NEWHORIZON

ISSUE NO. 189

October to December 2013
Zil Haja 1434 Safar 1435

GLOBAL PERSPECTIVE ON ISLAMIC BANKING & INSURANCE PUBLISHED SINCE 1991

David Cameron Announces Plans for

a UK Sovereign Sukuk

Rationale for the Prohibition of

Interest in Islamic Economics

Revisiting the Principle of Tabbaru in

Takaful Structures

Malaysia Tightens Regulations for

Conventional and Islamic Banking

IIBI September Workshop

Money Creation and Debt Based

Finance: A Fundamental Challenge to
the Islamic Finance Industry

Innovations and Developments in

Takaful and Re takaful

Examining the Determinants of

Operational Risk in Islamic Banking

Sacred Economics vs. Financial

Tyranny

Where are all the Promised Jobs in

Islamic Finance?

Great Mosque at Djenne, Mali

 NEWHORIZON Zil Haja 1434 Safar 1435

26 IIBI www.islamic-banking.com
NEWHORIZON September to December 2013
Features
11 David Cameron
Announces Plans for a UK
Sovereign Sukuk
The proposed UK Sovereign sukuk may be
relatively modest in size, but, as comments
from around the world indicate, it is seen
as potentially significant for the future of
Islamic finance.
14 Rationale for the
Prohibition of Interest in
Islamic Economics
Prof. Irfan Shahid, an academic and Shariah
scholar argues that interest is the source of
many of the ills that beset todays economies
and financial systems.
16 Revisiting the Principle
of Tabbaru in Takaful
Structures
Prof. Dr Asyraf Wajdi Dusuki reviews takaful
and particularly the principle of tabbaru.
He reviews the interpretations of different
schools of Islamic thought and underscores
Shariah concerns about the absolute transfer
of ownership..
19 Malaysia Tightens
Regulations for
Conventional and Islamic
Banks
This article summarises some of the main
points of the 2013 Financial Services Act,
which, among other things, allows the central
bank to take action against individuals who
are deemed to have broken the rules and not
just companies. Bankers could end up going
to prison.
Front Cover Picture: Mosaic, Isfhan Mosque, Iran
www.islamic-banking.com
CONTENTS
20 IIBI September Workshop 40 Where are all the
Structuring |Islamic Financial Promised Jobs in Islamic
Products Finance?
An overview of some of the key points highlight- David Evans, Evans Consulting suggests
ed during the IIBIs September Workshop. that the forecasts of potential jobs in
the Islamic finance industry have been
28 Money Creation and exaggerated
Regulars
Debt-Based Finance: A
Fundamental Challenge
to the Islamic Finance
05 NEWS
Industry
A round up of the important stories
Yusuf Jha, Senior Shariah Auditor at the Abu from the last quarter around the globe.
Dhabi Islamic Bank and a guest speaker at the IIBI
September Workshop looks at the ways in which 09 SUKUK UPDATE
money is created through debt and argues that by
being part of the global banking system Islamic
banking is not really delivering a true Islamic Highlighting some of the key
alternative. developments in the sukuk market
during the last quarter.
31 Innovations and
Developments in Takaful and 42 IIBI LECTURES
Re takaful
Reports of the September 2013
Mr Iqbal Asaria, also a guest speaker at the IIIBI lecture by Mohammad Khan of PWC
September Workshop, reviews the development of on the duty of takaful operators
takaful and re takaful, looking at the problems and to participants and shareholders
opportunities within the industry. and the November 2013 lecture
by Faisal Khan, Director, Banking
34 Sacred Economics vs. and Insurance, 3i Infotech, Western
Europe on technology, the key to
Financial Tyranny UK consumer acceptance of Islamic
financial products.
Kabir Helminski argues for a sustainable economic
system that respects the sacredness of life.
49 DIARY OF EVENTS
37 Examining the
Determinants of Operational
Risks in Islamic Banking
This analysis by Hylmun Izhar of the Islamic
Research and Training Institute (IRTI), Islamic
Development Bank concludes that enhancing
human capacity and increasing the know-how
in investment activities should be a priority for
Islamic banks and that cost-reduction strategies
should be emphasised more strongly.
IIBI 3
EDITORIAL NEWHORIZON Zil Haja 1434 Safar 1435

Deal not unjustly, and

ye shall not be dealt
Executive Editors Note
with unjustly. Are Islamic financial products just conventional products with a thin Islamic
veneer? This is a question that will not lie down and go away, but does it actually
Surat Al Baqara, Holy Quran matter? Provided the products being offered by Islamic banks and takaful operators
are less morally hazardous and less exploitative than the offerings of conventional
financial institutions, is not the Islamic finance industry a force for the good? The
answer is yes and yes yes they are force for the good and yes it matters that they
do not fully reflect the substance of the Shariah, but just satisfy the legal form.
EXECUTIVE EDITOR To some extent Islamic finances mimicking of the conventional industry is
Mohammad Ali Qayyum, understandable. The people who set up Islamic banks had for the most part
Director General, IIBI received their training in the conventional industry. Conventional financial products
were what they knew and indeed what their customers knew and were comfortable
EDITOR with. It could be said that the policy of being different but not too radically
Andrea Wharton
different worked well; it is forecast that the value of the Islamic finance industry will
reach $2 trillion sometime in 2013 or 2014 although it has yet to reach the masses.
IIBI EDITOR The question is where does Islamic finance go now? The debate is between
Farida Rahman
those who want to see the Islamic finance industry move closer to the just socio-
economic ideals that motivated the founders of the industry and those who see the
IIBI EDITORIAL ADVISORY PANEL future in terms of adapting conventional products. Shahul Hameed bin Mohamed
Iqbal Khan Ibrahim argues strongly in this issue for more charitable giving by Islamic financial
M Iqbal Asaria institutions, but this may be a hard sell given that shareholders, many of whom have
Mohammed Amin
Stella Cox
a conventional mindset, press to maximise short-term profit. This has resulted in
Richard T de Belder Islamic bankers using innovation that attempts to replicate conventional financial
Ajmal Bhatty products, encouraging unnecessary risk-taking and speculation.
Mufti Abdul Qadir Barkatullah
Dr Imran Ashraf Usmani According to Dr Mohammad Hashim Kamali, a contemporary Islamic scholar,
Maqasid al-Shari`ah, or the goals and objectives of Islamic law, is an evidently
important and yet somewhat neglected theme of the Shariah. Generally the
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financial institutions. While the prime focus may have been to invest in a profitable
Email: iibi@islamic-banking.com venture the Shariah governance is preponderant in relation to achieving the goals
through the desire and inclination to perform good deeds. This may at times require
undertaking types of operations that are designed to help the disadvantaged in
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society to work their way out of poverty, for example, providing venture capital
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It may be difficult to challenge the status quo in established financial markets,
but in the developing world there must be a serious willingness and sacrifice on the
Design Services: part of shareholders and the management of Islamic financial institutions to look
CxO Research Ltd beyond just maximising profits and be judged by their actions performed through
Tel: + 0203 143 3021 the quality of their intentions.
Email: tony@cxoresearch.com
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Mohammad Ali Qayyum
Director General IIBI

Institute of Islamic Banking

and Insurance This magazine is published to provide information on developments in Islamic finance, and not to provide professional advice. The views
expressed in the articles are those of the authors alone and should not be attributed to the organisations they are associated with or their
ISSN 0955-095X
management. Any errors and omissions are the sole responsibility of the authors. The Publishers, Editors and Contributors accept no
responsibility to any person who acts, or refrains from acting, based upon any material published in the magazine. The Editorial Advisory
Panel exists to provide general advice to the editors regarding matters that may be of interest to readers. All decisions regarding the published
content of the magazine are the sole responsibility of the Editors, and the Editorial Advisory Panel accepts no responsibility for the content.

4 IIBI www.islamic-banking.com
NEWHORIZON September to December 2013
Pent Up Demand for Islamic Pension Funds
According to estimates by Ernst
& Youngs (EY) Global Islamic
Banking Centre, the pent up
global demand for Islamic
pension funds is currently
between $160 billion and $190
billion. At present, most of
these funds are parked under
conventional sovereign pension
funds due to lack of investing
options.
Ashar Nazim, Partner, Global
Islamic Banking at EY said,
Several fast-growth emerging
markets including Malaysia,
Saudi Arabia and the UAE
are seeing strong demand for
retirement plans that are Shariah
compliant. With the maturity of
the sukuk market and Shariah-
compliant equity indices, as well
as technology available to screen
conventional indices to carve-out
Islamic sub-indices, there appears
to be sufficient assets available
for many of the pension funds to
UK Leads the Islamic Finance Education Sector
Earlier in 2013, Thomson Reuters
and the Islamic Corporation for
the Development of the Private
Sector (ICD) announced the
creation of the ICD-Thomson
Reuters Islamic Finance
Development Indicator (IFDI), a
numerical measure representing
the overall health and growth
of the Islamic finance industry
worldwide. The indicator
measures five key components
- quantitative development,
governance, social responsibility,
knowledge and awareness. Its
first report covers the issue
of education and based on its
analysis, the IFDI has found that
the UK is the global leader in
Islamic finance education with
over 60 institutions offering
www.islamic-banking.com
take the first step towards Shariah
compliant propositions.
EY go on to say that green-field
operations would take too long to
satisfy market demand and suggest
the more practical approach would
be the partial transformation of
existing pension funds to carve out
Shariah compliant subsidiaries.
They caution, however, that this
carving out would involve the
valuation of pension funds assets
at the date of transformation,
which in turn may have legal,
financial and tax implications.
Nazim added, There is a clear
preference by individuals in these
markets to manage their financial
affairs in a Shariah compliant
manner. This segment represents
anywhere between 10% and 70%
of the overall market, which is
sizeable. Traditionally, the focus
had been on switching their banking
relationship from conventional
Islamic finance courses and
22 universities offering degree
programmes specialising in
Islamic finance.
Malaysia and the UAE, both
established global Islamic finance
hubs, followed the UK in terms
of a comprehensive Islamic
finance education infrastructure.
Malaysia has 50 course providers
and 18 universities offering
degree programmes, whilst the
UAE has 31 course providers and
nine universities offering degree
programmes. Pakistan was placed
fourth, with 22 course providers
and nine universities offering
degree programmes. Overall the
IFDI recorded 420 institutions
offering courses in Islamic
to Islamic. Only now are we
beginning to see a greater awareness
regarding wealth management and
retirement planning, which in turn is
encouraging public pension funds to
consider offering Shariah compliant
alternatives.
A key decision is whether to allow
members of the fund to transfer
their existing account balance to
the Shariah compliant fund or if
only the future contributions should
be segregated as conventional or
Islamic. Additionally, the timing of
such transfers is important.
Nazim continued, We believe that
the emerging demand for Shariah
compliant retirement plans offers
significant opportunities for
financial institutions to diversify
their products and strengthen fee
income. This in turn will help
improve profitability, which is
clearly under stress for many Islamic
banks.
finance and over 113 universities
offering Islamic finance degrees.
Malaysia also led in terms of
research published on Islamic
finance in the last three years,
with 169 research papers, of
which 101 were peer reviewed.
The UK and USA followed with
111 research papers (56 peer
reviewed) and 73 research papers
(39 peer reviewed) respectively.
A total of 655 research papers
were issued globally on Islamic
finance in the last three years, of
which 354 were peer reviewed.
Khaled Al-Aboodi, Chief
Executive Officer, Islamic
Corporation for the
Development of the Private
NEWS
The report went on to say that
Indonesia and Turkey are two other
rapid growth markets with strong
prospects for Shariah compliant
pension programs. The development,
however, is likely to be a gradual
evolution due to the relatively smaller
size of the Shariah-compliant asset
management industry.
Nazim concluded, Regulatory
impetus will be critical for successful
roll-out. Countries that are able to
move swiftly are likely to strengthen
their global leadership in Islamic
finance.
Ashar Nazim
Sector, said, Our research shows
that countries that build their
educational infrastructure can
benefit most from the growth of
their Islamic finance industries.
Through their research and
thought leadership countries, like
the UK, Malaysia and the UAE
have the potential to significantly
influence the direction of the
regional Islamic finance sector.
(Interestingly, in an article in this issue
David Evans asks questions about
the whole Islamic finance education
industry is it producing too many
graduates, who have little hope of
employment and should it have a
stronger practical element. See Where
are all the promised Jobs in Islamic
Finance?)
IIBI 5
NEWS NEWHORIZON Zil Haja 1434 Safar 1435

Professional Association for Shariah

Scholars Launched
In recent years Shariah scholars,
their qualifications and fitness
to serve on the Shariah boards
of Islamic financial institutions
have been constantly in the
spotlight. Questions have been
asked particularly about their
understanding and knowledge of
finance and economics and also
their independence. A group of
well-known Islamic scholars have
responded to these questions
by launching a self-regulating
professional association, which
aims to develop training and
professional conduct standards for providers with a verifiable unified financial instruments and their
scholars. The organisation is called standard of Shariah guidance. accounting treatment, rather than
the Association of Shariah Scholars We expect a professional code of scholars qualifications or their
in Islamic Finance(ASSIF), a British- conduct and continuous professional professional conduct.
registered charity and it will address development (standards) to be issued
this longstanding problem with a by mid- February 2014. ASSIF will have a governing council
clear, commonly recognised set of of between 10 and 30 scholars.
qualifications for scholars. Currently, standards set by industry Co-founders and trustees already
bodies such as the Bahrain- include Bahrains Sheikh Nizam
The new association aims to work based Accounting and Auditing Yaquby, Syrias Abdul Sattar Abu
with the industrys existing bodies Organisation for Financial Ghuddah, Saudi Arabias Mohamed
around the globe rather than replace Institutions (AAOIFI) are enforced Ali Elgari and Malaysias Mohamad
them. Mufti Abdul Kadir Barkatulla, in full or in part by some countries Akram Laldin, who share around
ASSIFs deputy president said, but not all of them. These standards 270 Shariah board seats around the
ASSIF will help to organise advisory focus on the intricacies of Islamic world.

Closer Financial Ties Between Malaysia and the UAE

Bank Negara Malaysia has
announced a Memorandum
of Understanding (MoU) with
the Central Bank of the United
MoU Signing Ceremony
Arab Emirates. It provides
the framework to further
strengthen bilateral cooperation
with the Central Bank of the
United Arab Emirates for the
development of enhanced
financial services linkages
between the two countries,
including in the area of Islamic
finance, to support and facilitate
greater financial and economic
ties between Malaysia and the
United Arab Emirates.

Commenting on the
signing, Governor Zeti said,
This Memorandum of
Understanding provides further
avenues for our central banks
to work together in areas that
will facilitate closer financial
and economic linkages. I look
forward to the cooperation
and collaboration with the
Central Bank of the United
Arab Emirates in deepening our
financial sector linkages.

6 IIBI www.islamic-banking.com
NEWHORIZON September to December 2013 NEWS

Ernst & Young Identify Problems for the Takaful Industry

During the period 2007 to 2011 the
takaful industry enjoyed an annual
compound growth rate of 22%,
but according to the latest report
from Ernst & Young this fell to
16% in 2012. They describe this as
an alarming deceleration. In 2012
Saudi Arabia dominated the takaful
market with a 51% measured by
gross takaful contributions (GWC),
with South East Asia, mainly
Malaysia, having 25% and the GCC
16%.
This is, however, a story of two
halves. Saudi Arabia and Malaysia
are, by and large, doing well. They
have larger populations than the
Gulf States, for example and their
gross written contributions per
operator are also higher. The
picture in other markets is far less
rosy. Small operators are being
dragged down by heavy start-up
costs and companies are pursuing
a limited market, which is already
saturated, e.g. car insurance. The
result is that they grow market
share at the expense of profitability.
One possible way forward is
for companies to develop their
cross-border business, but they
are hampered in this by different
regulatory requirements and
the lack of a standard approach
to Shariah compliance. Even
assuming progress towards a more
level playing field in terms of
regulation and Shariah compliance,
the industry still needs large,
regional champions to exploit the
opportunities this would present
and there is little evidence currently
of any sort of consolidation that
would allow such champions
to emerge. On a more positive
note the report suggests that the
regulatory enhancements in rapidly
growing markets such as Turkey
and Indonesia will create new
opportunities, providing operators
can finds ways to meet this demand
cost effectively and efficiently.
Interestingly the operators
themselves identify the top two risks
in the market as rising competition
and evolving regulation. In the
case of evolving regulation the
report identified the new Malaysian
Financial Services Act 2013,
requiring operators to separate their
general and family takaful businesses
and Qatars decision to disallow
takaful window operations as actions
that are having a significant impact
on the development of the industry.

Significant Opportunities for Turkish Participation Banks

Thomson Reuters new Islamic than non-participation banks in average capital ratio is The report is based on a national
Finance Country Report on finding profitable places to deploy 13.7% compared with retail financial services perception
Turkey forecasts that there is new capital while remaining well non-participation banks survey and interviews with key
a significant opportunity for capitalised. Participation banks 17.4%. influencers in the financial industry.
participation banks (the name
used for Islamic banks in
Turkey) to more than double
their share of the total banking
sector to as much as 13.5% by
2017 from the current 5.1%.
Participation banks assets are
growing 25% annually, twice
as much as non-participation
banks.

It also found that 38% of

non-participation bank
consumers would consider
using a participation bank,
although there is still
significant need to educate
Turkish consumers more
than 80% of non-participation
finance customers and 40%
of participation finance
customers said they had
little to no understanding of
Islamic finance concepts.

Turkish participation banks

have also had greater success
Map of Turkey

www.islamic-banking.com IIBI 7
NEWS
Islamic Trade Finance Fund Launched
EIIB-Rasmala, a joint venture
between the European Islamic
Investment Bank and the Dubai-
based Rasmala Leasing Fund
has launched the Rasmala Trade
Finance Fund. The company
say the fund aims to offer a
diversified portfolio of trade
finance transactions exposed to
different geographies, industry
groups and individual companies
in order to lower exposure to
rising interest rates. It is designed
to obtain enhanced investment
returns from assets that can
Maybank Eyes US Expansion
Malayan Banking Bhd,
(Maybank) has identified at
least four new areas to expand
into, as part of its strategy
to boost its operations in the
United States. These include
transaction banking, asset
management, fixed income
distribution and Islamic
banking. The intention to
expand in the US has been
driven by the expected pick-up
in the US economy and the
future growth opportunities that
this represents. The Maybank
Group currently has a wholesale
banking presence in New York,
as well as a broking presence
through Maybank Kim Eng.
Speaking at the opening of
a new office in Park Avenue,
New York Datuk Abdul Farid
UAE Plan an Islamic
Finance Supervisory Body
The governor of the UAE central
bank, Sultan Nasser al-Suweidi
has announced that the bank
plans to develop an independent
authority which will supervise
the countrys Islamic finance
8 IIBI
often be undervalued due to lack
of recognition of their intrinsic
payment capabilities. The overall
strategy of the fund is expected to
provide it with a means to achieve
global diversification in both
the primary and secondary trade
finance markets.
Commenting on the new fund, Eric
Swats, Head of Asset Management,
said, We are delighted to announce
the launch of our latest fund,
which will cater to the increasing
demand for low risk, income-
Alias, Maybanks President and
CEO said, We are proud to say
that Maybank remains the sole
Malaysian bank in New York and
one of the only three ASEAN
banks to have a branch licence
here. He added that as the US
economy gained traction, the
Group expected an increase
in US-ASEAN trade flows.
Two-way trade which stood
close to $200 billion in 2012
is expected to grow further if
the Trans Pacific Partnership is
finalised. He believed that this
would create opportunities for
Maybank to explore new drivers
of growth and revenue, especially
in transaction banking, asset
management, Islamic banking
and fixed income distribution
including sukuk. He added, By
capitalising on our network and
industry, backed by legislation.
It is believed that the legislation,
which is being developed by the
UAE government, will enhance
the authoritys ability to influence
industry practices.
NEWHORIZON Zil Haja 1434 Safar 1435
orientated Shariah-compliant
investment products. The Rasmala
Trade Finance Fund will provide
investors with a low-risk alternative
investment opportunity to obtain
attractive and stable returns.
Interestingly Ernst & Young
suggested earlier this year that
trade flows with the East and
emerging markets are likely to
grow and Islamic trade finance is
likely to be one of the beneficiaries
of this growth, providing Islamic
banks can put together the sort of
core strengths in Islamic banking, we
will harness opportunities through
better synergy between our broking
and banking arms in the US.
This announcement came just two
weeks after the Group had
In Brief
Emirates Islamic Bank has
rebranded as Emirates
Islamic. The new branding
was the result of more than 12
months of market research.
Jamal Bin Ghalaita, Chief
Executive Officer, Emirates
Islamic said, The Emirates
Islamic brand is a reflection of
the transformational journey
that we have undertaken
over the past two years. It is
a reflection of how we see
ourselves today and into the
future.
First Gulf Bank has
announced the completion
of its acquisition of Dubai
First. This is in line with
FGBs expansion strategy of
developing existing businesses
and offering more value to an
expanding UAE customer base.
Ms. Hana Al Rostamani will
trade finance operations that will
persuade businesses to switch to
them. The EIIB-Rasmala Trade
Finance Fund would therefore
seem to be the right offering at the
right time.
Eric Swats
launched an Islamic asset
management company in
London. They positioned
the new company as a
gateway to the Asian Islamic
finance industry for global
investors.
lead the newly constituted Board
of Directors as Chairman of the
Company.
It is reported that the Libyan
Central Bank proposes to issue
licenses for three fully-fledged
Islamic banks in 2014. Apparently
five local investors have lodged
applications for these licenses.
Evaluation of these applications
is expected to be complete in the
first half of 2014.
The Global Centre for Islamic
Finance has opened in Istanbul.
It aims to become a knowledge
hub for developing Islamic finance
globally, conducting research and
training and providing technical
assistance and advisory services
to World Bank Group client
countries interested in developing
Islamic financial institutions and
markets.
www.islamic-banking.com
NEWHORIZON September to December 2013
Market Slowdown in 2013
Thomson Reuters Annual Sukuk Perceptions
and Forecast Study suggests that the gap
between the supply and demand for sukuk will
reach its peak in mid 2014 and will then steadily
narrow. The amount of outstanding sukuk
currently stands at $237 billion and is expected
to reach $749 billion by 2018. Issuance in 2013
stood at around $100 billion and is forecast to
almost double by 2018 to reach $187 billion,
with 2014 expected to show healthy growth of
just less than 30% to reach $130 billion.
To say that Malaysia dominate the market is
something of an understatement. In 2013
Malaya issued $53.3 billion of sukuk, with Saudi
Arabia in second place with $8.7 billion, the
UAE third with $5.2 billion and Indonesia fourth
with $5.0 billion.
Dr. Sayd Farook, Global Head of Islamic
Capital Markets for Thomson Reuters, said,
Although the sukuk global market in 2013 has
slowed down in terms of new issuance, we see
positive signs in 2014. We expect the appetite
for sukuk to increase in 2014 as cross-border
sukuk issuances continue to gain momentum.
Critically, we are seeing increased support
from governments with a number of countries
finalising regulations to allow the issuance of
sukuk in their local markets. Countries such
as Morocco, Nigeria, Oman, South Africa
and Tunisia have also shown great interest in
Dr Sayd Farook
www.islamic-banking.com
SUKUK UPDATE
Sukuk Update
issuing sovereign sukuk in 2014 to finance
infrastructure projects.
Despite the healthy outlook for 2014,
several sukuk market challenges remain
unresolved. Deficiencies still persist in the
areas of transparency, standardisation and
liquidity in the secondary market due to
limited trading mechanisms and the different
treatment of certain sukuk structures in
different jurisdictions.
delegation from the Islamic Development Bank
Interestingly the study sees some signs of
Group and the Government of Senegal.
change, which may encourage growth in
the secondary market. In the 2013 survey
In his response, the Senegalese Finance Minister,
only 14.2% of investors expected to hold
Mr. Amadou Ba, expressed his appreciation to
sukuk until maturity, down from 25% last
the ICD, and suggested that the President of
year.
Senegal, Mr. Macky Sall strongly supports this
initiative. In fact, he has initiated legislative
The study is based on a survey of sukuk
reforms to accommodate the products of
lead arrangers and investors, predominantly
Islamic finance. Mr. Amadou Ba stated that
based in Islamic markets in MENA and
the government of Senegal is grateful for
South East Asia, conducted in August and
the cooperation with IDB and reiterated the
September 2013.
interest of President Macky Sall for a stronger
relationship with the Islamic World.
Senegal Signs Sukuk Agreement
with ICD
Tilal Development Sell Omans
The Islamic Corporation for the
First Sukuk
Development of the Private Sector (ICD),
Tilal Development Co has sold Omans first
an entity of the Islamic Development
sukuk. The five-year, $130 million sukuk offers
Bank Group (IDB) and the government
a rate of 5% and is based on an ijara structure.
of Senegal have signed a sukuk agreement,
It is believed that this is a move that will be
which is the first of its kind in the West
emulated by other companies in Oman. The
African Economic and Monetary Union.
sukuk was privately placed with investors, the
The signing of the agreement took place in
overwhelming majority of whom are believed to
Washington DC during the World Bank/
be local pension funds and banks.
IMF Annual Meeting.
Tilal, which is 40%-owned by the Qatar
Mr. Khalid Al-Aboodi, the CEO of ICD,
Investment Authority, plans to use the proceeds
represented the Corporation, while Mr.
to expand the Tilal Complex in Muscat. The
Amadou Ba, the Finance Minister of
Complex incorporates the Muscat Grand Mall as
Senegal represented the government of
well as residential and office space.
Senegal. The Sukuk agreement worth US
$200 million is expected to be implemented
Cagamas Conclude Malysias Largest
from as of 2014. We hope this sukuk will
Commodity Murabahah Sukuk
serve the purpose of the government and
Cagamas Berhad (Cagamas), Malaysias national
the people of Senegal. We are grateful for
mortgage company, has successfully concluded
the trust bestowed by the government of
the countrys largest sukuk commodity
Senegal on ICD, said Mr. Al-Aboodi. We
murabahah issuance amounting to RM4.2 billion
will do our best to see that it is successful,
(Malaysian ringgits). The first issuance, which
and we hope this will open the door for
was upsized to RM3.8 billion from the initial
other African countries to sign more
issue size of RM2.5 billion due to overwhelming
sukuk agreement, Mr Al-Aboodi told the
IIBI 9
SUKUK UPDATE NEWHORIZON Zil Haja 1434 Safar 1435

