2. Islamic Financial System
In the second half of nineteen eighteens; the term globalization has arisen
in the international community. S ince then a lot of concepts, strategies,
models and structures appeared in the business world, every culture or
country tries to add its own touch to the international business system to
help it to become better. And each of these cultures tries to add which it
believes is the best to the business world. One of these tries was the Islamic
World try; which is known by “The Islamic Financial System”. The Islamic
Financial System comes from the Muslim world to help/add to the Business
world what it thinks would help the business world to become better and
which it thinks would match more with the Islamic beliefs. Thus, it’s a
system not only made for Muslims and Islamic world, but it’s a system
made for the whole world and originally comes from the call that god
“Allah” called in the Quran “O mankind! We created you from a single
(pair) of a male and a female, and made you into nations and tribes, that ye
may know each other (not that ye may despise (each other). Verily the most
honored of you in the sight of Allah is (he who is) the most righteous of you.
And Allah has full knowledge and is well acquainted (with all things).Quran
Chapter 49:13
Writing about the Islamic Financial system is a little bit hard because
of two reasons: (1) the religious background which is always in the
Muslim’s mind who wants to practice his religion in every aspect in
the his life, which might be hard for the non-Muslim to understand
why does the Muslim want to do that. (2) The second reason is that
the Islamic Financial system is not system applied only one country
however, it’s a system whether applied already in some countries or
partially in some other countries or timidly in other countries. Which
makes it hard for the researcher to find one system to write about
however; he will have to find resources from all these countries in
order to provide to the reader a reliable research.
Proceeding from these two reasons [or in this paper I will talk about]:
1- Introduction to the Islamic religion, with a promise to not make
the research religious.
2- Explanation to some of the major common values principles of
Islamic finance then
3- Prohibited transactions in the Islamic Financial system
4- Islamic modes of financing.
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3. 5- Governance and Regulation
6- Challenges which Islamic finance faces
In this paper I will introduce the Islamic religion, with a promise to not
make the research religious, and then I will explain major common values
principles of Islamic finance with a view on the prohibited transactions in
the Islamic finance system. Then we will take a look at the Islamic modes of
finance and governance and regulation. At the end of the research we will
discover the challenges that Islamic finance faces.
Introduction about Islam:
I believe that it is necessary before talking about Islamic finance, it is really
important to explain what Islam is which would show a full picture of the
Muslim mentality and would help to understand where Muslims who seek
to apply the Islamic financial system are coming from:
“Islam is the monotheistic religion articulated by the Qur’an, a text
considered by its adherents to be the verbatim word of God (Arabic: ,ﷲ
Allah), and the teachings and normative example (called the Sunnah
composed of Hadith) of Muhammad, often considered by the adherents of
Islam as the last Prophet of God. In addition to referring to the religion
itself, the word Islam means 'submission to God', 'peace', and 'way to
peace'. An adherent of Islam is called a Muslim.1
Muslims believe that God is one and incomparable. Muslims also believe
that Islam is the complete and universal version of a primordial faith that
was revealed at many times and places before, including through the
prophets Abraham, Moses and Jesus. Muslims maintain that previous
messages and revelations have been partially changed or corrupted over
time, but consider the Qur'an to be both unaltered and the final revelation
from God. Religious concepts and practices include the five pillars of
Islam, which are basic concepts and obligatory acts of worship, and
following Islamic law, which touches on virtually every aspect of life and
1
http://en.wikipedia.org/wiki/Islam
3
4. society, encompassing everything from banking and welfare, to warfare
and the environment.”
Based on the Islamic teaches, Islamic law regulates many aspects in the
Muslim’s life, starting with his relationship with his god, his relationship
with his self, his relationship with the others; whether Muslims or non-
Muslims and his relationship with the creatures around him/her such as
planets and Animals. Also, Islamic law regulates many areas in the person’s
life such family law, business law, international public law, International
private law, Inheritance law, environment law, human rights, Animal law.
