imam Al-Ghazali Rahimahullah mentioned, “Our children are gem.” So our job as parents is lustrous jewels is to always shine by providing appropriate education to them. If children are left with sufficient funding, are sure they will be able to continue their studies and enhance the level of education. In addition, the goal of producing human knowledge as specified natural National Philosophy of Education did not realized.
Islamic finance should help takaful firms outperform
January 30, 2010
The investment firm based at the Dubai International Financial Centre says in a report that takaful firms will benefit from favorable demographics and the growing availability of Islamic financial products. Takaful is similar to conventional insurance but investments are held to Sharia-compliant assets.
A quarter of the world’s population is Muslim but takaful contributions account for only half a per cent of premiums globally.
However, from 2006 to the third quarter of 2009, Islamic insurers registered a compound annual growth rate of 26.5 per cent, compared with 19.2 per cent for conventional insurance.
The bank said it expected the industry to grow faster than local economies. In a report released last Thursday, the World Bank said it expected the GDP of the MENA region to grow by 3.7 per cent this year and 4.4 per cent in 2011.
By comparison, Alpen expects the takaful industry to grow 16.1 per cent a year through 2012, said Tommy Trask, the executive director and head of research at Alpen.
But Mr Trask noted the predicted growth is far from assured. Because they are limited to Sharia-compliant assets, most takaful firms are heavily invested in regional equities and property.
As Islamic finance becomes more mainstream, takaful firms will be able to reduce risk, he said.
The report noted the takaful industry has about 72 per cent exposure to property and equities, compared with 54 per cent for conventional insurance companies in the region.
“Such holdings would normally be capped at 10 to 20 per cent of total assets under more sophisticated regulatory regimes,” it said.
The Bank of Malaysia in Nov 2009, said the value of Sharia-compliant assets under management could top $1 trillion globally by the end of 2010.
The investment firm based at the Dubai International Financial Centre says in a report that takaful firms will benefit from favorable demographics and the growing availability of Islamic financial products. Takaful is similar to conventional insurance but investments are held to Sharia-compliant assets.
A quarter of the world’s population is Muslim but takaful contributions account for only half a per cent of premiums globally.
However, from 2006 to the third quarter of 2009, Islamic insurers registered a compound annual growth rate of 26.5 per cent, compared with 19.2 per cent for conventional insurance.
The bank said it expected the industry to grow faster than local economies. In a report released last Thursday, the World Bank said it expected the GDP of the MENA region to grow by 3.7 per cent this year and 4.4 per cent in 2011.
By comparison, Alpen expects the takaful industry to grow 16.1 per cent a year through 2012, said Tommy Trask, the executive director and head of research at Alpen.
But Mr Trask noted the predicted growth is far from assured. Because they are limited to Sharia-compliant assets, most takaful firms are heavily invested in regional equities and property.
As Islamic finance becomes more mainstream, takaful firms will be able to reduce risk, he said.
The report noted the takaful industry has about 72 per cent exposure to property and equities, compared with 54 per cent for conventional insurance companies in the region.
“Such holdings would normally be capped at 10 to 20 per cent of total assets under more sophisticated regulatory regimes,” it said.
The Bank of Malaysia in Nov 2009, said the value of Sharia-compliant assets under management could top $1 trillion globally by the end of 2010.
Amana Takaful Sri Lanka gets General Insurance licence in Maldives
March 12, 2010
The Maldives Monetary Authority has granted the license for Amana Takaful (Maldives) Pvt. Limited, the Maldivian subsidiary of Amana Takaful Plc, to begin general insurance with effect from 4 March.
The company launched its operations in 1998 in collaboration with Takaful Malaysia, one of the largest Takaful operators in the world. It offers life and general insurance policies.
The consolidated loss of Amana Takaful Plc for the year ended 31 December 2009 was Rs. 8.547 million and accumulated group losses stood at Rs. 300.959 million.
The Maldives Monetary Authority has granted the license for Amana Takaful (Maldives) Pvt. Limited, the Maldivian subsidiary of Amana Takaful Plc, to begin general insurance with effect from 4 March.
The company launched its operations in 1998 in collaboration with Takaful Malaysia, one of the largest Takaful operators in the world. It offers life and general insurance policies.
The consolidated loss of Amana Takaful Plc for the year ended 31 December 2009 was Rs. 8.547 million and accumulated group losses stood at Rs. 300.959 million.
Tunisia – Finance: Zaytuna Takaful, insurance can also be Islamic
March 17, 2010
Radio Zitouna Zaytuna Bank and Takaful Zaytuna some time, the appellation is the same, activities vary, but come together in a single path: that of communication in different forms. The Zaytuna label is becoming more and more in the Tunisian economic landscape.