demand, which attracted a book size of
about RM8.0 billion from a diverse group of
domestic and offshore investors resulting in
a subscription rate of more than 3.2 times.
Tenures range from 1-20 years.
The proceeds of this issuance, along with
a second issuance of RM400 million in
tenures of 1-3 years, will be used to fund
the purchase of Islamic financing from the
financial system.
Senegal Set to Issue Sukuk in 2014
The government of Senegal have been
looking at the possibility of issuing a
sovereign sukuk, but it has now announced
that it is planning to issue its first sukuk in
2014. The sukuk programme is expected
to be worth $200 million. This would be
a cooperative venture between the the
Senegalese government and the Jeddah-based
Islamic Corporation for the Development
of the Private Sector (ICD), an affiliate of
the Islamic Development Bank. The Central
Bank of West
African States has
indicated that it
would be willing
to accept the
Senegalese sukuk
in its repurchase
operations.
Riyad Capital has been appointed as a financial
advisor and lead manager to this issue.
Talal Ibrahim Al-Qudaibi, Riyad Banks CEO
explained that Riyad Bank aims to diversify its
sources of funding and reduce the asset/liability
maturity mismatch by securing long-term funding
and provide good investment opportunities for
the banks clients and investors in the local market.
The issue is expected to earn a high rate of
investor interest given the banks strong financial
position. This is supported by the bank receiving
grade (AA-) from Capital Intelligence and (A+)
from Standard and Poors and Fitch Agency, which
are the largest global financial credit rating agencies.
These ratings are considered the highest among
all banks in the kingdom. They also confirm the
stable outlook of the bank, which reflects the
financial position of the bank.
Turkiye Finans Plan More Sukuk Issues in
2014
Turkish participation bank, Turkiye Finans, has
announced that they plan to issue further sukuk in
2014. (The bank issued a $500 million
sukuk earlier in 2013.) We think that the
experience we have gained from previous
sukuk issues will reflect on future sukuk
issues. We plan both domestic currency
and forex-denominated sukuk issues
in 2014, said Chief Executive Derya
Gurerk.
IDB Chooses Dubai for its Third
Sukuk Programme
The Islamic Development Bank (IDB)
is planning to set up a $10 billion
sukuk programme on the Dubai
NASDAQ. IDB has already launched
such programmes in London and Kuala
Lumpur; this is the first in the Middle
East. This announcement will boost
Dubais attempts to establish itself as a
centre for Islamic finance. IDB has so
far given no timeframe for the launch of
the programme. IDB is also planning to
extend its London programme, from $6.5
million to $10 million.

Saudi Arabias
Riyad Bank to
Issue Sukuk
Riyad Bank
is planning to
issue a medium-
term Sukuk in
Saudi Riyal. It
will be private
placement offer
to institutional
investors in the
local market. The
sukuk will be
for seven years
maturity callable
after five years
with a variable
return, which will
be determined
according to
subscriptions.
Mosque of Touba, Senegal

10 IIBI www.islamic-banking.com
NEWHORIZON September to December 2013
David Cameron Announces Plans
for a UK Sovereign Sukuk
By: Andrea Wharton, Editor, NewHorizon
It might seem strange to devote two pages to the announcement of a relatively small sukuk, just 200 million. The
announcement is, however, seen as significant by commentators both in the UK and in the wider world. It is, therefore,
worth examining what the announcement said and the reactions to it.
In October 2013 David
Cameron, the British Prime
Minister, announced the UKs
intention to issue a 200 million,
five-year sovereign sukuk. In
his speech at the World Islamic
Economic Forum held in
London in October 2013, he
said, First, for years people
have been talking about creating
an Islamic bond or sukuk
outside the Islamic world. But
its just never quite happened.
Changing that is a question of
pragmatism and political will.
And here in Britain weve got
both.
This government wants Britain
to become the first sovereign
outside the Islamic world to
issue an Islamic bond. So
the Treasury is working on
the practicalities of issuing a
bond-like sukuk worth around
200 million and we very much
welcome the involvement of
industry in developing this
initiative which we hope to
launch as early as next year.
The key phrase is the Treasury
is working on the practicalities
of issuing a bond-like sukuk.
That is a statement that falls
short of saying we will do
this; it still leaves room for
the Treasury to come back
and say they have looked at
the practicalities and they have
decided against such a move.
The Treasury has apparently
been down this road before,
www.islamic-banking.com
although, it has to be said, before
such a public commitment
by a serving Prime Minister.
On previous occasion they
reportedly rejected the idea on
the grounds of value for money.
So, what is different this time?
Richard de Belder, a partner with
international law firm, Dentons,
believes there is a difference.
He commented, I view the
announcement of the sukuk
against a broader backdrop.
In March the Government
announced the formation of
the Islamic Finance Task Force
of which I was a member. Its
role was, in part, to re-open a
dialogue with the various players
in the Islamic finance sector
in the UK to re-invigorate the
Islamic finance sector. Various
areas were looked at including a
UK sovereign sukuk, so I would
say the announcement of the
UK sovereign sukuk should be
seen as part of the overall wish
This government wants
Britain to become the first
sovereign outside the Islamic
world to issue an
Islamic bond.
David Cameron,
UK Prime Minister
NEWS SPECIAL
of the Government to promote
and expand Islamic finance
in the UK. I have had no
indication that the Government
has changed its mind either in
terms of this bigger picture or
in relation to the UK sovereign
sukuk and this is further borne
out by the Chancellor in his
Autumn Statement referring to
the various benefits that would
flow from a sovereign sukuk
issue. My understanding is
that we have moved on from
a value for money analysis
to looking at the practical
steps that need to be taken
to structure and document a
sovereign sukuk issue. In his
David Cameron,
speech Prime Minister Cameron UK Prime Minister
also said, Foreign investment
creates wealth, jobs and growth. the Islamic investments from
And far from weakening our which the UK has benefited
industrial base, that investment including the London Gateway
actually strengthens it. development, the Shard, the
Islamic investment is already development of the Chelsea
fundamental to our success. Barracks site and Battersea
He went on to list some of Power Station among others. It
is also worth mentioning that
the UK government is keen
to consolidate the City of
Londons position as a leading
centre of Islamic finance. If
the price of helping to achieve
these twin objectives is a sukuk
with somewhat higher costs than
a conventional bond issue, the
Government currently seem to
think it is a price worth paying.
What has the industry had to
say about David Camerons
announcement? Bank of London
IIBI 11
NEWS SPECIAL
and the Middle Easts Finance
Director and Chairman of the UK
Islamic Finance Secretariat, Richard
Williams, commented, We are
gratified, after years of championing
a UK Sukuk issuance, that the
Government has now taken this
step. A sukuk will consolidate the
UKs position as a global leader in
finance, deepen relationships with
the Middle East and Malaysia and
above all demonstrates pro-active
support for the countrys Islamic
finance industry. The ambition
shown by the Government to
cement the UK as a western hub
for Islamic finance highlights just
how much the sector has done to
support the British economy.
There are six Islamic banks in the
UK of which BLME is the largest
This will offer greater choice Chairman
for the Islamic banking
community in the UK and
will allow them to meet
their regulatory liquidity
requirements by investing
in sukuk-style bonds for the The view of most people I
first time.
Simon Hills,
Executive Director, BBA
The British Banking
Associations Executive
Director, Simon Hills said, This if the Bank of England was
will offer greater choice for the prepared to accept non-interest
Islamic banking community in
the UK and will allow them to
meet their regulatory liquidity
requirements by investing in
sukuk-style bonds for the first
time. To fill the gap between
now and the issuance of the
12 IIBI
NEWHORIZON Zil Haja 1434 Safar 1435
that until now have been without
a UK AAA-rated liquidity Despite its small size, I do
expect this announcement, if
instrument. This challenge will
now be resolved and is one of
the final measures in creating a
truly level playing field for the
UK Islamic banks. In the future
followed through by an issue,
we hope that Islamic institutions
will also be able to access
to have a major positive
schemes such as Funding for
Lending in a Shariah-compliant impact on the perception of
manner.
the UK as the leading country
At present the UK is the 9th
largest provider of Islamic
finance in the world, but a
in Islamic finance outside the
sukuk can only strengthen this
position and provide further
OIC (Organisation of Islamic
opportunities for growth for an
industry that is predicted to be Cooperation).
worth more than $15 trillion by
2015. Mohammed Amin,
Chairman of the Conservative Muslim Forum
of the Conservative
Muslim Forum and former
be good for Londons competitive
position. He added, The size of
UK Head of Islamic Finance
at PricewaterhouseCoopers,
the issue has clearly been set at
a value, 200 million, where the
comments, Despite its small size,
I do expect this announcement,
Government can feel confident
that UK Islamic banks can take up
if followed through by an the entire issue.
issue, to have a major positive
impact on the perception of Richard de Belder, Partner and
the UK as the leading country
in Islamic finance outside the
Global Head of Islamic Finance
at law firm Dentons is also bullish
OIC (Organisation of Islamic
Cooperation). Accordingly it will
about the proposed issue. He told
NewHorizon, As for the amount,
know in the Islamic finance
space is that they fully expect
Governments British Islamic
bond next year it would be helpful the issue will be successful
and there would then be the
bearing deposits for liquidity
management purposes from
Islamic banks.
expectation there would be
The size of the proposed sukuk,
subsequent issues.
200 million is modest, but
Mohammed Amin, Deputy Richard de Belder,
Partner, Dentons
www.islamic-banking.com
NEWHORIZON September to December 2013
it is small but people I speak
to believe the most important
thing is that there is a sukuk
issue, regardless of the size. The
view of most people I know in
the Islamic finance space is that
they fully expect the issue will
be successful and there would
then be the expectation there
would be subsequent issues.
The sukuk issue will make a big
difference. The announcement
itself has generated a lot more
interest and confidence in the
future prospects for Islamic
finance in the UK. It should
also help globally in that, once
a leading Western government
has issued a sovereign sukuk,
it should help persuade other
governments to consider this
form of finance. Within the
UK it is important for there to
be a sovereign sukuk benchmark
before corporate sukuk can be
issued for infrastructure projects
and so this is another positive
development.
It is also a critical requirement
for the UK Islamic banks
in terms of their liquidity
management and regulatory
David Camerons statement
that he wants London to
stand side by side with cities
in the Gulf states and Kuala
Lumpur as an accepted
and recognised centre
of excellence in Islamic
finance can only give further
confidence that the UK is
open to Islamic finance.
Samer Hijazi,
Director, KPMG
www.islamic-banking.com
compliance. Their ability to buy
a Sterling-denominated sovereign
sukuk will assist them in the
expansion of their activities.
Samer Hijazi, a director in
KPMGs financial services
practice said, I am very optimistic
about the announcement and
believe it will lead to increased
Islamic financial investment in the
UK across the financial services
and infrastructure sectors. I
believe that many outside the
UK will see it as a confirmation
of the UKs desire to engage
and do business with the Islamic
world. It will consolidate the
UKs position as the leading
hub of Islamic finance in the
Western world. David Camerons
statement that he wants London
to stand side by side with cities
in the Gulf states and Kuala
Lumpur as an accepted and
recognised centre of excellence
in Islamic finance can only give
further confidence that the UK is
open to Islamic finance.
The Government must,
however, be careful about how
they structure the sukuk. Two
years ago Goldman Sachs
notoriously fell flat on its face,
when it proposed to issue a
sukuk through the Irish Stock
Exchange. There were a number
of problems with the proposed
issue, including the fact that it was
based on the controversial reverse
tawarruq structure. Although
details are sparse at the moment,
it is believed the UK Government
will avoid this pitfall by electing
to use an ijara structure backed by
government property.
The response to the
announcement has been positive,
with publications around the
world apparently viewing it
as more than just a publicity
stunt designed to coincide with
the World Islamic Economic
Forum in London. Some of the
comments on the announcement
are as follows:
Arab News commented, Londons
decision to issue sukuk opens
the way for the Islamic finance
industry to contribute something
and add value to the ongoing
search for solutions to current
economic problems facing the
world.
The Kuala Lumpur-based
Business Times described it as
a positive step towards the
internationalisation of the Islamic
finance industry.
The UAEs TheNational said, In
tangible financial terms, the UK
sukuk offers Islamic investors a
benchmark for sovereign debt in
the western world. It will set up
a yield curve for such financial
instruments and the London
Stock Exchange listing should
ensure transparency and probity.
KPMGs Samer Hijazi agrees
that the announcement could
well have an impact beyond
the UK. He said, I believe
other Western governments
will follow this situation very
NEWS SPECIAL
closely. These remain very
challenging economic times, but
I expect that once the issuance
goes ahead and is well received
(over-subscribed in my view) by
the market then other Western
governments will take concrete
steps to attract Islamic financial
investment to their own shores.
As I said, I am of the belief that
this issuance, when it goes ahead,
will be successful and, as such,
should lead to further issuances.
He warns, The industry has
waited a long time for this and it
is critical that the issuance goes
ahead in accordance with the
timings announced by David
Cameron otherwise confidence
will be lost. This is a great
moment for Islamic finance, an
industry which is barely 40 years
old and yet has so much promise
that Her Majestys Government
is prepared to publicly announce
its commitment to the industry.
There are, however some
mean-spirited and sceptical
voices determined to downplay
the significance of the
announcement unsurprisingly
the main culprits are the usual
suspects in the British press.
Their voices are, however,
drowned out by the welcome
for this announcement from a
wide range of commentators
inside and outside the UK. A
UK sukuk has been a long time
in gestation and it is a fairly small
baby, but the more optimistic
commentators see it as a
harbinger of more to come. It is
now down to the Government.
David Cameron himself has
said the Government has the
political will to make it happen
and the positive response to
the announcement suggests the
goodwill is out there; now they
need to get the technical details
right. Given the experience
and advice they have available
to them, it would indeed be a
miracle of mismanagement if
they failed.
IIBI 13
FOOD FOR THOUGHT
Rational for the Prohibition of Interest
in Islamic Economics
By: Prof Irfan Shahid, Rizvi College, Mumbai
Interest on money is not
equivalent to rent on goods;
money is a medium of exchange
and a unit of value not a
commodity
Without reference to any particular
time, place or condition, God
Almighty prohibited usury in the
Quran. Though the prohibition
is gradual, its implementation is
unconditional till the Last Day.
There is no verse in the Quran and
hadith where Allah (swt) declares
war against any individual except
the verse which discusses the
prohibition of interest in chapter 2,
verses 278-279.
O ye who believe! Fear Allah, and give
up what remains of your demand for
usury, if ye are indeed believers. If ye
do it not, Take notice of war from Allah
and His Messenger: But if ye turn back,
ye shall have your capital sums: Deal not
unjustly, and ye shall not be dealt with
unjustly. (The Quran, 2: 278-279)
Wherever the Quran talks about
disobedient servants, Allah refers
to them as fools, who will be put
into the hellfire, but in case of
extravagance and interest, Allah
(swt) admonishes them by a severe
warning.
Logically anyone reading the
Quranic verse on the war against
interest givers and receivers will
Hardly any commercial bank
works for the betterment of
the underprivileged people of
the society.
14 IIBI
conclude that the war is not in
opposition to poor people. It
is clearly understood that the
dealers of interest are the strong
people in a society who are proud
of their power and money. It
is an unchallenged fact that
contemporary financial institutions
are very strong. They are backed up
by central banks and governments.
These commercial financial
institutions circulate money in
a particular class of society and
deprive most of the people who
live below the poverty line. Hardly
any commercial bank works for the
betterment of the underprivileged
people of the society.
Many people argue that modern day
interest is not similar to the usury
of olden day. Earlier interest was
based on exploitation and prevalent
interest is based on just principles.
Some people refer to the statements
of several economists of the 19th
and 20th centuries especially John
Maynard Keynes, that interest is
similar to renting land and property.
The permissibility of renting is
based on the quality and nature
of goods in Islam. The principle
of Islamic jurisprudence does not
permit the renting of perishable
goods (talful ain goods) like rice
and barley. Renting property,
land and machinery are allowed in
Islam; it comes into the category
NEWHORIZON Zil Haja 1434 Safar 1435
Islam does not perceive
money as the ultimate goal,
but an instrument which leads
to a goal.
of non-perishable goods and
there are minimum possibilities
of Talfulaian in this particular
group of goods. Rent is a reward
for the depreciation of value
and use of benefit in the case
of non-perishable goods. Some
financial experts believe that renting
property and money is similar. In
fact it is not so; the nature and
quality of the goods is different.
Islam does not consider money
as goods. Even for the sake of
argument if we consider money
as goods then we cannot give
money in rent due to its perishable
nature. The borrower cannot
return the exact notes (currency)
received from lender. He may
return another note of the same
denomination, which is not allowed
under the principle of Islamic
jurisprudence.
Secondly money is a medium of
exchange, a store of value and a
unit of measure. Contemporary
writings on the function of
money do not accept money
as goods. If money were to be
considered as goods, it should have
been mentioned in the function
of money. Renting money is a
phenomenon of banking and
finance.
A classical scholar of the first
Islamic century, Imam Hassan
Al-Basri (May Allah have mercy
on him), has described the nature
of money in Islam. He says
Money is such a companion of
yours that it does not benefit you,
unless it leaves you. Moreover
Imam Ghazali has said in Ihya-ul
Uloom that money is an instrument
which facilitates exchange of
goods. Islam does not perceive
money as the ultimate goal, but
an instrument which leads to a
goal. The one who uses money
in a manner contrary to its basic
purpose is, in fact, disregarding the
blessings of Allah. Consequently,
whoever hoards money is doing
an injustice by defeating its actual
purpose. He is like the one who
imprisons a ruler or postman. For
instance, if a ruler is imprisoned, he
could not fulfil his duty towards his
subjects and similarly if a postman
is imprisoned thus he cannot
distribute letters. The important
news enveloped in the letter cannot
reach the concerned person. Due
to the delay in receiving the news
the concerned person may suffer
a loss or cause loss to an entire
community. Hoarding or renting
money is an attempt to poison
money and preventing money
rendering its duty.
There are more than seven places
in the Quran where interest is
condemned. There are two kinds
of riba discussed in most of the
book of hadiths. A careful study
www.islamic-banking.com
NEWHORIZON September to December 2013
of riba-al-fadal and riba -ansia
will remove confusion about
interest. Riba bilfadl discusses
usury in relation to goods and
exchange. Taking a superior kind
of goods and returning more of
the same kind of goods of inferior
quality is an example of riba-al-
fadl. Riba-ansia discusses usury
on lent money. (For an in-depth
study kindly refer to Riba and Bank
Interest by Najatullah Siddiqui and
Sood by Maulana Maudoodi.)
Islam encourages ihsan and trade.
Ihsan promotes compassion,
generosity, sympathy, tolerance,
kindness and humility, while usury
develops greed, selfishness, cruelty
and cold-heartedness in people. It
oppresses the poor man.
Interest fosters a society of debtors
and sleeping business partners
and promotes the circulation of
money only amongst the rich.
Small entrepreneurs cannot have
access to credit or loans due to high
interest rates and poor credit in the
market. Recent studies conducted
by various research institutes show
the unavailability of microfinance
to farmers and small businessmen.
Microcredit was found to be too
costly in south India where many
farmers committed suicide due to
their inability to repay debts. Even
after a lot of efforts by NGOs
(non-government organisations)
no commercial bank is prepared
to offer micro loans on minimum
interest rates or zero interest. Why
would a commercial bank give loans
to small businessmen or to farmers
on a minimum interest rate when
interest is considered profit and
rent of money? Rather the bank
will prefer lending to tycoons and
creditworthy corporates that can
shell out huge sums in interest.
According to the survey by the
United Nation 20% of the richest
people of the world consume 82%
of the GDP (Gross Domestic
Product) of the world. The
www.islamic-banking.com
Interest fosters a society of debtors and
sleeping business partners and promotes the
circulation of money only amongst the rich.
Small entrepreneurs cannot have access to
credit or loans due to high interest rates and
poor credit in the market.
remaining 80% of the worlds
population is surviving on just
18 % of the worlds GDP. It
shows a huge difference in the
consumption patterns of people.
Our current economic and
financial system is responsible for
this disparity. Dr Yusuf Qardavi
has quoted an incidence of the
wellbeing of economy in his book
Alfaqr walejoha fil Islam (Islam
and Poverty) where a person
roams with his money in the era
of Umer bin Abdulaziz, but he
does not find any needy person
to accept it. That is the golden
period of Islam which provides
complete social, moral and
economic security to its subjects.
Some Ulama (Religious Clerics)
and monarchs have imprisoned
Islam in the mosque and the
madersa (religious seminary).
When the principles of Islam
are implemented in the markets,
courts and parliaments of any
society, then all the said problems
will be systematically solved.
Interest cannot bring an
economy into a position of
stability and equilibrium. Our
economy is based on interest.
Systematic economic research and
development has been going on
for more than 100 years, during
which time there have been several
financial crises, millions became
unemployed, thousands of
companies have been liquidated
and a number of people passed
FOOD FOR THOUGHT
away, yet economists and bankers
could not solve the problem backed
up by interest.
The practice of benevolence will
be encouraged in society when
the sacrifice of opportunity cost
is promoted. Interest does not let
people make that sacrifice. It corrupts
the whole society, demeans human
personality and induces negative
growth in the economy.
Some scholars translate the Arabic
Word riba as zulm (oppression) and
fasaad (corruption), which is an apt
term given its ill effects on society.
Some businessmen argue that interest
is the cost of inflation and it is quite
similar to profit, but a careful study
shows that it is not so. Inflation
occurs due to the mismanagement
of the supply of and demand for
goods and services in the economy
where profit is the outcome of
business derived by deducting
production costs from sales prices.
Islam promotes business through
fair partnership using the
mudarabah, musharkah, ijarah
and wakala models mentioned
in various hadiths and books of
Islamic jurisprudence. Modern
Islamic banking and finance uses
these models to develop financial
products such as mortgages, sukuk
and takaful.
Irfan Shahid is an Islamic finance
and economics professional and
a Shariah scholar. He has taught
economics and Islamic finance
at various business schools in
India, Europe and the Gulf. He
has worked closely with eminent
Islamic scholars and economists
to nurture Islamic finance in
India and abroad. He is currently
teaching economics and Islamic
finance to postgraduate students
at the Rizvi College, Mumbai.
IIBI 15
ACADEMIC ARTICLE
Revisiting the Principle of Tabarru in Takaful Structures
By: Assoc. Prof. Dr Asyraf Wajdi Dusuki, Head of Research Affairs, International
Shari`ah Research Academy for Islamic Finance (ISRA)
Defining Takaful
It has been widely accepted
today that Islamic insurance or
takaful, unlike its conventional
counterpart, is based on the
fundamental principles of mutual
cooperation (taawun) and donation
(tabarru`). Under the Islamic laws
of transactions (fiqh muamalah),
the existence of gharar (ambiguity)
and maysir (gambling), which
normally nullify an exchange
contract (muawadah), are tolerated
in a contract of donation (tabarru`).
This corresponds to the Islamic
legal maxim:
uncertainties are tolerable in a
gratuitous contract.
This is mainly due to the fact that
parties who enter into a tabarru`
contract do not aim to make profit
out of the contributed sum and
hence the potential dispute, which
normally arises in a profit-making
transaction, is deemed to be
negligible in a gratuitous-based
transaction. Furthermore, the issue
of uncertainty is irrelevant since the
contributor voluntarily gives away
his property or right to the recipient
without any consideration.
In contrast, conventional insurance,
which is based on the principle of
muawadah (exchange) and aims at
making profit out of the insurance
operations, is prohibited from
the Shariah viewpoint since it
contains gharar (ambiguity). This
is particularly true since a person
who pays the premium (insurance
price) for the insurance policy has
actually paid for peace of mind,
which will indemnify him should
any mishap occur in the future.
Being free from uncertainties is
16 IIBI
never possible in the insurance
industry, because uncertainties
are peculiar and integral to both
premium/contribution and claim/
compensation.
On the other hand, the Islamic
alternative to conventional
insurance, also known as takaful,
reflects a reciprocal relationship
and agreement of mutual help
between participating members
who undertake to mutually
guarantee and indemnify each
other in a particular defined event.
The act of guaranteeing each
other implies mutual help and
mutual indemnity on the basis of
brotherhood deeply rooted in the
tabarru` principle, which tolerates
the presence of gharar.
Notwithstanding the above, many
contemporary scholars have
started to raise concerns about
the current practice of takaful.
This concern stems from the
fact that many takaful products
and operations have begun to
converge closely to the practice
of conventional insurance. In
particular, the fundamental
structure of takaful, which is
premised on the basic concept
of tabarru, has started to be
questioned, because many benefits
are offered to the participants
at the beginning of the takaful
contract in return for the
contributions paid to the tabarru
pool managed by takaful operators.
This article, therefore, aims to
highlight some of the issues with
regards to this fundamental issue
of tabarru, which has been used
to underpin the concept of takaful,
as an alternative to conventional
insurance. To begin with, let us
NEWHORIZON Zil Haja 1434 Safar 1435
first understand the concept and
principle of tabarru.
The Concept of Tabarru
Tabarru is derived from the word
tabarraa, which carries the meaning
of contribution, gift, donation or
charity. Tabarru technically is a
unilateral declaration of intent,
which is a contract with a particular
nature in Islamic commercial
law. The purpose of this type
of contract is to give a favour to
the recipient without any specific
consideration in return. Unlike
the exchange contract, this type of
contract is valid and enforceable in
Islamic commercial law even for no
consideration.
The basis for tabarru is stated in
the Quran:
It is not righteousness that ye turn
your faces to the East and the West;
but righteous is he who believeth
in Allah and the Last Day and the
angels and the Scripture and the
prophets; and giveth wealth, for
love of Him, to kinsfolk and to
orphans and the needy and the
wayfarer and to those who ask,
and to set slaves free; and observe
proper worship and pays the poor-
due; and those who keep their
treaty when they make one, and the
patient in tribulation and adversity
and time of stress. Such are they
who are sincere. Such are the God-
fearing. (2: 177)
the beneficiary to own the object
It is also supported by many
hadiths; for instance, in a hadith
Asma narrated that the Prophet
(p.b.u.h) said:
will be the transfer of the subject
Give (in charity) and do not give
reluctantly lest Allah should give
you in a limited amount; and do
not withhold your money lest
Allah should withhold it from you.
(Sahih Bukhari)
Essentially, tabarru is a
contribution or donation that
entails no return but rather a
reward from Allah alone. There are
two important pillars of tabarru,
namely the absence of counter-
value and the intention to perform
tabarru. In the absence of any of
the two, it is no longer considered
tabarru. For instance, if a donor
contributes with an expectation of
a counter-value from the donation
given, then the whole transaction
will be perceived as an exchange
(muawadah) rather than a tabarru`
contract.
The Issue of Ownership and
Possession in Takaful
This basic structure of takaful
premised on the tabarru` principle
gives rise to one of the fundamental
Shariah concerns, which is
regarding the absolute ownership
transfer. When a participant pays
a premium to the takaful operator,
he has effectively donated his
contribution as tabarru`, hence,
relinquishing his ownership over
the object donated as prescribed
by the rules of tabarru`. Ibn
Qudamah in his famous book
Al-Mughni asserts that hibah (which
is a form of tabarru` contract)
requires the gift giver to enable
of hibah. It is further reiterated
by Ibn Nujaym in Al-Bahr al-Ra`iq
Sharh Kanz al-Daqa`iq that the most
important implication of hibah
matter to the beneficiary/donee,
which entitles him to hold the title
of ownership over the object of
www.islamic-banking.com
NEWHORIZON September to December 2013 ACADEMIC ARTICLE