…
And because Muslims believe Quran is the last message from god to the
earth, they believe that these laws are applicable until the end of the days.
Therefore, according to the Islamic teaches, Allah provided the world and
Muslims the main rules, which are flexible to be applied anytime and
anywhere.
The Islamic Business law:
Although Muslims have been conduction business and financial affairs in
accordance with the Sharia for over 1,400 years, the modern Islamic
finance industry is a fairly young sector. Its conceptual roots can be traced
back to the 1950s, with modern Islamic financial institutions being
established in the 1960s, 1970s and thereafter. The sector has gained
sizable market share, especially in the Gulf region in the 2000s and is
considered to be an integral part of the overall financial system in a number
of Muslim countries. In addition, Islamic finance has emerged as a fast-
growing niche industry in countries in which there are significant Muslim
minority communities, including United States, the United Kingdom,
Germany, Hong Kong, Singapore, and many more. [Aamir A.Rehman: Gulf
Capital & Islamic Finance: the rise of the new global players]
Islamic finance is depicted as (and, in essence, ought to be) an ethical and
equitable mode of financing that derives its principles from the sharia
(Islamic law). Therefore, Islamic Finance is governed by two main
principles:
• Contractual Fairness and Social Justice: The Quran sets out
principles of equity, justice, fairness, morality and social welfare,
among others, as preferable underpinnings of any human society.
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5. We have called them ‘Islamic’ principles. The Quran explains that
Allah (God) creates and owns everything and human beings
therefore hold wealth on amanah (Trust) for God to be spent and
dealt with accordingly. The beneficiary of such wealth, held by any
human being, is the collective community of humans whose
interest must be served in spending or dealing with money.
Contractual dealings, whilst governed primarily by the principle of
permissibility and recognizing the freedom of the individual to
contract freely, was nonetheless to operate within the ambit of
fairness as between the parties and social justice.
• Permissibility: The Quran grants substantial freedom in almost
every aspect of life, including matters of commerce, and property
may be freely held or traded. In general, it is accepted that in all
matters (mu’amalaat) other than faith (‘ibadaat) the operating
principle is that of permissibility (ibaha) unless there is a clear text
in the primary sources to the contrary. The principle of
permissibility does not operate in a vacuum but rather goes back,
and is linked, to the notion of human beings as trustees or
stewards of God’s wealth/creation on earth. Permissibility is
therefore tempered by rules enunciated in the Quran which
indicate, broadly, the extent to which contracting parties are free
in deciding their terms and conditions.
These two principles provide a platform from which Islamic Finance
is to be applied in compliance with the objectives (maqasid) of the sharia.
Among the objectives of the sharia is the creation of ease (maslaha), both
in this world and the hereafter (i.e. the material and spiritual spheres of
existence), which is derived from the concept of taysir (making things easy)
and relates closely to the concept of raf’ al haraj (the removal of hardship).
These objectives of the sharia are meant to ensure that there is no hardship
in the practice of the religion as the report by Tirmidhi about the prophet
Muhammad that ‘you [Muhammad] have been sent in order to make things
easy, not as one who makes them difficult.
Common Values Principles of Islamic Finance:
1. If something is immoral one cannot profit from it.
This principle is the most fundamental from these principles. One must not
profit from something immoral, one’s financial activities must be consistent
with her overall ethics and values. For example, if an investor believes that
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6. gambling is wrong, it would be inappropriate for her to profit from
gambling by owning a casino.
This principle is very rarely applied in the world of contemporary
investment. For example, teachers’ unions may unknowingly be investing
part of their pension funds in tobacco stocks through diversified mutual
funds, although these teachers might consider tobacco industry unethical.
Similar to the Islamic back-ground institutions, there are some
conventional financial institutions who adopted what’s called “Socially
responsible investments” (SRI) where these institutions avoid businesses
involved in alcohol, tobacco, gambling, weapons, and/or the military.
In the case of Islamic investments, the ethical screens are rooted in
principles and directives from Sharia. The bulk of the “prohibited” sectors
in the Islamic investments is bigger than the bulk in the SRI funds.