Zaytuna Takaful will be an insurance company governed by the laws of the insurance sector in force in Tunisia and is subject to 100% with all legal requirements and regulations governing the insurance industry in our country. It will market all products under the legal texts, provided they conform with the principles of Islamic finance, especially for this product “Life”. Life insurance capitalization is not allowed in Islamic insurance.
The official start of Zaytuna Takaful is not for tomorrow, we are still in consultations, study the information system should be adopted by the company, the choice of teams, installation and implementation of insurance products.
The term Takaful means mutual guarantee or indemnity between group members. In addition to the cooperative sharing of risk, there is a clear distinction between participant and operator. There is a clear separation between capital invested by shareholders and the funds deposited by applicants. Shareholders commit funds and charge a commission usually set to 25%.
In Takaful, said Lawrence Zaatar, an expert in Islamic finance, there is no mutuality without community, and therefore no insurance possible outside of it. The contracts are designed as a donation on behalf of policyholders. The surplus is redistributed to subscribe to participants so that the Shareholders have no control on underwriting profits. The investment Takaful Insurance must also be placed in interest-free funds and approved by the Shari’a. Operators must submit more as managers than insurers in the conventional sense.
According to Catherine Stagg-Macey, senior analyst and author of a study published by the U.S. firm Celent, a research and consulting, the Takaful system’s potential is enormous because the penetration of insurance does not exceed 1% Gross domestic product in Muslim countries. The skills and resources can be borrowed from the markets of traditional insurance.
Projections of the Institute of Banking and Islamic Insurance, the rate of growth of Takaful insurance is estimated between 15% and 20% and the market should reach 7.4 billion USD in premiums in 2015.
Our Ministry of Finance apparently initiated studies on the form of Takaful insurance. To be continued.
• About Takaful
The Takaful, which is based on principle I’entraide Ie was born in Malaysia in the early eighties. The client of a Takaful operator may have a similar function of the member in mutual companies. To better organize this new insurance business, regulators are hard at work, including I’Islamic Financial Services Board, based in Kuala Lumpur (capital of Malaysia). It must be said that Takaful products continue to grow with the leader among the Retakaful, Islamic reinsurance. One hundred and ten companies already offer such services and only six are of Retakaful for Takaful companies are forced to sell their business primarily to companies Retakaful. Now, the Islamic countries and major international insurance groups work together to consolidation system. For Takaful insurers are well advised to learn from the experience of conventional insurance. As such, the insurer Prudential is cooperating with Saudi Arabia and Malaysia to distribute Islamic insurance products.
Radio Zitouna Zaytuna Bank and Takaful Zaytuna some time, the appellation is the same, activities vary, but come together in a single path: that of communication in different forms. The Zaytuna label is becoming more and more in the Tunisian economic landscape.
Zaytuna Takaful will be an insurance company governed by the laws of the insurance sector in force in Tunisia and is subject to 100% with all legal requirements and regulations governing the insurance industry in our country. It will market all products under the legal texts, provided they conform with the principles of Islamic finance, especially for this product “Life”. Life insurance capitalization is not allowed in Islamic insurance.
The official start of Zaytuna Takaful is not for tomorrow, we are still in consultations, study the information system should be adopted by the company, the choice of teams, installation and implementation of insurance products.
The term Takaful means mutual guarantee or indemnity between group members. In addition to the cooperative sharing of risk, there is a clear distinction between participant and operator. There is a clear separation between capital invested by shareholders and the funds deposited by applicants. Shareholders commit funds and charge a commission usually set to 25%.
In Takaful, said Lawrence Zaatar, an expert in Islamic finance, there is no mutuality without community, and therefore no insurance possible outside of it. The contracts are designed as a donation on behalf of policyholders. The surplus is redistributed to subscribe to participants so that the Shareholders have no control on underwriting profits. The investment Takaful Insurance must also be placed in interest-free funds and approved by the Shari’a. Operators must submit more as managers than insurers in the conventional sense.
According to Catherine Stagg-Macey, senior analyst and author of a study published by the U.S. firm Celent, a research and consulting, the Takaful system’s potential is enormous because the penetration of insurance does not exceed 1% Gross domestic product in Muslim countries. The skills and resources can be borrowed from the markets of traditional insurance.
Projections of the Institute of Banking and Islamic Insurance, the rate of growth of Takaful insurance is estimated between 15% and 20% and the market should reach 7.4 billion USD in premiums in 2015.