hibah (thubut al-milk li`l mawhib
lahu).
Unlike the majority of scholars
who deem possession as one of the
pillars of hibah, Hanafi schools on
the other hand regard it to be an
important condition for the validity
of hibah. According to Al-Utsaimin
in Al-Sharh al-Mumti Kitab al-Waqf
wa al-Hibah wa al-Wasiyyah, hibah
will only take effect upon the
recipient of the donation taking
possession of it. This corresponds
to the Islamic legal maxim La
yatimmu al-tabarru illa bil qabdi,
which means tabarru, will not take
effect unless there is a possession.
This hadith is based on the saying
of the Prophet Muhammad (peace
be upon him):
Hibah is not permissible unless
it (the subject matter of hibah) is
possessed (Al-Zailaie al-Hanafi,
Fakhruddin Uthman Ibn Ali.Tibyan
al-Haqaiq Syarh Kanz al-Daqaiq.
Kitab: al-Hibah. Dar al-Kitab
al-Islami). Hibah, therefore,
is voidable without complete
possession. This is further
reiterated by a Malikis scholar, Al-
Qarafi in his book, Anwar al-Baru fi
Anua al-Furuq, who mentioned the
following:
If possession does not take effect
in hibah, it is void.
Shafie scholars also shared the
As an alternative to the pure tabarru`
concept, the Accounting and Auditing
same view with regards to taking
possession as an important pillar
for hibah to be valid. They based
their opinion on the famous saying
of Imam al-Shafie in his book
al-Umm:
Hibah and sadaqah are all
permissible contracts which exclude
compensation and should be
completed by possession.
Nevertheless, it is observed that
a takaful contract cannot be
considered a pure tabarru contract
but rather a qualified or conditional
tabarru contract due to the
following reasons:
1. The contribution made by a
participant in takaful is with
consideration to a right to
claim for compensation in
the event of loss or damage
of subject matter. Thus, the
tabarru is not merely for
charity but conditional upon
certain consideration, namely
the right to claim takaful
benefits in the event of loss.
Without such a right, he
will neither participate nor
perform the tabarru. This is
deemed to be a violation of
the fundamental objective of
tabarru.
2. Takaful participants are
normally obliged to pay
different amounts of
contributions depending
on the different degree
of risk exposure. This
inevitably implies that their
participation in the fund is
conditional upon a certain
amount of contribution to
deserve a certain amount of
compensation. Should the
participant disagree with the
amount, he will not be allowed
to participate or benefit from
the takaful protection scheme.
Again this would be perceived
as contradictory to the nature
of tabarru` since the real
intention of the contracting
parties is not for donation, but
rather to make them eligible
for certain benefits under
takaful.
3. There are some controversial
practices in takaful operations
which contravene the pure
tabarru concept. For
example, the surrendering
of benefit, survival benefit
or even the sharing of
underwriting surplus
among participants of
takaful although they have
surrendered all their rights
over their moneys to the
fund. It should not, therefore,
return to the participants
upon maturity of the policy or
liquidation of the fund.
Alternative Structure
As an alternative to the pure
tabarru` concept, the Accounting
and Auditing Organisation for
Islamic Financial Institutions
(AAOIFI) suggested the
principle of iltizam bil tabarru
or a commitment to donate
to underscore the relationship
between the participant and the
fund. According to this concept,
a contributor may donate a sum
of money for mutual assistance
purposes on condition that
the balance, if any, should be
returned to him. This will allow
him to retain his ownership right
over the initial contribution he
made, with a provision allowing
him to waive his right of
ownership over the portion used
to indemnify other participants.
This principle was expounded
by Maliki jurists, whereby if a
person commits himself to do a
good deed without subjecting it
to other conditions, he is obliged
to fulfil it as long as he did not
die or become bankrupt (See Al
Hattab, Tahrir Al Kalam fi Masail
Al Iltizam, Beirut: Dar Al Gharb
Al Islami, 1984 at p 71). In
takaful, the participants commit
themselves to perform tabarru
to other participants who sustain
losses. This principle is important
as the majority of scholars are
of the opinion that tabarru is
not complete unless the subject
matter is transferred to the donee,
although a commitment to donate
has been given. This is observed
in the question of hibah, whereby
possession (qabd) of the subject
matter is a condition for a binding
hibah; this is the opinion of many
jurists but not Maliki jurists.

Organisation for Islamic Financial The Maliki jurists, however, are of

the opinion that a commitment

Institutions (AAOIFI) suggested the principle

to donate or give is sufficient to
create a binding donation, based
on the saying of Saidina Ali and
of iltizam bil tabarru or a commitment Ibn Masud that:

to donate to underscore the relationship A gift, if specifically defined, is

binding, whether received or not

between the participant and the fund. and to prevent the

www.islamic-banking.com IIBI 17
ACADEMIC ARTICLE
materialisation of the saying of the
Prophet:
a person who withdraws his
gift or donation is like a dog
that withholds its vomit. (Sahih
Bukhari).
This principle is important in the
case of takaful whereby, upon
participating in a takaful contract,
the participants are said to have
given full commitment to pay
contributions to the takaful fund;
the fund is also committed to
compensate them against any losses
experienced by them, within the
period of the policy. Thus, in case
a participant delays payment of his
contributions, the company can
claim the contributions from him
and it may be considered as his
debt to the fund until he officially
withdraws from the policy. The
fact that he has not delivered his
donation does not make him not
liable to pay it as he has committed
himself to pay it and it is already
a binding contract. So, iltizam
bil tabarru here is deemed to
be binding and enforceable as
iltizam or a pledge alone can
create a binding tabarru contract.
Asserting that takaful is a binding
contract is important as it is the
basis for the computation of the
periodical contributions and the
amount of compensation payable
to the participant.
On the other hand, the relationship
between the fund and the recipient
of the compensation is said to be
iltizam bil tawid or a commitment
to compensate, which is a form of
iltizam bil tabarru. It is said to be
a form of conditional commitment
whereby the performance of the
commitment is subject to the
certain need, namely a claim by
a takaful participant due to some
loss sustained. Thus, in takaful, the
contributions of the participant
may be utilised fully or partially,
thus allowing him to claim any
underwriting surplus. This is based
18 IIBI
NEWHORIZON Zil Haja 1434 Safar 1435
on the opinion of Sheikh Abdul
Sattar Abu Ghuddah in Buhuth fil The practice of surplus
sharing and other benefits
Muamalat wal Asalib Al Masrifiyyah
Al Islamiyyah, vol. 6, Jeddah,
Majmuah Dallah Al Baraka, 2005
at p. 300. derived in takaful,
Hibah Bil Thawab
Notwithstanding the above, the
therefore, is in violation of
question remains whether the
counter-value in such takaful Shariah principles, which
practice is tantamount to an
exchange contract? This is so prohibit riba and gharar.
according to Al Hattab in his
book Tahrir Al Kalam fi Masail Al
Iltizam; if a commitment is given a charitable (tabarru) contract takaful be considered as an
subject to a condition that when but rather a muawadah or exchange contract, is that the
a donor contributes something, exchange contract. In the whole issue of riba, gharar
he is expecting a counter value takaful context, the gift is the and jahalah will emerge
then it falls under the category contribution and the thawab and resemble conventional
of hibah al thawab, a gift given to is the indemnification by insurance. The practice of
the beneficiary on condition that the risk fund. It is opined surplus sharing and other
a reward is given to the donor in that the ruling of hibah bi benefits derived in takaful,
exchange. For example, I give this al-thawab will take the ruling therefore, is in violation of
pen as a gift on condition that you of an exchange contract. Shariah principles, which
give your book in return. The main issue now, should prohibit riba and gharar.
As indicated earlier, hibah is a form
of tabarru or charitable gift in
which the donor has unilaterally
relinquished his right of ownership
over the object of gift to the
recipient or donee. The matter is Assoc. Prof. Dr Asyraf
known in classical jurisprudence Wajdi Dusuki is currently
as hibah bi al-thawab (gift with Head of Research Affairs,
expected compensation) or hibah International Shari`ah
bi shart al-iwad (gift with stipulated Research Academy for
counter value). Shafie and Hambalis Islamic Finance (ISRA).
scholars disallow such a transaction He also serves as a
based on the following hadith: Chairman of Shariah
Committee for AIA AFG
A person who withdraws his gift or Takaful and AIA Takaful
donation is like a vomiting person International.
who withholds his vomits.
This is also supported by another
hadith narrated by Al-Tarmizi:
A person who withdraws his gift or
donation is like a dog that withholds
its vomit.
On the other hand Maliki schools
allow the transaction. They
perceive, however, that hibah bi
shart al-iwad is no longer deemed as
www.islamic-banking.com
NEWHORIZON September to December 2013 REGULATORY MATTERS

Malaysia Tightens Regulations for Conventional

and Islamic Banks
Since the 2008 world banking crisis there have been many voices calling for bankers to be sent to prison for the actions, which brought
the world to the brink of economic collapse. The US authorities have defended their decision not to prosecute any individuals for fraud
on a variety of grounds including already overstretched judicial resources and the role the US government played by encouraging more
people to buy homes, keeping interest rates low and deregulating the financial sector. In the UK a few bankers have been made to
grovel in front of parliamentary commissions, but again no prosecutions. Five years on it seems like business as usual for the bankers.

One country that has taken the issue very seriously is Malaysia. In their 2013 Financial Services Act they have laid out very clearly
what they expect from the banking sector and set fines and terms of imprisonment for anyone who contravenes their rules.

Overview
The Act tightens consumer
protection; requires financial
institutions to adhere to
comprehensive standards of
business conduct; strengthens rules
on corporate governance; introduces
stricter rules on shareholding; brings
financial intermediaries such as
cooperatives and leasing companies
under the control of the Bank
Negara, Malaysias central bank and
empowers the central bank with
greater powers of intervention.
The central bank must approve
the appointments of directors
and senior officers of financial
institutions. They want to ensure
that these individuals are properly
qualified and have no criminal
record. (Such powers may be eyed
enviously by other central banks
around the world, not least the Bank
of England in view of the recent
case of Cooperative Bank Chairman,
Paul Flowers.)
Importantly, the Act allows
the central bank to take action
against individuals rather than
just companies. In Malaysia at
least the days when senior officers
of financial institutions can hide
behind the corporate facade look as
though they are numbered. If such
individuals are found to be in breach
of the Banks regulations, either
through omission or commission,
they will be held liable.
Most telling is Bank Negaras
intention to identify and act on
unsound practices before these
practices cause the failure of an
individual institution or affect the
stability of the broader financial
system. In the announcement of
the Act, they say, This includes
an increased focus on pre-emptive
measures to address issues of
concern within financial institutions
that may affect the interests of
depositors and policyholders, and the
effective and efficient functioning of
financial intermediation.
Regulations Applying to All Banks
Anyone carrying out a financial
business not authorised by the
Malaysian government and the
bank will be liable to a prison
term of up to 10 years and/or
a fine of up to RM 50 million
(Malaysian ringgits).
Anyone conducting an approved
financial business needs a
professional indemnity insurance
or takaful policy in an amount
specified by the central bank. A
failure to comply could result in
a prison term of up to five years
and/or a fine of RM 10 million.
The authorised personnel of
company that do not meet and
maintain the capital requirements
set out by the central bank will be
liable to a term of imprisonment
of up to eight years and/or a fine
of RM 25 million.
The authorised personnel of a
company that fails to comply with
any license conditions imposed
by the central bank will be liable
to up to five years imprisonment
and/or RM 10 million.
Authorised personnel may not
carry on any business inside or
outside Malaysia that is outside
the remit of its license unless
they have the written permission
of the central bank. Anyone
contravening this regulation will
be liable to up to eight years
imprisonment and/or a fine of
RM 5 million.
Licensed insurers, except for
reinsurers, may not carry on
both life and general insurance
business. Anyone contravening
this regulation will be liable to up
to eight years imprisonment and/
or a fine of RM 25 million.
Directors of financial business
may only exercise those powers
conferred on them for the
purposes for which those
powers were conferred. Anyone
contravening this regulation will
be liable to up to eight years and/
or a fine of RM 25 million.
Regulations Applying to Islamic
Banks
Licensed financial organisations
including banks, insurance
companies, financial advisors and
clearers that have applied to and
been approved to carry on an
Islamic finance operation must
keep its Islamic capital funds and
assets and liabilities separate from
its other funds at all times.
Islamic funds may not be used to
fund the other licensed operations
of the financial organisation.
Payment system organisations
must ensure that their operational
arrangements are Shariah
compliant.
The boards of directors of
Islamic financial institutions are
enjoined to have due regard for
the advice of their Shariah
advisors in respect of the
conduct of their business.
Enforcing Regulations
The Act also lays out the
procedures to be followed if Bank
Negara Malaysia (BNM) believe
that any of their regulations have
been contravened. BNM have
the right to launch and conduct
investigations themselves. The
investigating officers appointed by
the Bank can apply to magistrates
with written information about
the offence in order to get a
warrant to enter the premises
of the institution/person under
investigation, if necessary by
force and to examine and/or
seize anything that they believe
is material to the investigation.
They also have the right to search
individuals. Anyone who hinders
the investigating officers in any way,
whether by physically denying them
access or by destroying relevant
materials will be liable to up to eight
years in prison and/or a fine of up
to RM 25 million.
Conclusion
This Act is a bold move on
Malaysias part to try to consolidate
their position as a leading financial
centre in South East Asia. They
want their financial sector to be
seen as well regulated, transparent
and tough on those who would put
their customers, shareholders and
indeed the whole financial sector
at risk. It will be interesting to
watch their progress as the Act is
implemented.

www.islamic-banking.com IIBI 19
IIBI SEPTEMBER WORKSHOP NEWHORIZON Zil Haja 1434 Safar 1435

Structuring Innovative Islamic Financial Products

IIBI London 7th Annual Three-day Workshop 2013
The 7th annual Structuring Innovative Islamic Financial Products workshop took place in London from Friday, 13th to Sunday, 15th
September 2013. The event regularly attracts delegates from around the world and this year the countries represented included
Nigeria, Pakistan, Kenya, Malaysia, the United Arab Emirates (UAE) and the United States (US). The workshop, as always, focused
on the practical application of Islamic finance, looking at what is actually happening rather than the theory.