Therefore there are some investments are permitted in the SRI funds and
are not permitted in the Islamic investments such as consuming pork. On
the other hand not all the SRI funds screen out alcohol.
When investing in publicly listed stocks, Islamic funds apply three types of
screens during the Sharia filtering process. 1
1) Filter looks at the nature of the companies’ business. For example,
companies whose core business is in a prohibited sector such as
casinos are excluded.
2) Filter looks at the percentage of the companies’ income that comes
from interest or interest-based investments. If a significant portion of
its income comes from interest a company may be screened out even
if its core business is acceptable.
3) The third filter looks at the company’s overall debt-to-equity ratio. If
a company’s balance sheet is heavily leveraged (using conventional,
interest based leverage) it can be screened out irrespective of its core
business. For example: Conventional real estate development
companies are therefore customarily screened out even though real
estate investment itself is allowed in Islam.
2. To share reward, one must also share risk:
The most fundamental concern of Islamic finance is to avoid conventional
interest which is called riba in Arabic. It’s prohibited –as we will discuss
1
Gulf Capital & Islamic finance Aamir A.Rehman
6
7. later- in the Quran and is considered one of the major sins in Islam. Riba
includes all forms of guaranteed return on moneylending in excess of the
principal amount lent. Demanding repayment of $105 next year for $100
lent today would be considered an impermissible arrangement.
In addition to the prohibition of riba in Quran, there’s a moral critique of
interest-based lending is that it’s unfair to the borrower because of the
misallocation of risk and reward. Regarding this point Aamir A.Rehman the
author of “Gulf Capital & Islamic Finance: the rise of the new global
players” says:
“The borrower may, for example, be borrowing the money in order
to fund a business. In operating the business, he is taking a risk-the
business could succeed, or it could fail. The interest-based lender,
however, locks in a guaranteed return regardless of how the
business performs. In other words, the lender seeks a guaranteed
return without undertaking a commensurate risk. Of course,
conventional economists would argue that the lender undertakes a
real risk in the form of credit risk-the risk that the borrower may not
pay back the loan. This highlights an important principle in Islamic
law; that agreements should be assessed based on the expectation
that they will be fulfilled. One cannot enter into a contract that, if it
is fulfilled, is deemed to be “unjust” even if it is possible that the
contract will not be fulfilled.”
3. One cannot sell what one does not own:
Under this principle Muslim investor cannot sell something that she does
not own. This principle has significant implications for investment
practices in contemporary capital markets. Therefore, short selling is
impermissible, which explains why most of the Sharia scholars consider
short selling prohibited.
4. In any transaction, one must clearly specify what one is
buying or selling and what price is being paid:
A fourth basic principle of Islamic finance is that, in a transaction, one
must specify what she is buying and what price is being paid. The
underlying concept of relevance here is referred to in Arabic as gharar,
or excessive uncertainty. For example, conventional insurance is
considered impermissible by Islamic scholars because of a perception of
7
8. gharar. In the insurance agreement the buyer may know what premium
she is paying, but whether a clam will ever be made, what the amount of
that claim will be, and when it might be made are all unknown. On the
other hand, the industry of takaful (an Islamic equivalent of insurance)
operates differently in that it employs a mutual assurance model by
which policy owners contribute capital, share any profits from
investments, and agree to pay out “claims” in the event that other
contributors suffer a defined loss. This mutual model is seen as more fair
and transparent for all parties.
In commenting on the financial crisis of 2008-2009, some observers
have viewed the opaqueness of certain debt-based instruments such as
collateralized debt obligations (CDOs) as contemporary example of
gharar. [Rehman, “Relevance of Islamic Finance Principles]
Factors drive greater interest in Islamic investments by large
GCC institutions:
In addition to the values and ethical reasons that I mentioned above, there
are many reasons explain why Muslims want to apply Islamic finance
principle in their financial system and explain why large GCC institutions
became more interested, such as:
1) Islamic investment industry continues to develop broader and deeper
products and services to meet the needs of sophisticated investors.