Our Ministry of Finance apparently initiated studies on the form of Takaful insurance. To be continued.
• About Takaful
The Takaful, which is based on principle I’entraide Ie was born in Malaysia in the early eighties. The client of a Takaful operator may have a similar function of the member in mutual companies. To better organize this new insurance business, regulators are hard at work, including I’Islamic Financial Services Board, based in Kuala Lumpur (capital of Malaysia). It must be said that Takaful products continue to grow with the leader among the Retakaful, Islamic reinsurance. One hundred and ten companies already offer such services and only six are of Retakaful for Takaful companies are forced to sell their business primarily to companies Retakaful. Now, the Islamic countries and major international insurance groups work together to consolidation system. For Takaful insurers are well advised to learn from the experience of conventional insurance. As such, the insurer Prudential is cooperating with Saudi Arabia and Malaysia to distribute Islamic insurance products.
Takaful market poised for growth but lacks Shariah compliant investments, talent
March 20, 2010
SINGAPORE: The Islamic insurance or takaful market is expected to see strong growth this year.
Still, challenges remain including low market penetration and a lack of Shariah-compliant investment opportunities for takaful players.
Industry executives said they want to see more Islamic bond, or sukuk, issuances in order to help them balance their portfolios away from equities and reduce risk.
The multi-billion dollar purchase of AIA last week was a massive vote of confidence in Asia’s insurance sector and Prudential is not alone in being bullish about the outlook.
At a conference on Islamic insurance or takaful, industry executives said they were optimistic about growth prospects.
Total takaful contributions only account for just one percent of the global insurance market.
But this is expected to increase significantly, thanks to growing interest among Muslims and non-Muslims alike in shariah-compliant investment and insurance products.
Daud Vicary Abdullah, global leader, Global Islamic Finance Group, Deloitte, said: “We’ll see more growth in the Gulf. I think it’s occurring here in Singapore, Malaysia and Indoneisa. I think the growth is positive. But to put a figure on it on a global basis, the numbers of 10 to 15 per cent in terms of growth of market are not unrealistic.”
According to an estimate by Ernst & Young, total takaful contributions can reach US$7.7 billion by 2012.
That’s compared with just US$1.4 billion in 2004.
Despite the growth prospects, there appears to be a lack of shariah-compliant bonds or sukuks.
And some central bankers say they are working to address the shortage.
Azleena Idris, Deputy Director, Islamic Banking & Takaful Dept, Bank Negara Malaysia, said: “Malaysia regularly issues shariah-compliant money market instruments so that it will facilitate the liquidity aspect of things. Now when it comes to the takaful space, the longer term instruments are something we’re aggressively promoting under the MIFC banner.”
Industry players also said they’re severely lacking in talent and the industry will likely see more consolidation as the smaller takaful players strive to become more competitive.
SINGAPORE: The Islamic insurance or takaful market is expected to see strong growth this year.
Still, challenges remain including low market penetration and a lack of Shariah-compliant investment opportunities for takaful players.
Industry executives said they want to see more Islamic bond, or sukuk, issuances in order to help them balance their portfolios away from equities and reduce risk.
The multi-billion dollar purchase of AIA last week was a massive vote of confidence in Asia’s insurance sector and Prudential is not alone in being bullish about the outlook.
At a conference on Islamic insurance or takaful, industry executives said they were optimistic about growth prospects.
Total takaful contributions only account for just one percent of the global insurance market.
But this is expected to increase significantly, thanks to growing interest among Muslims and non-Muslims alike in shariah-compliant investment and insurance products.
Daud Vicary Abdullah, global leader, Global Islamic Finance Group, Deloitte, said: “We’ll see more growth in the Gulf. I think it’s occurring here in Singapore, Malaysia and Indoneisa. I think the growth is positive. But to put a figure on it on a global basis, the numbers of 10 to 15 per cent in terms of growth of market are not unrealistic.”
According to an estimate by Ernst & Young, total takaful contributions can reach US$7.7 billion by 2012.
That’s compared with just US$1.4 billion in 2004.
Despite the growth prospects, there appears to be a lack of shariah-compliant bonds or sukuks.
And some central bankers say they are working to address the shortage.
Azleena Idris, Deputy Director, Islamic Banking & Takaful Dept, Bank Negara Malaysia, said: “Malaysia regularly issues shariah-compliant money market instruments so that it will facilitate the liquidity aspect of things. Now when it comes to the takaful space, the longer term instruments are something we’re aggressively promoting under the MIFC banner.”
Industry players also said they’re severely lacking in talent and the industry will likely see more consolidation as the smaller takaful players strive to become more competitive.
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