Commenting on the event, Euroweeks Hassan Jivrak said, The event highlighted the complexity of product structures, which some
investors find less attractive than interest-based products (particularly mortgages). It also pinpointed the need for better infrastructure,
support systems, marketing, accounting standards, international Shariah harmonisation, as well as the governance of banks and
Shariah scholars.

The workshop also revealed that standards are not fully developed in practice. Although Islamic banks structure their services in
accordance with Shariah, in practice they operate closer to their conventional rivals.

The following report contains a fuller flavour of the workshop with two separate articles on takaful progress and the issue of money
creation and debt-based finance based on presentations given by Iqbal Asaria, Afkar Consulting who also teaches Islamic finance and
Yusf Jha who currently works as Shariah Manager at a major GCC based Islamic bank.
Welcome and Introduction financial institutions to provide
Richard de Belder, a partner and financial statements. These are
head of Islamic finance with prepared according to three global
international law firm, Dentons, standards, US GAAP (Generally
opened the workshop. He said that Accepted Accounting Principles),
the financial crisis of 2008 meant IFRS (International Financial
that now was a very interesting time Reporting Standards) and J GAAP
for Islamic finance. He said that the (Japanese GAAP), but the problems
challenge was whether the Islamic is that none of these standards
finance industry could innovate and really accommodate Shariah-
come up with new products and compliant institutions. As a result
ideas, particularly bearing in mind AAOIFI was established in 1991 in
the dichotomy between trying to get Bahrain to develop and promulgate
closer to Shariah goals and what is standards more relevant to Islamic
currently on offer. financial institutions.

In the UK Mr de Belder said the AAOIFI covers four key areas

government had set up an Islamic
finance taskforce, of which he is a
member. The objective is to build
on what has happened in the UK
so far in terms of Islamic finance.
He believed that this was a positive
message for the Islamic finance
industry.
AAOIFI Standards
The workshop began with a brief
overview of accounting standards
for Islamic finance as set by
AAOIFI (Accounting and Auditing
Organisation for Islamic Financial
Institutions) was given by Zahir
Rashid of Ernst & Young. In most
jurisdictions regulators require
accounting, auditing, ethics
and governance. To date they
have issued 88 standards and are
currently undertaking a review
to bring them more into line
with IFRS without contravening
any Shariah requirements. The
key difference between IFRS
and AAOIFI is that IFRS looks
at substance over form, while
AAOIFI looks at both substance
and form.
AAOIFI standards are, however,
advisory everywhere except in
Bahrain. There is no requirement
outside Bahrain to comply with
AAOIFI standards.
Islamic Banking The Context
Dr Salman Khan, who is head of
the Shariah office for a prominent
GCC-based Islamic bank and also
a well known trainer in the field of
Islamic finance, began by stressing
the importance of developing a truly
Shariah-based financial industry
with the right support systems
and infrastructure in place. He
also stressed that Islamic banks
should be genuine traders, investors
and entrepreneurs; they should
not simply be lenders or financial
intermediaries. The only justification
for making a profit is sharing
risk; being an integral part of, for
example, setting up a new business
or taking part some sort of trading
activity.
The basic premise on which
Islamic banks were founded is that
they have a system of ethics that
is superior to the conventional
banking industry. That system
of ethics is primarily based on
muamalat or ethical principles in
mutual transactions, e.g. fair and
honest dealings, acting for the
common good and the avoidance
of exploitation. These principles
should be evident in Islamic
financial contracts, so, for example,
avoiding exploitation translates
into the ban on riba or interest.

20 IIBI www.islamic-banking.com
NEWHORIZON September to December 2013
In summary, there should be no
unfair benefit involved in Islamic
financial contracts and actions should
reflect intentions. If these principles
are observed, the contracts should
reflect both the form and substance
of Shariah; the theory will equal the
practice.
The problem for the Islamic finance
industry in applying these ethical
principles is that it was not created
in a holistic way it developed in
different geographies at different
times; development has been
haphazard. As a consequence the
nascent Islamic finance industry
started to use the conventional
banking systems and infrastructure
and this has created some problems.
Conventional banking systems are
based on four principles:
Money is a commodity.
Money has a time value; it cannot
be allowed to lie idle.
The banks priority is to look after
its own interests.
Any profit accrues to the bank
first of all.
All of these principles are disallowed
in Shariah. By using the systems
and infrastructure designed for
the conventional industry, Islamic
banking is trying to fit a square peg
into a round hole. Islamic finance
has had to adapt to these systems and
as a result Islamic financial products
have begun to follow the rules of the
existing system; Shariah products
have no space in that system.
www.islamic-banking.com
Islamic Financial Product
Analysis
Dr Khan continued with an analysis
of the existing products in the
Islamic finance sector, focusing
on the innovations in the different
product areas.
Murabaha
Murabaha is basically a cost plus
sale involving tangible goods, where
the bank buys the goods and then
sells on to the customer at an agreed
price, which is something above the
amount they paid. The price fixed
at the outset does not change. In
IIBI SEPTEMBER WORKSHOP
its original, antique form, there was
no provision for deferred payment;
it was a straight spot sale, but in the
1970s and 1980s deferred payment
became an accepted element of
murabaha, despite the doubts
expressed by many scholars.
Dr Khan highlighted some of
the controversial aspects of
murabaha, such as the advanced
promise, which effectively makes
the transaction risk free for the
bank and is therefore not Shariah
compliant. The innovation that has
largely solved this issue now is a
returns policy, which allows banks
to return goods to the supplier
within a specified time at no cost
to themselves, should the buyer
renege on the contract. Other
issues discussed and the innovations
to address them included title, the
use of agents, cost of funds, IBOR
(InterBank Offered Rate), exchange
rate risks, performance risk and
letters of credit.
Dr Khan made the point that many
problems arise because Islamic
banks are trying to play by a set of
rules that were not designed for
them like trying to play football
according to the rules of squash.
Furthermore, he said that in 30
years Islamic banks have lobbied
more effectively to have these rules
amended to allow them to be truly
Shariah compliant in all aspects of
their operations.
Commodity Murabaha/
Tawarruq
Dr Khan explained that
commodity murabaha or organised
tawarruq, which is very similar
to a cash overdraft, is particularly
controversial, because the
goods involved in the financing
transaction, usually metal, never
actually move, although AOIIFI
regulations say that the goods
should move. In effect this is not
a real transaction and the source of
the profit in such a transaction is
entirely based on the fact that the
metal does not move. In practice,
therefore, tawarruq transactions
breach AOIIFIs rules. The Jeddah-
based Islamic Fiqh Academy has
a much more straightforward
approach; it has ruled that
tawarruq is not permissible in any
circumstances. The simple fact
is that the market is choosing to
ignore these rules with Shariah
dispensations based on market
need.
IIBI 21
IIBI SEPTEMBER WORKSHOP
A variety of other types of
murabaha transactions such as
rollover murabaha and murabaha
with shares and the problems
associated with them were
also discussed. In all cases the
essentially non-Shariah-compliant
transactions are justified on the
basis of market need.
Ijara
Ijara means rental or lease or a
durable, tangible asset. It requires
a lessor and a lessee, each having
different rights and responsibilities.
For example the lessor is
responsible for any damage to the
leased asset, unless the damage is
caused by the lessee, insurance,
taxes, etc. The lessor may set the
rental at a level that reflects these
22 IIBI
additional expenses. The lessee
is obliged to take proper care of
the asset and make regular, agreed
rental payments as soon as the
lessee takes possession of the
asset. If the asset is totally lost
no rentals may be charged and the
agreement may be terminated at
any time with mutual agreement.
Dr Khan also described the range
of ijara agreements including
sale and leaseback, service ijara,
diminishing musharakah and
syndicated lease, which is a sukuk
version of ijara.
Dr Khan highlighted some of the
Shariah-related problems and the
solutions that have been developed
to get around issues such as
combinations of contracts, the risk
NEWHORIZON Zil Haja 1434 Safar 1435
that assets may fall in value, the cost
of funds and the restructuring of
ijara agreements. Perhaps the most
controversial of these solutions has
been the permission by scholars for
banks to link the variable rental part
of contracts to IBOR, provided
that there is a ceiling beyond which
rentals may not rise. They justify
this on the grounds that this is
a minor uncertainty and not an
excessive one.
Other issues covered included
forward leases and mortgages.
There was a lively discussion
about the issues raised by ijara,
particularly the separation of
contracts, genuine sale (for
example, the intention in sale and
leaseback is never anything other
than to sell back to the leaseholder)
and the use of sale and leaseback
to settle debt (debt to settle debt).
Dr Khan suggested that there was
a desperate need for standards to
bring clarity to all of these issues.
Service ijara is a relatively small
volume business, but it is growing.
It raises yet another set of issues,
such as who is responsible when
the service provider fails to deliver
the service or delivers it in such
a way that the outcome results
in damage. Banks, with Shariah
approval, typically frontload the
repayments to minimise their risk.
The payments are deferred, but the
client remains responsible for them
regardless of whether a service
provider goes out of business or
fails to provide the service for some
other reason.
There is a gulf between the
characteristics of current
Shariah-based products
and the characteristics
they ought to have.
Ijara sukuk are similar to sales and
leaseback except that the investors
funds are secured against an asset.
One of the key concerns with this
instrument is that the investors get
a guaranteed return; they take no
risk. A second is that investors are
not free to sell the asset in the case
of a default. Thirdly most ijara
sukuk are used to restructure debt.
Another variation of ijara sukuk
is based on a syndicated lease,
where the asset is leased rather than
owned. A major concern here is
that the rent may be frontloaded
to ensure that the investor is
guaranteed a return.
Sukuk
The session on sukuk was
presented by Fazl Syed, an Ivy
League educated lawyer who
has advised Islamic financial
Institutions and other Shariah-
compliant businesses and also acts
as a global consultant to law firms
and Shariah consultancies.
He examined the structure of
sukuk, murabaha, musharakah
and ijara and the controversies
surrounding their Shariah
compliance. For example, if the
investors are given a guaranteed
payback at the end of the period of
the sukuk, are they taking any risk
and if not, does this contravene
Shariah. In effect sukuk appear to
be mimicking conventional bonds.
He also discussed other issues
including the ownership of the
asset being used to back the sukuk
and whether the sale of the asset to
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NEWHORIZON September to December 2013
the SPV (Special Purpose Vehicle)
that acts as the trustee and issues
the bonds to investors is a true sale,
particularly important in situations
where the beneficial owner of the
asset goes bankrupt.
Mr Syed stressed that it was
particularly important for investors
to understand what they are
investing in and what recourse
they have in the case of default.
For example, in Dubai foreigners
cannot own assets in the country
and so foreign investors have no
right to claim the asset backing
a sukuk in order to recoup their
investment.
He also highlighted the differences
between the treatment of murabaha
sukuk in the Middle East and
Malaysia. Murabaha is effectively
debt and in the Middle East debt
cannot be traded, but it can be in
Malaysia. The variation in attitude
is attributable to the different
schools of thought prevailing
among Shariah scholars in these
two geographies.
Sukuk and Syndication
Innovations
Dr Khan addressed the issue
of innovation in sukuk and
syndications. He suggested that
most of these innovations have
been designed to help sukuk fit
more comfortably into the delivery
structure of conventional banks.
He reminded delegates that sukuk
can be based on equity or debt,
the latter being in the majority.
The main purposes of sukuk and
syndications are for refinancing and
rescheduling debt. These structures
closely resemble collateralised
loans.
Dr Khan outlined a series of
innovations that have been
developed to overcome Shariah
objections. For example, he said
that with conventional bonds,
borrowers are liable to pay a range
of fees to the investors, most of
www.islamic-banking.com
IIBI SEPTEMBER WORKSHOP
which are not permissible under
Shariah, e.g. commitment fees.
To get around the problem with
sukuk these charges are loaded
into the arrangement fee, which
is permissible as a payment for
services provided by the arranger.
Other innovations have also been
developed to address the issue
of charging the borrower for any
major, unforeseen maintenance that
has to take place unforeseen and
uncertain at the time the original
contract is signed and therefore
technically not Shariah compliant.
practices, which are proscribed There are also a series of financial
In summary, contracts are arranged by organisations such as AOIIFI, prohibitions, such as trading debt
so that the investors/owners incur e.g. organised tawarruq, but which or money and receiving money
few additional costs, whether that is are being used. The justification from interest-bearing sources. For
maintenance, insurance or anything is market need. Other topics example, if a company is carrying a
else and almost no risk, because in covered included floating rates and large amount of debt on its balance
the event of total loss the onus is default conditions. He stressed sheet, trading in the shares of that
always on the borrower or lessee, that innovations in sukuk contracts company would equate to trading
either to have insured the asset or have been organised to protect in debt. The problem is that it
if that has not been done, to bear the interests of banks/investors, is very difficult to find equities
the cost of the loss. Yet, under rather than borrowers, even when that do not have some prohibited
Shariah law, the owner (investor), on the face of it this would seem to elements in their overall makeup, so
should bear those costs. contravene Shariah laws. the Shariah scholars have allowed
a certain degree of flexibility; this
Dr Khan covered the issues of Private Equity flexibility has tended to increase
substitution, early settlement, Shariah-compliant investments over time.
purchase undertakings and the may not be in certain sectors
interdependence of documents. of the economy such as alcohol Hedge Funds
He also highlighted various production or the arms industry. Hedge funds are all about
IIBI 23
IIBI SEPTEMBER WORKSHOP
avoiding/managing risk to
produce a return for investors.
There are two common hedging
strategies. This first is to buy
with a view to holding on to
the investment and to sell in the
future for a profit; buying long
and there are no issues with that.
The second is shorting, where a
fund borrowed shares, rather than
buys, because they think the price
will fall; they then sell when the
price has fallen and actually buy
the shares at the lower price in
order to complete their contractual
obligation. This strategy does
have Shariah problems; you
cannot sell what you do not own.
Typically Islamic hedge funds get
round the problem by using a
third party, a conventional broker
to acquire the shares on the basis
of a salam contract, an advance
payment from the broker with
delivery to be made at a later date.
The Islamic hedge fund earns
money from the advance payment,
which will be invested elsewhere
and through the lower cost of the
shares that have to be delivered
to the broker at a later date. The
broker is rewarded through the
payment of commission on the
transaction.
There are, however, still problems.
For example, salam assumes
24 IIBI
NEWHORIZON Zil Haja 1434 Safar 1435
homogenous goods, such as oil,
coffee, etc., that always have a
value, but that may not be true of
shares, e.g. if the company goes
into liquidation the shares no longer
have any value. How then can the
hedge fund deliver the shares at the
appointed time?
Dr Khan also covered structures
based on arboun, which involves
a down payment, but is in other
respects similar to salam.
Swaps and Derivatives
Islamic swaps and derivatives are
based on waad or mutual promises
and are based on a concept called
Shariah conversion technology. The
advertised aim is to wrap a non-
Shariah-compliant structure into
one that is Shariah compliant. The
concept was pioneered by Deutsche
Bank and then adopted by other
banks. The result of this conversion
technology is that if Islamic investors
choose to exercise the swap option,
taking their returns from the parallel
conventional investment and not
from the salam contract, they are
effectively investing in conventional
funds, with all the problems
that these may pose to Shariah
compliance. This structure has been
extremely controversial, although
some scholars have been prepared to
approve it.
Revisiting Innovations
Dr Khan posed the question, is
current best practice in Islamic
finance based on Shariah principles.
In essence these principles can be
summed up as unfair benefit being
prohibited and actions equalling intent.
Every product in the Islamic financial
industry is based on an underlying,
permissible commercial or economic
activity. In order to be genuinely
in line with Shariah principles,
the commercial arrangement of a
product should be in line with the
characteristics of the underlying
economic activity as it is known in the
world. It is very important to follow
this rule, because the Islamic finance
industry was set up to challenge what
were perceived as the unfair practices
of the conventional industry. Shariah-
based products cannot be replicas of
conventional products, which emanate
from an industry that not only does
not embody Islamic principles, but
is also based on principles, which are
actually inimical to Islam. Similarly the
support or delivery system needs to be
designed for Shariah-based products
and that support system needs to
come before the products.
There is a gulf between the
characteristics of current Shariah-
based products and the characteristics
they ought to have. There has
been little effort to work towards
bringing the products and the
underlying system into line with the
Shariah, nor has there been real
thought leadership in the matter.
Why has no-one challenged this
state of affairs, which has been
ongoing for the last 30 years?
Firstly, there is no desire to stir up
controversy. Second, anyone who
does question the state of affairs
tends to be accused of damaging
the Muslim ummah (community).
Dr Khan stressed that he was
not promoting revolution, merely
asked for some open recognition
and discussion of the issues, in
the hope that this will lead to
some modest moves in the right
direction.
Some people justify what is
happening on the basis that the
industry needs to achieve a certain
critical market share, before they
can begin to diverge from the
conventional banking norm. It is
questionable whether this is likely
to be a successful strategy would
customers who have signed up
for one service be happy if they
suddenly found the ground rules
had changed and they were being
offered something very different.
www.islamic-banking.com
NEWHORIZON September to December 2013
The fact is that you cannot challenge
a flawed system with something that
is in effect a complementary system.
Infrastructure is key to the whole
argument. The Islamic finance
industry has to have a vehicle to
deliver truly Shariah-compliant
products, which have different
characteristics and demands. Such an
infrastructure cannot be put in place
overnight, but the industry should
be continuously working towards a
bespoke system.
Shariah governance is one of the
most important elements in this
infrastructure. Malaysia has done
some meaningful work towards
effecting change in Shariah
governance. Dr Khan described
the IFSB (Islamic Financial Services
Board) standard on Shariah
governance as a crown jewel, but
many scholars around the world
are not comfortable with applying
it strictly, because it would change
the way they are used to working,
for example their ability to serve on
multiple Shariah boards. One of
the key differences is that outside
Malaysia standards are advisory; in
Malaysia any infringement attracts
punitive action. Dr Khan also
touched on other issues relating to
Shariah governance such as the dire
www.islamic-banking.com
shortage of young Shariah scholars,
scholars qualifications and conflicts
of interest.
Dr Khan summarised by saying
the industry needed Shariah-based
products founded on genuine
business templates and a code of
business ethics; products should be
based on real contracts relating to, for
example, lease and trade; there should
be profit sharing; the focus should
be on real deals, substance rather
than form and there should be no
combining of contracts.
Working Towards Greater Shariah
Compliance
Achieving greater and genuine
Shariah compliance will not happen
overnight; there are no quick fixes.
Dr Khan examined the common
financial instruments, highlighting
the problems with them as they
exist today and the aspects of these
instruments that should be avoided.
For example, murabaha contracts
should not involve advanced
promises; there should be genuine
trade involved; banks should be
operating like a trader, a paradigm
shift in a world where banks typically
own nothing other than office space;
profit should not be benchmarked
against IBOR; there should be no
agencies involved; the transaction
IIBI SEPTEMBER WORKSHOP
should involve normal trading
risks in order to warrant earning
a return on the transaction and
there should be no repricing.
Other types of instrument such
as salam, ijara and sukuk were
also discussed. Dr Khan said
that many instruments that are
widely used today were based on
exceptions made at a point in time
for a particular reason, which have
now become accepted as normal
practice.
The Product Lifecycle in
Islamic Finance
This session was presented by
Mufti Barkatullah, a prominent
UK based Shariah advisor
and member of the Shariah
Supervisory Committee of
several Islamic financial
institutions. He described the
product development process
and particularly how the Shariah
process begins even before a
financial organisation is up and
running, at the business planning
stage. The Shariah advisors then
continue to be involved through
product development, launch
and delivery, along with other
departments such as marketing,
finance, etc. Their continuous
involvement ensures that products
are and continue to be Shariah
compliant throughout their life.
He suggested that to some extent
the scholars role was to achieve a
balance of fairness between buyer
and seller, between the bank and
its customers taking into account
financial, legal, regulatory and
social issues. He also reminded
delegates that scholars do not have
overarching authority; they often
have to compromise, for example
with regulators.
Mufti Barkatullah said that Shariah
at the moment is being practised
pragmatically in a given set of
circumstances. It is unrealistic
to think that Islamic finance can
exist in a vacuum, untainted by
prevailing circumstances. Muslims
and non-Muslims cannot cease
to influence each other, because
they must trade with each other.
Islamic finance will always have to
deal with the fact that it is doing
business with the interest-driven
conventional industry. Shariah
is basically pragmatic and accepts
that the world is imperfect.
There should always, however, be
a quest for perfection.
The Malaysian Story
This brief presentation was
made by Professor Laldin, who
is a highly respected scholar and
member of a number of Shariah
advisory committees in Malaysia
and internationally. He talked
about the history of Islamic
banking in Malaysia. He pointed
out that in 2005 Malaysia set
up a Central Shariah Advisory
Council, which is part of the
central bank, Bank Negara and
mandated that scholars can only
sit on one bank Shariah board
and one takaful Shariah board.
In 2009 an amendment to the
law made it mandatory for courts
to follow the written decisions
of the Central Shariah Advisory
Council.
In 2013 an Islamic Financial
Services Act was introduced.
Under that act every Islamic
financial institution has to share
the risk with customers; the risk
cannot be passed in its entirety to
the customer. In order to
facilitate this change, ISRA
(International Shariah Research
Academy) has developed in
conjunction with the central
bank a set of standards for
contracts. Second, under the
new act, Shariah scholars will be
held accountable for what they
do; they can sued, taken to court,
heavily fined and even go to jail.
Conclusion
The workshop concluded with
a panel discussion and the
presentation of certificates to
delegates.
IIBI 25
 QUALIFICATIONS & TRAINING, MEMBERSHIP, PUBLICATIONS

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Cascade Risk Placement, USA

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There would have been no career in Islamic To motivate, educate and develop people to
Finance for me and for many of my friends achieve their personal and professional goals
without the Institute of Islamic Banking and through distance education, practical training,
Insurance. The organisation provided the only membership, research and publications.
source for education and response to the need
The goal of the IIBI is to empower individuals
across Europe. So it feels that none of the new
with knowledge and understanding the
or developmental programmes of education
processes that enable them to conduct their
would have occurred and would have never
dealings based on the universal principles of
been able to meet the need without the Institute
Adl (justice), Niyyah (intention that translate
in place.
into good actions), Ikhlaas (purity, morality),
Richard Thomas, OBE, Chief Executive
Gatehouse Bank, London, United Kingdom. 2011
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Haram (actions and activities that are morally
reprehensible).

IIBI courses delivered through an online platform (virtual learning environment) by email
(distance learning) makes it possible to acquire knowledge and skills for a career in the
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financial district, London

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and ideas have come to the Islamic Finance Industry.
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IIBI SEPTEMBER WORKSHOP
Money Creation and Debt-Based Finance: A
Fundamental Challenge to the Islamic Finance Industry
Presentation by Yusuf Jha, Shariah Manager at a major GCC-based Islamic bank,
on 14 September 2013 at IIBI London 7th Annual Three-day Workshop.
Context
Mr Jha opened his session
with a quote from the Koran,
Where then are you headed?
He stressed that this question is
important to everyone, Muslims
and non-Muslims. Whenever
anyone decides to pursue
an activity, it is important to
understand what we hope to
achieve and where it is taking us.
He said that his understanding is
that the financial system of the
world today in its whole global
architecture and how it operates
arose out of a simple act; that act
was the legalisation of interest.
Once interest was legalised it
brought about the creation of
money as being interest based.
Money is what connects goods
and services; it is something that
connects institutions and the way
society interacts. When countries
such as Pakistan and Sudan
declared themselves to be Islamic,
they had to ask themselves the
question what does Islam say
about banking and finance? Their
conclusion was that banking is
interest based and Islamic finance
has to be different.
How does Islamic finance
provide something different
and was that articulated before
people jumped into the Islamic
finance project? The fact that
money itself is interest based
has ramifications for Islamic
finance. Much of the way that
the monetary economy works
is diametrically opposed to the
Islamic mindset.
28 IIBI
The History of Money and
Interest
History is important specifically
with regard to interest and how it
has affected the banking system.
Prior to the 17th century interest
was almost universally felt to be
wrong. Christians, Jews, Hindus,
Buddhists and the ancient Greeks
all felt that interest was wrong; it
was among the major sins. The
reformation with its emphasis on
realism and industry, led by men
such as Martin Luther and John
Calvin, was a turning point. This
period saw the introduction of
terms such as usurious rates of
interest, whereby interest above a
certain level was a sin, but below
that it was acceptable. It saw
society develop a tolerance for
acceptable levels of interest.
Before banks emerged, the
goldsmiths performed the function
of safeguarding money, which at
the time was gold. They took in
the gold and gave the depositor
a receipt, which was not name
specific; it simply said the bearer.
The bearer, anybody holding the
receipt, could go to the goldsmiths
at any time and ask for the gold.
People soon realised that they
could trade in the receipts, thus
the goldsmiths effectively created
money.
The next step was when goldsmiths
started to lend the receipts into the
economy, loans. When the receipts
came back to settle the loans, the
goldsmiths simply cancelled the
receipts and no-one ever discovered
that they were not actually based on
gold held by the goldsmiths. They
NEWHORIZON Zil Haja 1434 Safar 1435
were so successful that the practice
became institutionalised and the first
banks came into being.
The first central bank, the Bank of
England, grew out of King William
IIIs need to raise money to fund a
war with France. Unwilling to raise
the money through taxes and become
unpopular with the people, he
borrowed from the goldsmiths, who,
in return, asked for the right to create
the first central bank. This effectively
legalised the goldsmiths practice of
creating money out of nothing and
money itself became interest bearing.
This is relevant, because this is how
money comes into existence today.
The Creation of Money
Only 3% of the money in
circulation is in the form of coins
and banknotes; 97% is electronic.
For example if you go the bank
and ask for a mortgage, you sign a
contract, which says you owe the
bank x and that contract is then
part of the banks assets. The bank
enters the amount, principle plus
interest, into your account as a to a certain percentage of their
liability; this entry is money in
terms of how it functions. Bank
credit makes up the majority of
money. Money only comes into
existence when someone agrees to
pay back more.
In summary:
Commercial banks create
more than 97% of the money
in the economy.
Modern day money is simply
created as an accounting
entry.
Banks can create as much
money as they want based on
their reserves.
This is how banks make money.
They are incentivised to keep
people in debt, because the
system needs us to be in debt for
it to survive and banks need us
to pay the interest. The question
is, if money only comes into
existence when someone agrees
to pay back more, where does the
more come from? Every country
in the world from the developed
economies through to the third
world needs to grow in order to
perpetuate this system. If there
is no growth, there is not enough
money to pay back debts and the
result is a recession.
The Money Multiplier
The money multiplier is not
a way of creating money; it is
a concept normally taught in
economics courses. Economists
try, increasingly unsuccessfully,
to suggest that this process has
some kind of control on it, some
type of regulatory control, i.e. the
central banks can require banks
to limit the creation of money
reserves. The reality is that is not
the case. In the UK, for example,
the Bank of England has not
imposed any reserve requirement
since 1981. Since that date UK
banks have applied loose capital
adequacy ratios.
The Basel Committee, which
has been responsible for setting
capital adequacy standards,
is a loose conglomeration of
banks, who sit with regulatory
authorities to propose ratios that
they consider banks should have
for their own
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NEWHORIZON September to December 2013
stability. It is also something of a
public relations exercise to promote
public confidence in the banks,
because the system is reliant on the
public accepting that what banks
are creating is, in fact, money.
Late 20th Century Changes in
Currency Regulation
The proportion of money created
by central banks has been gradually
decreasing since the early 1900s,
but the pace of that decrease
accelerated dramatically from
the 1970s onwards. In the 1970s
money was still somehow pegged
to a commodity. All the currencies
in the world were pegged to the US
dollar and the dollar was pegged to
gold. President Nixon decided to
remove this peg.
In the 2009 Banking Bill debate in
the UKs House of Lords, the Earl
of Caithness said, Our UK money
supply has grown from 31 billion
in 1971, when President Nixon
closed the gold window, to in excess
of 1,700 billion today. Let us
consider the implications of those
last two figures. They mean that
every year since 1971 the banking
system has created on average
for its own use 44 billion. That
is more per year than the entire
money supply, which until 1971 had
sustained our economy since our
recorded history began.
The 2008 financial crisis completely
shook this paradigm. Banks simply
stopped lending. The policy of
quantitative easing deployed by
central banks, who bought debt
from the banks to create a reserve
for them, should have helped to
restart lending, but it did not. If
nothing else this is a proof that
the reserve theory has nothing to
do with banks lending. Banks only
lend when they know the money
will be paid back; the only thing
banks worry about is a default and
www.islamic-banking.com
having to take a loss somewhere
else on their balance sheets.
Does it Matter?
Charles Eisenstein, the American
degrowth activist, said, The logic
of interest is the logic of an addict.
The more an addict goes on, the
more he runs out of resources
to support his addiction. This is
exactly what our money system
has become. It thrives on debt; it
needs us to go into debt for it to
survive and there is only so much
debt we can take. The more money
is created, the more of it has to
go towards goods and services;
money does not exist in and of
itself; something has to be bought
and sold. Our planet itself is being
bought and sold. The forests have
to be deforested; fish have to be
fished and depleted across the
rivers and oceans. A tree standing
as a tree is not worth any money,
but when you convert it into
lumber and deforest Indonesia to
produce palm oil that can go into
toothpaste in Tesco and Asda, then
it is worth money. The system has
to destroy the environment.
No matter how much money comes
into existence, there is never going
to be enough to pay it back, so the
system is geared to conflict; who
are going to be the winners and
losers. When anyone talks about
money today, it is rarely talk about
collaboration. A business has to
succeed; if it is static the business
Money comes into being
through debt and those
who already have money
have the ability with interest
to make money.
IIBI SEPTEMBER WORKSHOP
model is flawed. A business needs
to be constantly ahead of its rivals
in competing for scarce resources.
Key economic axioms suggest there
are limited resources for unlimited
wants and each person wants to
maximise his utility. This is not a
given; it is an assumption. Perhaps
human beings can have limited
wants. How many assets can you
own and does that fulfil any deeply
felt desire? It is a numbers game.
Human nature does not accord
with this system. This may be a
theoretical argument, but there are
more practical examples.
Trade Distortion
When you understand that most
of the money in the world is
created as debt, inevitably the
people with the debt are the ones
that benefit the most. As a result
there is concentration in every
field of trade. Every area of
trade is controlled by a handful of
companies, big business and there
is a tie-in between big business
and the banks. If you look at the
US company, Walmart, their trade
with China exceeds the combined
trade of the UK and Germany
with China. One in five items in
any US household comes from
Walmart. Companies such as Shell
and Exxon have more money than
Bangladesh and Pakistan combined.
In the US four or five companies
control all the agriculture business;
another four or five control the
pharmaceutical business and so
on. The same is true in the UK.
Every single industry has become
an oligopoly and trade has become
distorted.
Allah in one of his sayings made
trade halal and riba haram. One
of the connotations of this is that
once you adopt a paradigm of riba,
you distort the paradigm of free
trade and grant the freedom to
oppress.
Systemic Booms and Busts
One of the results of the banks
creating more and more money
is inflation, because there is more
money than there are goods and
services and prices rise. If there
is less money there is a recession.
This is systemic, built into the
system.
Monetisation of the Commons
As more and more money comes
into the system, it needs to go into
goods and services, which, in turn,
means we have to sell more and
more things. Things that were
previously common have to be
bought and sold. For example,
no-one would ever have thought we
would be buying and selling water,
but today it is one of the biggest
commodities being bought and
sold. In Bolivia, Bechtel, managed
to get a law passed to say that any
rain water that falls is the property
of Bechtel, which led to the water
wars.
The concept of the commons is
a deeply Islamic concept. Some
things have no right to be bought
and sold.
Wealth Polarisation
Money comes into being through
debt and those who already have
money have the ability with interest
to make money. This is creating a
polarisation. If you take the top
IIBI 29
IIBI SEPTEMBER WORKSHOP
three wealthiest individuals
in the world today, they have
a combined wealth that is
greater than the combined
GDPs of the 48 poorest
countries. The richest 2% of
people in the world today own
52% of the worlds assets.
Even if you take a developed
country such as the USA,
fewer than 7,500 individuals
collectively control 75% of
the nations industrial financial
assets, 66% of the banking
assets and more than 75% of
its insurance assets.
The average European cow
in terms of the value of what
it eats per day is wealthier
than 75% of Africans. This
is nothing to do with wealth;
it is about how the system
has been set up. Africa is
rich in minerals, soil and
many other things, but the
globalised system operating
on the premise of debt then
says to relieve poverty, you
need to receive credit. The
credit comes through the
banks operating through the
World Bank and the IMF
(International Monetary
Fund). They make loans with
interest and many countries
have actually paid back their
loans many times over, but the
compound interest means that
they can never ever pay back
the principle. The result is
that an increasing proportion
of that nations economy,
Islamic banks operate
today within a conventional
marketplace that survives
on debt.
30 IIBI
NEWHORIZON Zil Haja 1434 Safar 1435
which could otherwise be spent
on healthcare and social care,
is going to pay back interest.
Africa has been systematically
robbed of its wealth.
The World Bank and the IMF
are heavily influenced by the G7,
the seven richest countries in
the world, as to where loans go.
The G7 countries, however, are
under pressure from big business
in their home markets, to lend
in such a way that it supports
their own growth. Usually
that pressure is in the form of
privatisation of the economy
within the recipient countries.
Today, for example, it is cheaper
to go to the supermarket and buy
strawberries shipped half way
around the world than to go to
the small greengrocer across the
road and buy the locally-grown
equivalent, because trade has
been globalised and trade itself is
controlled by this conjunction of
big business and money.
How Do Islamic Banks
Tackle the Problem?
In Mecca and Medina, there are
Islamic Macdonalds restaurants,
selling Islamic Big Macs. If you
have an Islamic high cholesterol
diet, you will get Islamic diabetes
and Islamic heart attacks. To
append the adjective Islamic
to something does not make it
Islamic.
An Islamic analysis has to be
holistic taking into account
means and ends. That has not you money, if you give me
happened in the Islamic finance more of it. That contract
industry. One of the founders does not exist for the very
of Islamic banking when he simple reason is that is based
accepted a prize from the on riba, but that is the very
Islamic Development Bank said, system on which banks
The reality is we failed to give operate.
our financial institutions any
characteristics beyond simple Some scholars, however,
financial intermediation. said that when money was
created out of nothing, it was
Mufti Taqi Usmani, one of created relevant to a sale or
the most influential scholars an asset and, therefore, it was
in Islamic finance said, It was not like conventional banks.
expected that we would progress The reality is, however, that
in time to genuine operations Islamic banks use sales to
step by step, but what we have simulate the way conventional
found now is, if anything, banks work, i.e. interest-based
the same characteristics as loans. The remit for Islamic
conventional, interest-based banks is always to fit in with
marketplace products and we conventional banking modes.
are going backwards instead of This is not the mode that the
going forwards. industry should maintain.
There are opportunities to
Islamic banks operate change, but the industry needs
today within a conventional to think about how money
marketplace that survives comes into existence and
on debt. Money comes into the effect it has, alternative
existence only when you pay economies, alternative
back more of it. In the history currencies and areas of trade.
of Islam you will never find a The industry needs to change
contract that says, I will give its own mindset.
Yusuf Jha is an AAOIFI certified
Chartered Shariah Auditor and
Advisor. He is Shariah Manager
at a major GCC-based bank, and
is involved with auditing,
contract review, structuring
and product development for
a variety of products with the
primary focus being on the
Treasury, Corporate and Investment Banking divisions. He has worked
on a variety of Treasury Products and has been involved in various
Investment Banking Transactions, playing a key role in both the
structuring and documentation of major deals.
www.islamic-banking.com
NEWHORIZON September to December 2013
Innovations and Developments in
Takaful and Re-takaful
Presentation by Iqbal Asaria, Afkar Consulting with many years experience teaching
Islamic finance, on 14 September 2013 at IIBI London 7th Annual Three-day Workshop.
Background
Dr Asaria began by posing
the question is it acceptable
from an Islamic point of view
to have insurance? He went
on to say that risk is in the
hands of Allah, but only after
humans have done everything
they can. Secondly he said that
it had always been acceptable
(and indeed sanctioned in
the Sunnah) to pool funds to
compensate someone for a
loss, e.g. the payment of blood
money in cases of manslaughter.
Insurance operates on the
principle that there is a need in
society to do something about
risks that are beyond anyones
normal day-to-day control or
bigger than any individual can
handle.
Calculating Risks
How do insurers calculate risk
and therefore how much to
charge? First of all they rely on
data such as the incidence of
car accidents. The probability
of having an accident is then
tweaked according to other data
such as the age and sex of the
driver. From this data they build
models to calculate insurance
If there is uncertainty in a
contract it is intrinsically
non Shariah compliant and
therefore not valid.
www.islamic-banking.com
premiums. This approach applies
to the category of insurance called
general lines cars, houses, etc.
The other category of insurance is
life, where premiums are based on
mortality statistics. For Muslims, life
presents a slightly more complicated
problem, because of the element of
betting against Allah. As a result,
in places such as Malaysia, they do
not call it life insurance; they call it
family takaful, e.g. you are insuring
the future of your family home
bought with a loan or mortgage,
which is paid off by the policy in the
event of death. In many countries
regulators require separate licenses
for general lines and life.
Takaful, Re-takaful and Retro-
takaful
There are about 143 takaful
companies worldwide, plus about
35 window operations attached to
conventional insurance companies.
In 2012 the estimate of total
contributions/premiums was $12.4
billion annually. The split between
general lines and life is moving
towards life.
In addition there is re-takaful,
which is the Islamic equivalent of
IIBI SEPTEMBER WORKSHOP
reinsurance. This allows insurers/
takaful companies to pass on
some of their risk and ensures that
claims are paid.
There is also retro-takaful. In the
case of exceptional risks, such
as an air crash, premiums are
pooled, but the problem is that
contributors to the pool will not all
be takaful companies. Ways have
to be found to allow takaful and
non-takaful companies to work
together. This can be done with
enough imagination and expertise.
Takaful Prospects
The need for insurance increases
as GDP (Gross Domestic Product)
rises. In many Muslim countries
GDP is rising. In Malaysia for
example GDP per person has
increased from $300 400 in 1970 to
$8,000 9,000 today. Consequently
the potential market for takaful is
also increasing.
The growth in Muslim countries
is also changing the way people
live. When there is little social and
geographic mobility, people tend to
stay in the same place in extended
family groups and the family in
effect provides the insurance.
As people move into cities away
from their families the need for
insurance also increases. Again
using the Malaysian example, in
1970 30% of the population lived
in cities; today 70% live in cities.
Insurance Structures
In conventional insurance the
model that has become most
common is the shareholder-
driven model, where the
shareholders invest their money
to offer insurance and in return
individuals or companies
transfer their risk to them for
a premium. This is called risk
transfer. If there is a profit, it
goes to the shareholders. It is
not a mutual scheme; it is a one-
to-one contract for risk transfer.
Scholars do not like this model.
An alternative model is a mutual
or cooperative model, where
people come together and pool
their contributions; this is risk
sharing. There are issues with
this model. One of the main
problems is if the calculated risk
proves to be underestimated
and the claims cannot be paid,
the only recourse is to ask the
participants in the pool for
additional premiums. That
is only practical with a small
community of contributors; it
is impractical with national or
global operations. If, however,
the operation has been going
for five or six years without any
claims being made, a reserve will
have been created and that can
be used to pay the claims. Most
of the mutuals and cooperatives
that have survived have done so
because they have been able to
build up reserves.
Shariah Objections to
Shareholder Models
The primary Shariah objections
to shareholder models are based
on the prohibition of gharar
IIBI 31
IIBI SEPTEMBER WORKSHOP
(uncertainty), maysir (gambling/
speculation) and riba. Insurance
is inherently about uncertainty,
whether it is conventional insurance
or takaful. It is impossible to
take uncertainty out of it, but
maysir should not feature in a
well-defined insurance contract.
It can be removed without
problems. Riba becomes an issue
when the premiums are invested
in non-Shariah-compliant funds.
(Premiums are invested to deliver a
return thus allowing the operator to
offer more competitive premiums.)
Riba can be removed easily by
having a policy of only investing in
Shariah-compliant funds.
If there is uncertainty in a contract
it is intrinsically non Shariah
compliant and therefore not
valid. To overcome that problem
contributions are pooled under
a tabarru contract. Tabarru is
normally translated as a donation,
but this is an unsatisfactory
translation. A donation is usually
given with no expectation of any
return, but that is not the case with
takaful; a contributor will expect
any claim to be paid. A better
translation is that it is a pooling
for the common good and minor
gharar does not interfere with that
arrangement.
Takaful Operator Models
An operator is needed to manage
the pool of contributions, assuming
the number of contributors is
significant. The operator is paid
through a contract that may be
mudarabah, wakala or waqf. This is
allowed because they are operators
and not insurers.
If there is uncertainty in a
contract it is intrinsically
non Shariah compliant and
therefore not valid.
32 IIBI
NEWHORIZON Zil Haja 1434 Safar 1435
A basic mudarabah model is a
risk-sharing arrangement, where
the operator is paid a percentage
of the investment profits. Any
surplus after claims and the operator
has been paid is returned to the
participants. If the fund is a large
one, the percentage the operator
receives will be an adequate reward,
but if the fund is small it is unlikely
to be attractive to an operator.
Furthermore, if there is a loss, the
operator does not get paid.
In a modified mudarabah model the
operator shares in the whole surplus, year there are more claims than case be less than in the proportional
not just the returns on investments. were predicted. That may equal model. Managing re-takaful is a key
This is slightly better, but still very out over time and losses can be factor in profitability.
risky for the operator and definitely recouped. Second, if the risk
not attractive for small funds. The has been underestimated and the Asset Management
scholars are also not keen on this cost of insurance underpriced, In the Islamic investment market
arrangement, because the sharing the only solution is to increase certain types of instrument are not
of the surplus implies the transfer premiums and risk losing available. One of the biggest of
of risk. business, which is something of a these is debt securities, e.g. bonds,
vicious circle and recovery can be treasury bills, etc. There are sukuk,
In a basic wakala or agency models difficult. Third, management may but there are not enough of them.
the operator receives a management be weak leading to costs running As a result takaful companies have
fee, a percentage of the contribution out of control. Qard hassan is a to keep more funds in cash form
upfront. This is slightly better, but strong incentive for operators to and there is no return on cash,
if there is a loss the operator has to behave themselves. If you know so to make the same return as
pay qard hassan, effectively a short- the loss is going to come out of conventional companies, takaful
term loan to cover the shortfall. The your own pocket, you will not companies put more of their funds
temptation for the operator is to sell under price. in risky investments.
as much as possible and this may
lead to under pricing, which in the Re-takaful Models The situation is improving as more
longer term is looking for trouble. Re-takaful is about spreading Shariah-compliant asset classes
risks, but it carries a cost; it will become available. Takaful is,
In modified wakala the operator is impact profits. Re-takaful can however, still at a disadvantage at
given a share in the management of be approached in a number of the present time and will probably
the investment and a performance ways. The takaful company can remain so for some time.
fee in addition to the upfront fee. In say, for example, that they will
the event of a deficit, he is still liable give 40% of the premiums to the Reserves
for qard hassan. re-takaful company in return for In 2006 GGC takaful companies
50% of the risk. In this case the were earning 97% of their returns
How do deficits occur? One way in re-takaful company has no choice from investment, mainly
which deficits occur is that in a bad in which bits of the risk they take; property investment and just
it is across the board. This is a 3% from management, e.g.
proportional model. efficient claims handling, hiring
the right staff, etc. As a result
An alternative is a facultative
model, where, for example the
management was largely ignored
and consequently management
takaful operator will agree that the
re-takaful company takes on any
effectiveness deteriorated;
companies were bloated and
claim over $1 million. The cost
to the takaful operator will in this
inefficient. By 2008 with the slump
in the property
www.islamic-banking.com
NEWHORIZON September to December 2013
market, 84% of returns were
coming from management. The
only way companies could make
more money was to improve
management, which is the
bread and butter of insurance
companies.
Malaysian companies were in
a better position. They had a
lower proportion of their return
coming from property investment
and concentrated more on
management efficiency. They also
had access to a broader range of
sukuk, bringing their percentage
of investment in this type of
instrument close to the percentage
invested in debt securities by
conventional companies.
Return on Investments
Investors want to maximise their
returns. Takaful always gives
lower returns than conventional
insurance. Part of the problem
is that conventional insurance
companies are bigger and
therefore benefit from economies
of scale. To continue to attract
investors takaful has to provide
some confidence that it can catch
up with the performance of
conventional companies.
Branding
One of the problems for takaful
is that it is not well understood or
indeed explained by the industry
itself. Takaful needs to attract the
man on the street and make clear
what takaful offers. For example,
fair trade products are well
understood. The buyer pays a fair
price to the producer, even if they
pay slightly more than they would
for alternative products; it a value-
driven price; the consumer likes
the idea of paying the producer a
fair price.
Takaful needs to project a similar
message to persuade customers
www.islamic-banking.com
to switch from conventional
insurance. The customer
needs to be persuaded they
are doing something good by
sharing risks and managing
investments in a more ethical
manner.
New Media
When insurance companies
began to use the web to
promote their products it
was one-way traffic. The site
told customers what was on
offer and invited them to
buy. There were about 25
million such sites. Today sites
have two-way traffic, where
customers can communicate
back to the company in a
variety of ways; there are 80
IIBI SEPTEMBER WORKSHOP
million such sites and growing. more loans. Microtakaful must
The caveat is that if you make accompany microfinance to make it
a mistake the whole world more successful.
knows about it straightaway.
Companies have to be very sure Many people, including scholars,
what they are doing to use new have argued that the best use of
media. zakat (the percentage of income
of wealthy Muslims given for
Microtakaful charitable purposes) is to use it for
Microtakaful is a very useful microtakaful contributions, because
concept. Microfinance is it leverages the whole poverty
designed to provide funds for chain. It is much more effective
very poor people, for example, than giving direct handouts.
to create a business. If that
person becomes ill, they default Malaysia has already set up regional
on the loan because they have zakat boards to do this. They have
no collateral. Microtakaful can been assisted by the fact that Shafii
help to address this issue and jurists have already broadened the
the default rate of microfinance ways in which zakat can be used.
providers will go down and The Hanafi jurists are still very
it will be possible to make literal.
Iqbal Asaria has advised many banks and
insurance companies in the UK on their
launch of Islamic financial services. He is
also consultant to a number of institutions
on structuring and marketing Islamic
financial products in the UK He is now a
Special Adviser on Business and Economic
Affairs to the Secretary General of the
Muslim Council of Britain. In this capacity,
he was a member of the Governor of the
Bank of Englands working party set up
to facilitate the introduction of Shariah
compliant financial products in the UK
market. He was awarded the CBE in the
2005 Queens Honours List for services to
international development. He also teaches
various BA, BSc, MSc and MA courses in
Islamic Finance, Banking and Insurance at
various UK University affiliated Business
Schools. He also teaches the Islamic
Economics module for the CASS Business
School EMBA in Dubai.
IIBI 33
LETTER FROM AMERICA
Sacred Economics vs. Financial Tyranny
By: Kabir Helminski
This article contains is reproduced with permission of the author from his HuffPost blog in which he expressed the urgency to share something about the financial tyranny that is
governing life on this planet. There are many problems in todays world, but practically all of them can be traced back to out-of-control finance capitalism and the tyranny of debt. It
is an issue of profound moral consequence and therefore should be addressed as a religious issue.
What if our religions and many
great philosophers were right
about usury? What if there
is something inherent in the
creation of interest-bearing debt
that leads to profound economic
injustice?
I will admit that there was a
time when I saw the prohibition
against usury (creating debt
with interest) as a quaint relic
of the past. I reasoned like this:
the prohibition against usury
arose from situations where
lenders charged outrageous rates
of interest, but surely theres
nothing wrong with lending at a
reasonable rate of interest. How
else would we have access to
capital when we need to buy a
house or start a business? How
else would we keep up with
inflation?
Well, what if it could be shown
that inflation itself is the net
result of the system of debt
based on the charging of
interest, a vicious cycle. What
if the charging of interest
inevitably leads to an increasing
proliferation of debt and an
The super rich have
relentlessly striven to
dominate and control all
resources, economic activity
and political power.
34 IIBI
NEWHORIZON Zil Haja 1434 Safar 1435
increasing inequality between rich
and poor?
It is becoming more and more
obvious to many people that there
is something terribly wrong with
the economic system under which
we live. Vast amounts of wealth
continue to be more and more
concentrated in less than one
percent of the population. And
within our political system we do
not find leaders who are willing
and able to clearly identify the
problems of our monetary system,
nor offer coherent solutions.
Systemic greed favours a tiny class
of people who concentrate more
and more capital, as well as more
and more control over our lives.
As Henry Ford said, It is well
enough that people of the nation
do not understand our banking
and monetary system, for if they
did, I believe there would be
a revolution before tomorrow
morning. But all the lawlessness,
fraud and criminality is so well-
dressed in respectability, and even
admiration, that most people are
blind to whats happening right
before their eyes. If we could
It is becoming more and
more obvious to many
people that there is
something terribly wrong
with the economic system
under which we live.
truly see the naked reality of this
situation, we would be witnessing
these bankers for what they are:
at best, conscienceless champions
of greed who add nothing to the
productive economy, pursuing
their own short-term advantage;
and in many cases, soulless con
men plundering nature, profiting
from endless war, privatising
profit, foisting liabilities for all
their damages on the public at
large, and charging us interest on
all the debt!
The conflict between sovereign
citizens and an oppressive
central banking system predates
the founding of our country
(the USA). The currency act
of 1764, passed by the British
Parliament under the influence
of the Bank of England, was the
cause of economic hardship and
unemployment in the colonies
and, according to Benjamin
Franklin, was the primary cause
of our revolution.
The super rich have relentlessly
striven to dominate and control
all resources, economic activity
and political power. The central
banks of the world, governed
by a few unelected individuals,
have claimed for themselves
the unrestricted power to
set interest rates and control
the money supply. President
James Garfield, an implacable
foe of the banking cartels,
expressed his opposition by
saying, Whosoever controls
the volume of money in any
country is absolute master of
all industry and commerce.
And when you realise that the
entire system is very easily
controlled, one way or another,
by a few powerful men at the
top, you will not have to be told
how inflation and depression
originate. Garfield was
assassinated in 1881.
The bank panics of 1873, 1893,
in 1907 were crises engineered
by international bankers
through the manipulation of
credit, which further set the
stage for the public to believe
that a central banking system
was needed to protect them.
Senate Republican leader
Nelson Aldrich spent two years
in Europe consulting with the
www.islamic-banking.com
NEWHORIZON September to December 2013
central bankers of Germany,
France, and England and upon
his return he lobbied for the
creation of a central bank for
America. His wish would soon
be realised.
In November 1910 a secret
meeting on Jekyll Island
attended by Aldrich and
representatives of major,
interconnected banking families
the Morgans, the Rockefellers,
the Schiffs, the Vanderbilts, the
Warburgs formulated plans for
what would become the Federal
Reserve (the Fed). The Federal
Reserve Act passed Congress
on December 23, 1913, at
a time when few members
of Congress were present
because of the Christmas
holidays. Congressman Charles
Lindbergh, Sr. said upon
its passage, From now on,
depressions will be scientifically
created. Invisible government
by the monetary power will be
legalised. People may not know
it immediately, but the day of
reckoning is only a few years
removed. The worst legislative
crime of the ages is perpetuated
by this bill.
From this point on, money
creation was in the hands of
these private bankers who have
been able to manipulate the
economy through a series of
financial bubbles and busts.
Also known as pump and
In the current system
capital automatically flows
to whatever makes the
most money, no matter how
destructive it is to life.
www.islamic-banking.com
dump, these intentionally
created cycles have allowed
the central bankers to further
consolidate their wealth by
buying assets on the cheap
during the busts by having
privileged access to vast
amounts of capital, while
continuously creating more and
more debt through the fractional
reserve system.
If you could join this club with
all its privileges, you would
be able to borrow as much
money as you like at nearly zero
percent interest; you would be
able to extend mortgages to
others just by making an entry
on your account ledger; you
would be able to buy up the
mortgages and debts of others
and purchase any equities,
commodities, or real property.
And, oh yes, you would also
be able to gamble with these
great sums of money! Except
that your bets would be insured
by the rest of the population.
The justification for all these
privileges is that by increasing
your wealth in this way, some
of this wealth would gradually
trickle down to the rest of the
population if and when you
decided to let it.
How did we get from merely
charging interest to the universal
system that is now enslaving
most of humanity? Well, in
America it went something like
LETTER FROM AMERICA
this: our Constitution mandates
that money creation is the right
of the Treasury Department.
Some of our founding fathers
understood that a central banking
system, like the Bank of England
in their time, is designed to profit
from lending to governments,
especially by financing wars and
eventually leads to the control
of government itself. Presidents
Thomas Jefferson and Andrew
Jackson were two courageous
opponents of the idea of a central
bank. A maxim attributed to the
House of Rothschild says, Let us
control the money of a nation and
we care not who makes its laws.
In other words, these banks
acquire capital that can be used
as reserves for lending at a ratio
of 10 to 1, though in some recent
situations today the leverage is
much higher 50 to 1, for instance.
The money that is lent as debt
multiplies through the whole
banking system through further
leveraging, bringing not only
individuals but whole countries
into unsustainable debt. In other
words, the debt created is much
more than the real world assets
needed to eventually pay off the
debt. This inevitably leads to
extreme levels of indebtedness
in which not only individuals but
whole countries owe more than
can ever be repaid and the banking
cartel confiscates what real assets
exist.
Its a very clever system, designed
to appropriate all of our common
wealth and transfer it to the
banking class. The financial sector
produces nothing; it exists as an
intermediary between producer
and consumer. In 1870 it was
only 2 percent of the economy;
it reached 5 percent in 1980
and in 2010 it was 9 percent of
GDP. It not only puts our whole
financial system at risk through
its derivatives, it skims trillions of
dollars from the real economy
without producing anything.
The Fed has institutionalised
inflation, causing the dollar to
decline to less than 5 percent of
its 1913 value. But, one might
argue, our wages have increased
too. What is obscured here is
that inflation disproportionately
harms the average person,
depleting their savings, pensions
and retirement resources, while
giving a major advantage to those
with greater capital who gain
through speculation and other
investments.
The Feds recent spell of
quantitative easing (QE) has
boosted the value of stocks by
more than 25 percent this year
alone, but the vast majority of
that wealth has gone to a tiny
percentage of the population
who own stocks. QE has
been described by billionaire
hedge fund manager Stanley
Druckenmiller as the biggest
redistribution of wealth from the
middle class and the poor to the
rich ever.
In the current system capital
automatically flows to whatever
makes the most money, no matter
how destructive it is to life. We
dont spend dollars, the dollars
spend us! From the apparently
insignificant beginnings in the
mere charging of interest, a
whole system of out-of-control
capital has developed.
Almost every religion has warned
against usury (interest-bearing
debt) and many great thinkers
as well (Solon, Plato, Aristotle,
Cato, Cicero, Seneca, Jesus,
Muhammad, Aquinas, Jefferson,
and Goethe). What we are
witnessing today is just the most
sophisticated and comprehensive
rip-off in the history of the
world.
IIBI 35
LETTER FROM AMERICA
What if we found out that most
of the wars of history were
caused not by religions and clerics
but by banks and financiers?
Politicians and governments are
bought and paid for. Wars are
financed with credit extended
to both sides of the conflict by
bankers who stand above the
fray but profit handsomely. The
public would never be willing
to pay for such wars if they
immediately had to pay out
of their own pockets. But the
system doesnt work that way. It
would be too obvious. Instead,
irrational fears are promoted;
enemies and scapegoats are
proffered; we stumble blindly into
war and the costs are temporarily
deferred, while the majority of
us and future generations are
stuck with the costs. It is time for
communities of faith to confront
this unjust system that pillages
our whole economy and enables
the war-making machine.
Sacred economics is an
economics that serves the cause
of human dignity and well-being.
The Financial Tyranny we have
today is a consciously designed
system of debt enslavement that
perpetually harvests the energy
and substance of the people.
In this system all money is
created as debt, first of all to
the Fed and other central banks,
36 IIBI
NEWHORIZON Zil Haja 1434 Safar 1435
then to all banks and credit card
companies that extend debt The Financial Tyranny we
have today is a consciously
to borrowers, businesses and
government. More and more
money is being made through
financial instruments, through the
Feds pumping up the economy
designed system of debt
with empty dollars; less and less
through actually making things.
enslavement that perpetually
And all of this money comes
into being as debt owed to the harvests the energy and
Fed.
substance of the people.
Is there a solution, an alternative
to this interest-based system? As problems here: one is the of good faith must try to
a minimal first step, reinstitute intrinsic nature of debt-with- understand this system of debt-
Glass-Steagall, to separate normal interest that empowers capital enslavement and organise to end
banking from investment, i.e. take to prevail over human needs. it. Our economy requires the
the heroin away from the addict; The second is the extent of suicidal increase of consumption
do not let these too-big-to-fail the privileges given under the to meet the requirements of
banks gamble with money that current financial architecture increasing debt. It is a profoundly
is not theirs. Next, revisit the to the worldwide financial elite, unrealistic and unsustainable
Chicago Plan, devised during namely the Fed and other central trajectory that makes an idol of
the Great Depression by some banks. profits no matter what the cost to
of the worlds best economists, human life and dignity. We need a
though vehemently opposed by Jesus threw the money lenders new vision of economic justice, a
the banking cartel at the time. out of the temple and proposed sustainable economic system that
Eventually, end the Fed; restore the forgiving of debts. People respects the sacredness of life.
money creation to the Treasury
so that money will not be
created as debt, but money will Our economy requires
be created as a reflection of the
actual resources of the country. the suicidal increase of
Yes, it is difficult to grasp how
fundamentally our monetary
consumption to meet the
system needs to change in
order to avert economic and
requirements of increasing
environmental catastrophe.
There are two interconnected debt.
Kabir Helminski is an author as well as the translator of numerous books of Sufi literature and especially
Rumi. He is the co-director, with his wife, Camille Helminski, of the Threshold Society, a nonprofit
organistion dedicated to sharing the knowledge and practice of Sufism. As the publisher of Threshold
Books for some twenty years, he was largely responsible for making Rumi the most widely read poet of
our time. He leads workshops and retreats for Sufis and the broader multifaith community.
www.islamic-banking.com
NEWHORIZON September to December 2013 ANALYSIS

Examining the Determinants of

Operational Risks in Islamic Banking
By: Hylmun Izhar, PhD, Islamic Research and Training Institute (IRTI), Islamic
Development Bank
A complete version of this study was presented at Global Development Finance Conference, 5- 7 November 2013 in Cape Town, South
Africa; organised by Africa Growth Institute in collaboration with Chartered Institute of Development Finance.
It is very well understood that the of return on a large number of results from factors associated with be found in Ismail and Suleiman
complexity of operational risk explanatory variables, which include operational risk such as asset write- (2005), Hassan and Dicle (2005)
measurement has been exacerbated the first difference of 22 variables downs, unstable or unpredictable and Muljawan (2005). This study
by two major spectrums of representing credit risk, interest rate cost structures and volatile income therefore attempts to fill the
operational risk data, namely high risk, exchange rate risk and market sources. They also suggest a ratio gap in the empirical sphere of
frequency-low severity (HF-LS) risk. The three Fama-French (1993) of training expenditure to total operational risk by investigating
and low frequency-high severity factors are also used as explanatory expenses and the proportion of the determinants of operational
(LF-HS) and the integration of variables. An important finding incentive-based remuneration. risks. The empirical part of this
scaling external and internal data. resulting from Allen and Balis study has benefited from utilising
Consequently, each type requires research is that operational risk In another study, Chernobai et al. the data of the Islamic banking
a different approach to cater for exposures often exceed market risk (2007) examine the microeconomic industry in Indonesia which spans
operational risk. The current resulting in higher capital charges and macroeconomic determinants the period from January 2001 up
literature on operational risk mainly for operational risk. of potential losses in financial to June 2010 (monthly time series
focuses on two issues firstly, the institutions. On the basis of 24 data), extracted from published
estimation of operational risk loss Another approach in analysing years of US public operational loss monthly financial reports (balance
processes using extreme value operational risk exposures is by data covering the period 1980- sheet and income statement)
theory or Cox processes1 , and deploying financial ratios. This 2003, they demonstrate that the comprising 10 fully-fledge Islamic
secondly, the application of these can be found in the study by Tripe firm-specific characteristics (such as commercial banks and 23 Islamic
estimates to the determination (2000); who investigates some size, leverage, volatility, profitability business units.
of economic capital 2. Despite benefit in using ratios derived from and the number of employees)
that, an essential issue remains to financial statements to determine turned out to be highly significant The estimation approach in this
be resolved, i.e. to determine the capital requirements for a number in their models. They also found study commences by partitioning
main factors of operational risks of New Zealand banks based that the overall macroeconomic the business units in Islamic
to help bank management make on the volatility of non-interest environment is less important, banks into three different income
a better decision in carrying out a expenses. He also considers although operational losses tend to generating channels (IGC), which
desirable scale of operational risk two ratios the ratio of operating be more frequent and more severe would then function as the unit of
management. expenses to total assets and the during economic downturns. The analysis for measuring operational
ratio of operating expenses to evidence they obtained indicates risk3 . Each IGCI, is partitioned
In an attempt to estimate the level income. The figures suggest that that contrary to the traditional view into three different units, (a)
of operational risk exposures, Allen bank capital levels should embody that operational risk is unsystematic, investment channel- IGCI, (b)
and Bali (2004) deploy the residual a significant element of operational operational loss events cluster financing channel- IGCF, and (c)
of their econometric models risk. Ford and Sundmacher (2007) at the industry level in excess of service channel- IGCS. 4 The level
to approximate operational risk also advocate the use of financial what is predicted by the stochastic of operational risk exposures is
exposures. In order to deal with ratios such as cost to income ratio frequency estimates. measured as the uncertainty of
the data problem, they estimate as a leading indicator of operational earnings in each IGC in terms
an operational risk measure for risk. The underlying argument In the context of Islamic banking, of a series of risk factors. This
individual financial institutions is that a reduction of this ratio, there has not been any single study, hence, defines uncertainty as
using a monthly time series of which is essentially a measure of study on both methodological and volatility.5
stock returns over the period 1973- efficiency, is favourable since it empirical studies in operational
2003. The model is represented implies lower cost per dollar of risk. Nonetheless, some empirical An investment channel consists of
by ordinary least squares (OLS) income. The volatility of this studies on the aspect of operational any investment in the form of a
regression of the monthly rate ratio is also a leading indicator as it soundness in Islamic banks can partnership, while a financing
1
See Chavez-Demoulin et al., 2006; Coleman, 2003; de Fontnouvelle et al., 2004; de Fontnouvelle et al., 2005; Ebnother et al., 2001; Jang, 2004; Moscadelli, 2004; Lindskog
and MecNeil, 2003 ; K. Dutta, J. Perry, 2007.
2
See de Fontnouvelle et al., 2004; de Fontnouvelle et al., 2005, Moscadelli, 2004, and Basel Committe on Banking Supervision, 2009.
3
Income generating channel is defined as the production unit by which an Islamic bank creates a product to its customers.
4
Hence, the bank has three IGCs, namely IGCI (income generating channel for investment channel), IGCF (income generating channel for financing channel), and IGCS (income
generating channel for service channel)
5
From this point onward, the term volatility is used to explain uncertainty

www.islamic-banking.com IIBI 37
ANALYSIS
channel contains any financing
instruments that are used
primarily to finance obligations
arising from the trade and sale
of commodities or property.
Service channel, however,
consists of any financial
transactions that create earnings
by charging fees.
In IGCI, earnings are represented
by the rate of return on financial
securities (RoS), which is based
on profit sharing. The financial
securities represent ownership of
profit-sharing-based investments
carried out by Islamic banks.
A proposed set of operational
risk categories that can be
mentioned here are Shariah
non-compliance risk, fiduciary
risk, people risk, legal risk and
technology risk. Due to the
quantitative nature of the data,
Shariah non-compliance risk,
legal risk and technology risk,
which are qualitative in nature,
will not be included in the model
as they cannot be captured by
the data. As a result, that leaves
the model with fiduciary risk and
people risk.
Fiduciary risk can be
characterised as a condition
whereby Islamic banks are liable
for losses arising from their
negligence, misconduct or breach
of their investment mandate. In
other words, fiduciary risk is an
indication of failure to perform
in accordance with explicit and
implicit standards applicable to
their fiduciary responsibilities
(IFSB, 2005:26).
In the model, a set of proxies
for fiduciary risks is decomposed
into a series of risk factors,
namely volatilities of (i) volume
of investment in financial
securities (FS), (ii) return on
saving deposits (RoSD), (iii)
return on 1-month time deposits
6
As of June 2010, murabaha makes up over 60 percent of the total financing.
7
As of June 2010, service fee only contributes less than 2% to the value adding process
38 IIBI
(RoTD) and (iv) the ratio of
operating expenses over operating
income (BOPOI).
The choice of a proposed set
of fiduciary risks mentioned in
the previous paragraph results
from an inference drawn from
the definition of fiduciary risk set
out by IFSB. It can also be read
as follows an unstable volume of
investment in securities, return
on saving deposits, return on
one-month time deposits and
operating expenses; reflected
by their respective high (low)
volatility would demonstrate
an inability (ability) of Islamic
banks to sustain their fiduciary
responsibilities. In other words,
a highly steady performance of
investment, return on saving
deposits and time deposits
demonstrates the ability of an
Islamic bank to safeguard the
interests of their fund providers.
Moreover, a high volatility of
operating expenses might attribute
to the operational errors that a
business may incur during its
operations (Makridakis, 1998).
People risk, nonetheless, is another
type of operational risk arising
from incompetence or fraud,
which exposes Islamic banks to
potential losses. This includes
human errors, lack of expertise,
compliance and fraud (Akkizidis
and Kumar: 2008). A proxy for
people risk, on the other hand,
is represented by the volatility
of training expenses (Tr ). It is
I I
argued that training expenditure
has a reverse effect on the number
of employee errors and customer
complaints (Taylor and Hoffman,
1999 and Shih, Samad-Khan and
Medapa, 2000). The more skilled
the bankers, a result of intensive
training, the less people risk the
bank would incur (Jackson-Moore,
2007). Hence, the higher the
volatility of training expenditure
the more it would affect the
NEWHORIZON Zil Haja 1434 Safar 1435
volatility of the operational risk
indicator. Therefore, it is expected
that the two variables have a
positive relationship.
In IGCF, on the other hand, rate of
return on financing (RoF) signifies
earnings. RoF contains a bulk
of returns on financing, which
unsurprisingly, is still dominated by
the murabaha mode of finance.6
Fiduciary risk in IGCF is symbolised
by the volatilities of two elements,
namely volume of financing (F)
and the ratio of operating expenses
over operating income (BOPOF).
As for people risk, IGCF employs a
similar variable to IGCI, that is the
volatility of training expenses (Tr )
F
. earnings. RoF contains a bulk
IGCS has deliberately been taken
out of the analysis since the volume
of service fee does not contribute
significantly to the value adding
process.7
Hence, IGCI has the following the
earnings function:
v ( R o S ) f ( v ( F S, R o S D, R o T D,
BOPOI,TrI)))
Volatility of return on securities
is a function of a series of risk
factors, i.e. volatilities of investment
in securities (FS), return on saving
deposits (RoSD), return on one-
month time deposits (RoTD),
ratio of operating expenses over
operating income in investment
channel (BOPOI) and training
expenses in investment channel
(Tr ).
In the equation above, proxies for
fiduciary risk, namely FS, RoSD,
RoTD and BOPO are also expected
to have a positive relationship
with the target variable, RoS. The
argument is that the more unsteady
or volatile the explanatory variables
the more volatile RoS can be. To
put it differently, a higher fiduciary
risk will be likely to positively
impact a greater exposure of
operational risk, represented by the
volatility of RoS.
IGCF has the following earnings
function:
v(RoF)f(v(F,BOPOF,Tr ))
F
Volatility of return on financing is a
function of a set of risk factors, i.e.
volatilities of volumes of financing
(F), ratio of operating expenses
over operating income in
financing channel (BOPOF) and
training expenses in financing
channel (Tr ).
F
In IGCF, rate of return on
financing (RoF) signifies
of returns on financing, which
unsurprisingly, is still predominated
by the murabahah mode of
finance. Fiduciary risk in IGCF is
symbolised by the volatilities of two
elements volume of financing (F)
and the ratio of operating expenses
over operating income (BOPOF).
As for people risk, IGCF employs a
similar variable as IGCI, that is the
volatility of training expenses
(Tr .
F)
Discussing the Empirical
Results
A set of econometric
misspecification tests conducted
on the models show that both
IGCI and IGCF earnings
functions have violated the basic
assumption of the classical linear
regression model in three respects
- normality, presence of serial correlation
and heteroskedasticity. Thus, the
regression results cannot be used as
the basis for drawing the conclusion
in the analysis. Therefore,
modification of the regression
models is required.
A technique adopted in this study
is weighted least squares (WLS)
which, according to Asteriou and
Hall (2007), is one of the effective
ways of overcoming
www.islamic-banking.com
NEWHORIZON September to December 2013
heteroskedasticity. In addition,
this study also utilises the White
heteroskedasticity test developed by
White (1980).
Due to the presence of
autocorrelation problem in
IGCI, the model is transformed
into an autoregressive model
through the Cochrane-Orcutt
iterative procedure, which proves
to make a positive difference
in its DW value from 0.42 to
1.75. More importantly, the
model transformation is also very
significant at the 1% confidence
level.
The empirical results of this
study show that there are two
main determinants of operational
risk exposures in IGCI the
volatility of training expenses
and the volatility of return on
saving deposits. Volatility of
training expenses is significant
at the 1% confidence level,
whereas the volatility of return
on saving deposits are positively
related to the target variable and
significant at the 5% level of
confidence. The dominance of
training in investment activities
gives an indication of the role
of an intensive training, which
will produce highly specialised
human resources, well versed
in both Shariah and financial
economics. In other words, the
result shows that the performance
of investment activities in Islamic
banking is significantly affected by
the highly-skilled personnel who
run the banking activities, which
are unfortunately quite scarce at
the present stage. The finding
also confirms the concerns raised
by Archer and Haroon (2007) and
Jackson-Moore (2007).
It is also apparent that volatility of
return on saving deposits, which
represents a fiduciary role in an
Islamic bank, is also essential as
demonstrated by the significance
www.islamic-banking.com
of its t-statistics. However, it can be
argued that investment activities in
Indonesian Islamic banks are highly
affected by people risk as compared
to other type of operational risks.
The rectified model, nonetheless, is
also proved to be the best model,
since the variability of explanatory
variables can be explained by the
model at around 95% as shown by
the value of R-squared.
As for the financing function
model (IGCF), it is re-estimated
by using WLS to address the
issue of non-normality and the
presence of heteroskedasticity. The
empirical results of IGCF show
that all variables produce a positive
coefficient as expected. Meanwhile,
the values of R-squared, F-stat and
DW, which are 73%, 96.58 and 2.2
respectively, show that the model
now fits in explaining the variation
of the explanatory variables with
respect to the target variable, namely
volatility of return on financing.
It is worth stating that although
people risk (represented by TR
and is significant at 5% level of
confidence) still plays an important
role in affecting the magnitude of
operational risk exposures; it is
no longer dominant in financing
activities as compared to its impact
in investment activities. Ratio of
operating expenses to operating
income (BOPO), on the other hand,
plays a major role in this regard.
The findings indicate that for
financing activities, the role of
maintaining operational efficiency as
part of an Islamic banks fiduciary
responsibilities is extremely high
in the case of Indonesian Islamic
banks. In the model, BOPO
is significant at 1% level of
confidence.
Following some corrections on the
initial models, the empirical finding
in this study shows that fiduciary
risk and people risk are significant
in both channels, IGCI and IGCF.
However, people risk is immense
and plays a major role in affecting
the magnitude of operational
risk exposures in Islamic banks,
particularly in investment activities.
The finding is in line with the
concern raised by Archer and
Haroon (2007), Jackson-Moore
(2007) and Nienhaus (2007) over
the high degree of people risk in
Islamic banking activities. This
finding also validates the priority of
Bank Indonesia, being the regulator
of the Indonesian Islamic banking
industry, to enhance the capacity
of the human resource that runs
the Islamic banking business,
particularly in investment activities,
which show an inexorable growth
trend over the last three years.
As for financing activities,
although people risk is also
significant, its impact on the
papers in various international conferences and has conducted professional
training courses for regulators, bankers and university professors in the area
of Islamic economics and Islamic finance.
ANALYSIS
exposure of operational risk
is outweighed by the role of
the operational efficiency ratio,
represented by BOPO. The
results suggest that an expansion
of financing activities should
retain the prudential principle
combined with a principle of
costs minimisation, as it would
otherwise increase the level of
un-repayment. Such a finding is in
line with the projection of central
bank of Indonesia as reported
in Indonesian Islamic Banking
Outlook (2011).
In a nutshell, the empirical
findings of the study suggest
that enhancing human capacity
and increasing the know-how in
investment activities should be
the priority of the Islamic banks
policy, whereas a cost-reduction
strategy should be emphasised
more strongly in an Islamic banks
financing activities.
Prior to joining IRTI IDB,
Hylmun Izhar was a lecturer
at the Markfield Institute of
Higher Education (MIHE)
in the UK where he taught
Islamic Financial Instruments,
Economic Development and
Finance and Cross Culture
Management. He was also a
Research Associate in Islamic
Finance at Oxford Islamic
Finance in the UK. He
has a masters degree from
Loughborough University
and a PhD in Islamic Finance
from Durham University. He
has also presented numerous
IIBI 39
POINT OF VIEW NEWHORIZON Zil Haja 1434 Safar 1435

Where are all the Promised Jobs in Islamic Finance?

By: David Evans MA (Islamic Finance), FCMI, MIET, Evans Consulting
Introduction
The Islamic finance media is at times overwhelmingly of the opinion that there is a significant demand for qualified personnel in Islamic
finance in todays market. In July 2013, Amilin published an article quoting Prof. Dr Baharuddin Aziz, the director of communications
for the International Islamic University Malaysia commenting that by 2020 the industry would need 65,000 trained Islamic finance
personnel. This message was reiterated in a November of 2012 article by Paul Clark in the financial services recruitment website,
efinancialcareers.com, which identified the need for 57,000 trained personnel.

At first glance the enthusiastic student of Islam or financial services would, upon taking stock of these figures, probably decide that an
investment in training for Islamic finance would reap sound benefits as the industry is bereft of qualified job candidates. CIMAs own
website currently highlights the need for 50,000 professionals over the next seven years, interesting and worthy of further investigation,
isnt it?

Well, actually the figures can be misleading. The first challenge to the proposed shortfall lies in the definition of qualified personnel,
qualified in what exactly? Is there a need for 50,000 new personnel trained in Islamic finance or is it simply financially services trained
in activities such as operations and payments?

Undoubtedly there are regional demands within the Islamic financial services industry such as those seen in Malaysia where Islamic
finance has seen phenomenal growth over the past 10 years. Whilst the UK Islamic finance sector has increased its dominance
in Europe, the industry at best hires 1,000 personnel (based on insight of the size of BLME, Gatehouse, IBB and others) in non-
consulting, delivery roles ranging from teller/customer support through to treasury, front office sales and senior management positions,
hardly a dominant force in the recruitment market and not even a consideration for new graduates.

Dedicated Roles in Islamic
Finance
Within Islamic financial services
there are very few roles that are
purely dedicated to the needs
of Islamic financial services
knowledge. For example, in
processing a payment for an ijarah
the majority of the necessary
product knowledge is based upon
activities that are aligned with its
conventional cousin, the lease
arrangement. Clients need to be
brought on board, screened for
credit worthiness, accounts will
be set up, contracts will be drawn
up and signed, payments will
be established and funds will be
transferred.
When considering the need for
a strong knowledge of Islamic
financial products we can see that
those who have knowledge of the
product structures will design the
product, the Shariah supervisory
boards will approve those designs
and the legal team will establish the
contractual terms and conditions.
This is true for most products
highlighting that most skills are
generic to conventional finance
with only a few needing a true
grounding in Islamic finance.
Automation and Information
Technology
The activities mentioned above
are also seeing increasing levels of
automation through the utilisation
of information technology
(IT) with product structures
standardised within the software
systems. The back office support
staff is typically focusing on data
validation and entry with very little
movement outside of the processes
and rules established earlier.
Increasing levels of automation
within financial services driven by
the desire for greater profitability
and time to market is recognised
as a key influencer in the reduced
resource demands across financial
services today. It is, therefore, a safe The Mathematical Perspective
assumption that IT systems in Islamic Validating the Numbers
finance follow the same patterns and We can take an educated guess
as such the need for headcount faces using a simple mathematical
the prospect of further reduction approach to analysing the
and not growth. The use of IT in figures, where we see a very
turn also brings with it the laws of interesting picture of the
economy of scale in that the cost possible demand/ growth.
to process 100 transactions is not The illustration below shows
ten times the cost of processing a conservative estimate of the
10 transactions. So, whilst growth number of open positions per
will see a demand in the volume of year that must be occupied by
personnel needed it will not be a 1:1 in individuals qualified in Islamic
personnel growth to volumes. finance.
350 Islamic finance organisations (IMF, 2008)
200 Staff per institution (see note)
70,000 Personnel working in Islamic finance
33% Conservative view of the percentage of staff that
must be qualified in Islamic finance.
23,100 Qualified personnel
9% Average turnover (Personnel Today, 2010)
2,079 Number of open, qualified roles per year

40 IIBI www.islamic-banking.com
NEWHORIZON September to December 2013
Note The average number of staff
per institution total is based on my own
estimate, as no official/quantifiable figures
are available. As such I have used my
experience of institutions within Islamic
finance as a benchmark.
We need to reflect, however, that
there is growth within the industry
when considering the above figures.
In 2010, the Islamic Financial
Services Board quoted a growth rate
of 20% year on year. Table 1 below
shows a year on year growth pattern
assuming that 20%.
Taking a cumulative picture of those
2,079 candidates growing at 20%,
in year five we are hiring 4,311 new
personnel per year and in year ten
we are hiring 10,727 new staff per
year. The total number of new hires
over a ten-year period equals 53,968.
Table 1. Staff Growth at 20%
(please see below)
Whilst we can see some validation
in the top-line figures mentioned
at the start of this article, we must
consider that we have assumed that,
first of all, job leavers do not simply
move to another Islamic financial
services organisation and we gain no
further operational efficiencies over
the 10 years for the figures to hold
true. Finally, when considering the
mathematics, at year six (assuming
2020), we have only engaged 20,644
new personnel and not the 50,000
65,000 we see mentioned at the start
of this by media sources. We can
therefore see a discrepancy in the
expected demand for new personnel
within the industry with the media
figures not holding mathematical
probability.
Social Media Commentary
If one was to visit the various
social media websites such as the
professional career/networking site,
LinkedIn and toured the Islamic
finance forums we can see further
evidence that challenges the volume
Year 1 Year 2
New Roles 416
Total Hires 2,079 2,495
www.islamic-banking.com
POINT OF VIEW
of required qualified personnel. (not forbidden) and as such the around so that we deliver graduates
There are numerous conversation move towards profit is core to the with a combination of both the
threads at play from those with all teachings of Islam. theoretical and practical.
levels of qualifications from industry
certifications from organisations such Conclusion Todays course offerings would
as CIMA and AIMS through to those In reality we see the media undoubtedly benefit from a
with Masters and PhDs all looking messages proclaiming a shortfall combination of practical education
desperately for their first role in the coming from those with a vested in the day-to-day operations of
industry. Whilst the use of social interest in selling the value of a financial institution examining
media presents anecdotal evidence education. Education in itself is payment processing, KYC/AML and
at best, it does highlight that there a good thing, something we all other such activities with a period of
may be contradictory perspectives should actively promote. To quote job placement/internship in order
a shortage of qualified candidates figures that may be construed that the industry delivers candidates
yet with an apparent abundance of as misleading to prospective with more than the theoretical
qualified personnel desperate to find candidates in the hope that they perspective. Todays financial
their desired roles. sign-up for expensive courses is services industry desires and needs
not, however, the image that the those that can be productive on
The Industries Challenge Under industry should be portraying and day one and not those that have the
Qualified Graduates ultimately will leave the industry theory and no experience as this cost
The challenge for a number of the with an abundance of very highly is prohibitive in todays
freshly qualified is that there are no qualified candidates and little marketplace.
graduate training schemes focused prospect of working in Islamic
on those with Islamic finance finance. Clearly the message of an abundance
qualifications, but no operational of jobs and unqualified candidates is
experience. Secondly, the majority of To ensure that we manage the a mixed message. Yes, the industry
the courses in Islamic finance focus long-term picture supporting the is growing; yes, the industry needs
on the academic and theoretical and potential for Islamic finance we qualified candidates, but, the industry
not the practical. When hiring for an need to ensure that we do not also needs experienced candidates
open position in finance, payments, frustrate those who support our and this is part of the problem,
operations and trade-finance, most industry through false promises theoretical training is good but only
financial services organisations and instead turn our focus and when supplemented with experience.
will not be able to afford the paint a more reflective picture of Can we substantiate the numbers
luxury of employing those with no the potential opportunities. That presented by some in the training
experience as they inevitably need picture will reflect the true growth, industry? I dont believe so; the
hands-on training, extra supervision the regional variations in demand numbers and the facts just do not
and development when there are and turn our education system tally up.
experienced candidates in the
marketplace that can be productive at Prior to undertaking his MA, David was The
a much quicker rate than those with Interim Head of Projects at the Bank of
no experience and who can study for London and the Middle East and previously
their IFQ/CIMA at a later date if the Senior Vice President of Business
required. Change and Process Re-Engineering at the
Bank of America where he researched in
Logic may say therefore that Islamic financial services. Currently David is
what Islamic financial services a member of two professional bodies: The
organisations need is a training Chartered Management Institute (FCMI -
programme for new entrants. This Fellow) and the Institute of Engineering and
however takes time and money with Technology (MIET Member). Davids academic qualifications include
no short-term return, a concept an MA Islamic Banking Finance and Management from the University
that is alien to shareholders who of Gloucestershire/Markfields Institute, Postgraduate qualifications
wish to see profit and a return on in Senior Management and Strategy from the Open University MBA
their investment. Remember, Islam programme and certifications in Islamic Banking, Insurance and
prohibits interest but approves Commercial Law from the Charted Institute of Management and
of a fair profit and therefore the Accounting (CIMA).
desire for a return via profit is halal Table 1.
Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Total Hires
499 599 719 862 1,035 1,242 1,490 1,788
2,994 3,593 4,311 5,173 6,208 7,449 8,939 10,727 53,968
IIBI 41
IIBI LECTURES NEWHORIZON Zil Haja 1434 Safar 1435

IIBI Monthly Lecture Series September to November 2013

September: The Duty of Takaful Operators towards
Participants and Shareholders

Mr Muhammad Khan, a partner at
PricerwaterhouseCoopers, began
by saying that takaful companies
are Islamic insurance companies
and like any company they are
there to do one thing, which is to
make a profit. He added that there
is nothing wrong with making a
profit. The reason he made that
point is that people often say to
him that there needs to be a social
good in Islamic finance. While
that is right, they also need to
make money albeit in an Islamic/
Shariah-compliant way. If you do
not make money, you do not really
have an enterprise anymore.
If you look at the history of
insurance, it is all about pooling
risk and if you are talking about
more than a handful of people,
you need a company to run that
pooling activity. The basic tenet
of takaful is that you share in the
risk and you pay someone to run a
company on your behalf and allow
them to make a profit. That is non
controversial.
insurance. The problem is that
most people today do not think
of insurance as sharing risk. They
believe that if they do not make
a claim, the premiums they pay
should reduce; they forget about
risk sharing.
The company taking the
contributions/premiums makes
money in two ways. It can charge
an expense fee or make money by
reinvesting the premium fund. In
the past there has been a slight
misunderstanding about how much
you can charge in terms of those
fees. Traditionally, when takaful
companies have first set up in
business, the fees have been quite
high. They can be 30-40% of the
premium. This is not necessarily
unfair as the companies need
to build up funds to pay out on
claims, but most policy holders do
not realise that and yet the whole
point of Shariah insurance is to
make things easier for people to
understand.
In addition most customers
probably do not understand that
if a company makes a profit,
the policy holders fund makes
a profit and they are entitled
to a share of that profit. If
you look at takaful companies
around the world, how many of
them have issued a profit to the
policyholders? The answer is
hardly any, although, because the
industry is so young, many takaful
companies may have decided
to retain profits for prudential
reasons.
The rationale for highlighting
these points is that takaful
companies were originally
established, just like insurance
companies, in most countries,
by the people, for the people.
Most people, however, do not
understand the contracts to
which they are signing up and
secondly what they are entitled to
under the contract. This is quite
fundamental, because, if the one
of the main purposes of Shariah
finance was to make it easy for
consumers to understand, it is
failing. Part of the reason for this
misunderstanding is traditional.
Most people, when they think
about insurance or takaful, think
about what they already know.
There are also very few people
who will look at the accounts
of the insurance company from
which they buy insurance. In the
UK they probably do not need
to, because, for example in the
case of motor insurance, if a
company fails, there is a body who
will step in. In most countries

The Difference between

Convention Insurance and
Takaful
In insurance in the UK generally,
when you buy an insurance policy
from someone such as Royal Sun
Alliance or Churchill, what you
are doing is outsourcing your risk;
paying the insurance company
to take the risk off you. That is
not true of takaful, where you
are still sharing in the risk, i.e. if
the takaful company runs out of
money because they have had a
lot of claims, they can call on their
policyholders for more money.
This is not true in conventional Source:PWC

42 IIBI www.islamic-banking.com
NEWHORIZON September to December 2013
that sell takaful, there is no such
body. When consumers take out an
insurance policy, they should think
about whether the company is going
to survive or not.
How Insurance Works
Insurance companies use their
premium income to pay out claims;
they set some aside to create a
reserve against future claims; they
need a proportion to cover expenses
and what is left is the profit. The
difficult part of this sum is deciding
how much to set aside for future
claims. Takaful companies are
more complicated. They need
to deduct the amount of money
needed to run the company plus the
profit for the takaful operator. As
mentioned earlier, they can charge
an upfront premium to cover that
(wakala) or they can share in the
profit the insurance company makes
(mudarabah).
If a mudarabah model is being used,
the operator wants to maximise the
profit of the insurance company,
which might mean they take more
risks with the company; invest in
riskier assets. Under the wakala
model the operator wants to
maximise contributions; bluntly it
wants more customers or to charge
higher premiums.
What Policyholders Want
What do policyholders wants from
the insurers? First, they want the
company to last a long time; they
want to maximise profitability, but
at the same time they want the
company to be prudent in the way
it runs itself. Some companies
have taken a hybrid approach using
what they see as the best elements
of both models. Typically the
way that has worked in the Middle
East is that companies have taken
a percentage of the insurance
premiums (it used to be 40%, now
it is about 10%) and they also try to
take a percentage of the investment
income.
www.islamic-banking.com
Takaful Problems
If you look at takaful companies
around the world, one of the
big problems they face is one of
scale. Muhammad Khan said
that in his view there were too
many takaful companies in the
Middle East. For example, in
Qatar there are more than 40
such companies, predominantly
writing motor insurance for a
population of slightly less than 2.1
million people; that is probably
too many companies. That
pattern is replicated in the rest
of the Middle East. That leads
to problems, because there are
not enough customers to enable
the companies to drive premium
revenue. Similarly, if they are
trying to maximise profit, they are
faced with a large expense base
and the efficiency measures that
can be taken are finite.
In Malaysia there is competition
between conventional insurers
and takaful companies. When
premiums are low in takaful
companies, you will find 30-40%
of policy holders are non Muslim
and vice versa.
Today, most takaful companies just
sell policies to the general public
personal lines. They do not
provide business insurance, where
operators require substantial funds
(capacity) to enter this sector of
the market. For example, if one
of the jackets of a North Sea oil
platform collapses, how much
would an insurer have to pay to
rectify the problem? You are
probably looking at 150 million.
The problem is takaful does
not have much capacity, even in
Malaysia.
Another problem is whether
people understand the pricing
in these markets, whether that is
takaful or conventional insurance.
In the Middle East in particular
there is so much competition that
premiums are insufficient to cover
claims. The operators duty in
this situation is to raise premiums,
but if they do they will lose all
their business. If they do not do
that and say maybe premiums will
rise in the future, implicitly what
you are doing is sacrificing your
current policy holders for future
policy holders. How can that be
equitable or Shariah compliant?
What would a scholar say about
that? It is an interesting question
with which people have not really
grappled.
Separation of Funds
In takaful there is a requirement
to have a separation of funds
the participant or policyholders
funds and the shareholders
funds. Participants put money
in; the operator takes some of
that money to run the company
and all the rest of that money has
to be kept completely separate
from how the operator spends
its money. In a conventional
insurance company that is all one
single fund. Most important, in a
takaful company is the separation
of the money set aside for
claims, because that is by far the
biggest number on any insurance
companys balance sheet, whether
that is conventional insurance or
takaful.
If a takaful company runs out of
money, they will pay out on claims
by giving the policyholder an
interest-free loan and any future
profits will be used to pay off
those loans. To some extent this
explains why takaful companies
in the early years of operation
may charge as much as 40% in
expenses; they know
there is a strong probability that
they will have to make these
interest-free loans, but at the
same time they need to make
a return. High fees at the start
are not necessarily non-Shariah
compliant or unfair.
IIBI LECTURES
Profit Distribution
If the takaful entity makes a profit,
the profit can be distributed
back to the policyholders. That
could be in the form of a
cheque in the post, a reduction
in premiums or a guarantee of
lower premiums for the next
three years, for example. These
are all ways of distributing the
profit. Muhammad Khan said that
he felt that there was currently
insufficient transparency around
that issue. He added that did not
mean the companies were not
trying, but that policyholders did
not understand what was going
to happen. Any distribution, of
course, assumes the company will
make a profit and it might not.
Mr Khan went on to say that one
of the advantages of pooling risk
rather than outsourcing it was that
participants/policyholders might
be more likely to think twice about
making exaggerated/fraudulent
claims, because they could see
the direct effect that would have
on them and the profit made,
although he warned that not all
policyholders might understand
that. He said that if the takaful
industry was going to expand, it
was key for policyholders to have
a much clearer understanding of
what takaful is all about and the
risks they are taking on when they
buy a policy.
An Operators Duty
An operators duty in takaful is
very much a balancing act. The
operator has to maximise profit in
order to remain in business; they
have to have fair contributions or
premiums, although these may in
the early years be relatively high;
they have to meet participants
reasonable expectations, which
again raises the issue of whether
they fully understand the policy
they are taking out and the
operator has to protect the takaful
funds.
IIBI 43
IIBI LECTURES
Questions
In response to a question about
tax on profit distributions Mr
Khan said that in a UK context he
believed that any such distribution
would be treated as income and
would therefore be taxable. He said
he did not know what the situation
would be in the Middle East. He
added that all the profit distribution
examples of which he was aware
November: Technology The Key to
UK Consumer Acceptance of Islamic
Financial Products
Mr Faisal Khan, Director, Banking
and Insurance, 3i Infotech, Western
Europe began by saying that his
presentation would look at both
takaful and Islamic banking and
compare these two manifestations
of Islamic finance to conventional
insurance and banking from a
competitiveness point of view. At
the end of the day we live in a plural
world and Islamic finance has to
coexist with competitive forces, i.e.
conventional forms of insurance and
banking.
He said he would then turn to
technology and share some thoughts
on where technology is today and
what are the conventional worlds
of banking and insurance thinking
about. In other words how will
they exploit technology to make
themselves more competitive and
be as strong as possible. He said
he would then look at how Islamic
finance can exploit the same
technology and why it is not doing it
at the moment. He said he believed
if Islamic finance were to do so it
would compete and progress would
be much faster than it is.
Takaful
The good news is that year on year
global premiums for takaful have
been increasing at around 20% per
annum. The premiums, which are
now touching $19 billion per annum,
are, however, miniscule compared to
conventional insurance; it is probably
less than a half of 1% of global
insurance premiums. We can on
44 IIBI
had been in the form of reduced
premiums in future and this
would not be treated as income.
A second question related to
cash calls on policyholders. Mr
Khan said that he was not aware
that any such calls had ever been
made. He suspected that if
anyone made a call no one would
pay.
the one hand be justly proud of the
growth of something that started in
2004; it has grown by about six times
in the space of nine years, but it was
a small start and the industry has a
huge amount of work to do to make
this a stable offering in the Islamic
world.
What are the business challenges
faced by takaful operators? The
challenges vary somewhat from
year to year as the market changes.
Looking at Ernst & Youngs 2012
takaful report the least difficult
challenge was tapping pent-up
demand. That is to be expected,
because the market for takaful is
vast and today the industry is just
skimming the top of that demand.
The issue is and never has been,
therefore, about demand.
The number one issue in 2012 was
competition. (It has always been
a top three concern.) That tells us
that it is tough to compete against
other takaful operators and most
importantly it is extremely tough
to compete against conventional
insurers. It is critical for takaful
operators to ask themselves how they
make themselves more competitive
and secure a bigger share of the
market.
In 2012 the second most significant
challenge was regulatory compliance.
In particular Solvency II is lurking
just around the corner. This is an
extremely strict set of solvency
requirements that every company,
NEWHORIZON Zil Haja 1434 Safar 1435
Mohammad Khan is a partner in PricewaterhouseCoopers
LLP. He leads the personal and commercial lines actuarial
practice and is also the firms UK Islamic Finance Leader.
He is an expert in insurance and reinsurance in the Middle East and has
significant experience of working in the region.
As PwC UKs Islamic Finance Leader he has advised clients on converting
their banking and insurance operations to be Shariah compliant and helped
to establish and grow takaful and retakaful businesses.
certainly in Europe, has to face. It on equity is what the investors will
will demand a lot of changes among be looking for. Takaful operators
insurance operators, particularly
around the data that is captured
in general are less than half as
successful as conventional operator
and the data they have to provide on return on equity.
to the regulator for transparency
purposes. It has, therefore, Second is investment returns, the
become a significant cost. For the money insurance operators earn by
relatively young takaful industry investing surplus funds. Takaful
with immature systems, this is a earns 6% compared to 11% in
significant challenge. conventional insurance.
In third place in 2012 was a shortage The expense ratio is essentially
of expertise. Again, this has been a the ratio of all administration
top three challenge since 2009. This costs relative to the premiums
is to be expected, because takaful being collected. It is an
is a new industry. Experience of important measure of efficiency.
underwriting and risk assessment is Conventional insurance sits at 23%
limited. and takaful at 33%; takaful is almost
50% less efficient.
For the first time we are beginning
to see takaful operators talking about The combined operating
costs, misaligned costs relative to ratio represents claims plus
conventional insurers. Mr Khan administration relative to premiums.
said that is why he believes the If the claims plus administration
industry has to grasp the technology is more than the premiums, the
challenge and begin to address some company is making an operating
of these issues. loss. The ratio for takaful is 102%,
which means they are making a
Insurance Company Statistics loss. This is counterbalanced by
It may be argued that the aims of the 6% they earn from investments.
a takaful operator are not the same Conventional insurers have an
as for conventional insurance. operating ratio of 77%. There
Takaful is, however, competing in are two factors that contribute to
the marketplace with conventional the higher administration costs in
insurance and therefore it is takaful. Firstly, they are inefficient
necessary to have some KPIs (Key and secondly the claims are higher,
Performance Indicators) to measure suggesting their risk management
their success. The measures in the is also less good. This comes back
diagram have been chosen, because, to expertise, having systems and
even in takaful, there are three sets data to analyse, which conventional
of stakeholders the investors, the insurers do very well.
takaful operator and the people
requiring insurance. Looking at the other big centre
for takaful, Malaysia, again the
The comparisons are based on return on equity is very small
takaful and conventional operators and the investment return is half
in the GCC states. Firstly, return that of conventional insurers.
www.islamic-banking.com
NEWHORIZON September to December 2013 IIBI LECTURES

Takaful operators have, however, Khan said that he believed the first into the first takaful operator in the survey conventional insurers do not
started to address the issue of quarter of 2014 is the date when UK. It failed after 18 months to the come out very well on trust, so this is
efficiency and are as efficient as insurance companies have to be chagrin and anxiety of the Muslim an opportunity for takaful.
their conventional counterparts. compliant with Solvency II. That is community, because many Muslims
Malaysia seems to have more a massive overhead. Conventional had supported it by insuring with There is a very small Muslim
mature operators, who have insurers, however, only have to it. It was sold in 2012 to a run-off population in the West, but the GDP
understood how to compete comply with Solvency II. Takaful operator in the UK for 4.5 million. created by Muslims in the West is
against the conventional operators. operators have a double headache, The industry can continue to grow, significant and so their potential for
because they have to be Shariah but if the bottom line does not premium is massive. Some 50% of
This situation in relation to takaful compliant as well. work, there is going to be a lot of the potential premium for takaful
operators cannot be sustained, if disappointment and dissatisfaction could come from Western Europe
the market is going to continue to Third, how do companies safeguard among the Muslim community and the USA and the industry needs
grow at 20% or higher. It has to everyones interests? Some of . to be conscious of that. It needs to
address those issues. If they do the edicts coming from those Key Strategic Issues for Takaful develop takaful so that it is efficient
not, in 10 or 15 years, even though bodies that set Shariah rules are The efficiency of the operation is and provides a service that is as good
there is market demand, it will not contradictory. For example, how fundamental, so too is the quality of as that provided by conventional
have the sustainable profitability to can takaful operators use surpluses? the underwritten business. Unless insurance.
continue to operate. There has been a recent edict, which companies have the ability to analyse
said that any surplus can be shared their risk and understand what it is Islamic Banking
The Takaful Operators Viewpoint between not only the contributors, they are underwriting, then claims The good news is that Islamic banking
The people inside the takaful but also with the takaful operator. will be much higher than expected. is growing at 20%. In 2012 the sector
operation have a lot of pulls and What about the shareholders? Why Capital requirements, solvency and had assets worth $1.4 trillion, but that
pushes acting on them. Firstly, should they not be able to share in regulation are the other issues. is still only 1% of the worlds total
they have to follow the principles any surplus? There are all sorts of assets and there are some underlying
of Shariah, which is not easy, interesting issues that have to be The Potential for Takaful concerns.
because there is no uniform addressed by the takaful operators There is, however, huge untapped
regulatory environment across concerned. potential for takaful. If the industry Key Performance Indicators
the different countries. Being can get the fundamentals right, there Islamic banking produces a return on
compliant is a significant cost. Profitability is also a challenge, as is a very bright future for takful equity of 12% whereas conventional
is consumer confidence. A case in in both Islamic and non-Islamic banking produces 15%. Return on
Second, as well as being Shariah point is the former UK Principal countries, because takaful has an assets is 1.3% in Islamic banking
compliant, they have to be Insurance, using the brand name, appeal to everyone. It is about ethics compared to 1.7% for conventional
compliant with Solvency II, Salam Halal Insurance. This was and how you provide trust in a world banking. There is better news on cost
another set of regulations. Mr 60 million of private investment that does not have trust. In a recent of funds with Islamic banks being able

www.islamic-banking.com IIBI 45
IIBI LECTURES NEWHORIZON Zil Haja 1434 Safar 1435

to obtain their funds at the same customer is individual; it is about
sort of costs as conventional banks. mass personalisation.
Comparing operating costs with
operating income, the cost for
Islamic banks is 47%, whereas for
the conventional sector it is 40%.
That is significant; to operate at 7%
higher costs than your competitors
is a tough call. Finally, provisions
compared to operating income are
19% for Islamic banks compared to
12% in the conventional sector.
On almost every count Islamic
banking has a challenge. Analysts
and commentators recognise that
Islamic banking has a challenge
in relation to regulatory issues,
risk transformation and how they
operate in the retail environment.
Technology is what will make the
difference in banking. It is required
to help compliance with regulation;
to understand customers and the
environment and delivery.
Banks, Insurers and
Technology
The technological concepts being
debated by conventional banks and
insurers are also key to the future
of the Islamic sector; this is the
path Islamic banks and insurers
have to follow. If they do not bite
this bullet, then the conventional
sector will move ahead.
Another term for this phenomenon to move onto a world where data is
is big data. Some 90% of the generated and analysed in real time in
worlds data has been created in the order to take decisions in real time.
Collaboration last two years, so before that we had This topic is at the top of the agenda
Typically large institutions have conventional systems and all they for the finance industry today.
been heavily departmentalised. did was generate transaction data,
These departments have been silos. but suddenly the world has opened Virtualisation
Technology at first mimicked that up to data, which is being generated Processing virtualisation has happened
style and accentuated those silos with all the time. We are all part of that; already. Once upon a time we
the results that today one department we use Facebook, Sykpe and similar used to run one process on one
simply does not know what another technologies, which adds to the data operating system on one processor.
is doing. in the world. On a daily basis we Virtualisation has allowed us to run
are generating 2.5 quintillion bytes as many programs as we want on
The issue today is how to use of data or the equivalent of one as many processors as we want and
technology to create seamless billion Wikipedias. it is transparent. This means that
collaboration. This really does processing is now a commodity.
address the fundamental issue The real issue about design for
of efficiency, because when an analytics is that there is a sea of We have done the same with storage.
institution has to go from department data and in it there are nuggets Through storage networks we do not
to department to get something done of gold. From a corporate care where data sits; we can always find
that creates cost. Relatively new point of view we have to find it and we can manage huge amounts
social technologies such as Facebook ways of navigating that data to of it.
have really revolutionised the way create a better understanding of
information can be opened up across organisations and their customers. The same is happening now with
silos, so the challenge is embedding If that can be done, then we start to networks. We are going to be able to
social technology into enterprise leapfrog where conventional banks manage networks through software
technology and insurers are today. and that will bring another level of
. flexibility and agility in markets.
Design Analytics Everything today is real time, but
Today the world is creating huge enterprise systems were designed The Cloud
quantities of data. The diagram to be batch, so there is a real need Everybody has heard of the Cloud.
illustrates this very clearly. for banking and insurance systems The Cloud means the movement

Relationships at Scale
To deliver service to a customer
today banks and insurers have to
take advantage of all the digital
information that is around their
relationships with customers.
Whereas 15 years ago IT used to
spend all of its time worrying about
the transactions, the issue today
is how do banks and insurers use
technology for interactions; how
do they manage their relationships
with customers through the digital
information they get. That is the
challenge with which conventional
banks and insurers are grappling.
The Islamic sector has to start to
think about that. It is all around
the fact that today there is so much
digital information available and
how institutions use that data to
ensure its relationship with each

46 IIBI www.islamic-banking.com
NEWHORIZON September to December 2013
from fixed cost. In the old days
organisations had to build 2 million
of hardware, 1 million of
software and a lot of networks,
before you could even start business.
Today in a Cloud environment
they are basically buying a bit of an
infrastructure that already exists.
They are, therefore moving from
fixed costs to variable costs. That is a
fundamental shift. When we look at
things like return on assets and return
on equity, this is a shift that the world
of Islamic finance has to absorb.
Organisations can have a private
Cloud, a managed Cloud or a public
Cloud, so this is offering all sorts of
new flexibility and choices for people
who are savvy enough to understand
what they are doing. Many banks
today will not consider the Cloud.
They say it is insecure, but they have
not understood what the Cloud
means.
www.islamic-banking.com
Technology Impact
It is critical that Islamic finance
institutions put in the work to assess
the likely impact of the various
technologies on different aspects
of the business. This is not a trivial
exercise, but it is worth doing, with
a view to making the investments
that will produce a quantum leap in
performance. The diagram shows the
likely impact of different technologies
in takaful and banking.
Conclusions
Institutions need to address the
underlying performance of Islamic
financial services. They also need
to understand that technology can
be a weapon. Mr Khan said that
virtually every takaful and Islamic
banking operation he had come across
viewed technology as a necessary
evil that they have to have because
the conventional sector has it. That
is a defensive reason for investing in
technology. Mr Khan said that
he believed Islamic finance has
to turn that around and begin to
think of technology as a weapon.
The people who will drive a
change in thinking are the boards
and CEOs. The key issue is, do
they even understand what this
debate is about, so there is a huge
education task that needs to take
place. Sound external advice is
also going to be critical.
Principal Insurance, the failed UK
takaful operation, chose Capita
to provide their IT services. Mr
Khan said that Capita is the most
expensive outsourced IT operator
in the UK. This decision was
taken, because nobody on the
board of Principal understood
anything about IT. It is critical to
get across to people in leadership
positions the real benefits of
IIBI LECTURES
technology; how it should be used
and what should it cost.
The UK has many young,
outstanding technology experts.
Their knowledge has to be
harnessed and brought into Islamic
finance debates.
Everybody will be familiar with
recent initiatives in London to try
to establish the UK as a centre for
Islamic finance. Everyone also
knows that Kuala Lumpur and
Dubai are also vying for supremacy
in this field. Islamic finance in the
UK does not have a very good track
record in the retail elements of
finance. For example, if you look
at the six Islamic banks in the UK,
none of them is profitable. That
is not a very strong story to tell.
On the wholesale side, however,
there is a huge amount of activity
and there is a need to use our
expertise to ensure London is pre-
eminent. London has lots of legal
and accounting expertise, but not
technology expertise; that situation
needs to be remedied.
It should be remembered, however,
that conventional banks also have
their problems, particularly the
reliance on legacy systems. Islamic
banks do not have that legacy,
so they are at something of an
advantage there, if they understand
the power of technology and start to
adopt it now.
Faisal Khans career in the IT
industry spans 34 years, 19 years
spent with IBM. He currently
runs the banking and insurance
business for 3i Infotech (Western
Europe) Ltd as well as sitting
on the Partner Advisory Board
for Oracle. He is an engineering
graduate from Cambridge
University and has a Masters in
Computer Science from London
University.
IIBI 47
IIBI NEWS
April 2014
14 15: The 9th Annual World Takaful
Conference, Dusit Thani Dubai
This years conference focuses on
exploiting the growth potential for
takaful and re takful. It will cover
issues such as scalability, achieving
critical mass and overcoming product
and distribution challenges.
Contact: Yasmeen Shah
Tel: +971 4 343 1200
Email: yasmeed@megaevents.net
www.megaevents.net
Dusit Thani
Dubai
14 15: AAOIFI 13th Annual Shariah
Conference, Bahrain
The conference will comprise eight
panel sessions including modern
applications of salam sukuk, legal and
beneficial ownership: implications
in structuring sukuk and modular
contracting laws for Islamic financial
transactions.
All enquiries should be directed to
AAOIFI through their web site.
48 IIBI
NEWHORIZON Zil Haja 1434 Safar 1435
Diary of Events
May 2014
19 22: 11th Annual Islamic Financial
Services Board Summit, Mauritius
Titled New Markets and Frontiers for
Islamic Finance: Innovation and the
Regulatory Perimeter, the conference
will cover topics such as the legal and
regulatory environment, sukuk market
development and
regulation and the role of Islamic
finance in economic development.
Contact: Yazmin Aziz
Email: yazmin@ifsb.org
www.ifsb.org
June 2014
2-4: 5th Annual World Islamic
Banking Conference, Pan Pacific
Hotel Singapore
This event features plenary session,
facilitated debates, roundtable
discussions and an exhibition. Its
theme this year will be Building Bridges
Across Asia and the Middle East.
Contact: Sophie McLean
Tel: +971 4 343 1200
Email: sophie@megaevents.com
www.megaevents.com
22 24: 4th Islamic Banking and
Finance Conference 2014, Lancaster
University Management School
The conference aims to provide a
forum for an exchange of views on
recent developments and to identify
key issues/challenges underlying the
paradigm of Islamic banking and
finance in the 21st century. The keynote
speaker is Thorsten Beck, Professor of
Banking and Finance, Cass Business
School
Contact: Marwa Elnahass
Tel: + +44 (0)121 204 3000
Email: islamicfinance@aston.ac.uk
www.aston.ac.uk/aston-business-
school/events
Pan Pacific Hotel, Marina Bay,
Singapore
www.islamic-banking.com