2) There is increased pressure from the stakeholders of Gulf institutions
to consider Islamic investments. Beneficiaries, citizens, government
officials, and the management of these investment bodies became
more aware of Islamic investment in their personal lives which made
them more comfortable and motivated to explore Sharia-complaint
alternatives at the institutions level.
3) The global financial crisis has fostered a greater appreciation among
Muslins of the prudential aspects of Islamic investment principles
and revealed the risks of certain speculative conventional investment
modes.
Prohibited transactions:
The basic rule in Islamic finance that every transaction is permissible
except the one has been prohibited. Therefore the permissible ring is bigger
8
9. than the prohibited ring. However, the problem comes because most of the
conventional financial services are interest-based services, which puts the
burden on Muslims to find and create alternative products that avoid
interest. The prohibited ring contains main prohibited transactions, mostly
those who interest-based transactions which is known as riba. However,
prohibited transactions are not only those who contain riba, also any
transactions which contain gambling, uncertainty, in addition to other
prohibited transactions.
1. Riba:
The word Riba means increase or addition which means the interest in the
modern finance system. Riba is a loan with the condition that the borrower
will return to the lender more than and better than the quantity borrowed."
And it’s considered the fundamental distinction between Islamic and
conventional finance systems.
Prohibiting Riba does not only exist in the Islamic religion, however, it’s
existed in other religions such as Christianity and Judaism.
In Quran: Allah says:
‘They say that trade is like riba, but God hath permitted trade and
forbidden riba’ [2:275]
‘Believers, do not consume usury, doubled and redoubled, and fear
Allah, in order that you shall prosper ‘[3:130]
In the Bible God says:
“He lends at usury and takes excessive interest. Will such a man live?
He will not! Because he has done all these detestable things, he will
surely be put to death and his blood will be on his own
head” (Ezekiel 18:10-13)
“Do not take interest of any kind from him, but fear your God, so that
your countryman may continue to live among you.” (Leviticus 25:36)
Therefore Riba is considered one of the major sins in Islam and that
explains why Islamic finance is based on avoiding interest-based
transactions.
2. Gambling (maysir)
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10. The caution against gambling (maysir) in the Quran is the basis upon
which the sharia prohibits any form of speculation. This has essentially
deterred many Islamic Financial Institutions from participating in
derivative transactions. Speculative investments on the capital market in
general are viewed suspiciously by sharia committees and avoided by
financial institutions. Caution must; however, be taken not to confuse risk
with speculation. Risk taking is inevitable in commercial and investment
transactions (the basis for making a profit/increased returns). Speculation
may on the other hand be viewed as excessive and/or avoidable risk taking.
3. Gharar:
Gharar is often, and insufficiently, translated ad uncertainty. It is much
wider than uncertainty and encompasses speculation, excessive risk, and
ignorance and generally hints at consumer/investor protection. As a
concept, it is predicated on the principles of equity and efficiency in
transactions. The current position on gharar is that its existence is a
contract is prohibited and may render the contract void. Hence, contracting
parties must disclose all the terms and details of the contract.
4. Prohibited transactions/investments:
Islam prohibits transactions involving prohibited elements such as pork,
alcohol, activities involving speculation, gambling and any sort of
immorality such as pornography.
Example for Islamic investment caribou
Caribou Coffee (America’s second-largest coffeehouse chain) is owned by a
Bahrain-based Islamic investment firm (Arcapita Inc.) Therefore the
company does not invest in any businesses which offer credit or
charge interest, or sell pornography, alcohol, or pork products.
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11. Islamic mode of financing:
Islamic finance is said to prefer equity financing over debt financing and
that it is fundamentally asset-based because, according to the prevailing
interpretations of Islamic law, profit and loss sharing (equity) contracts are
not only consistent with Islamic beliefs, they are also superior to debt based
financial instruments. Conventional debt financing (interest-based lending
or conventional bonds) is deemed not to have a place in Islamic finance
where the risk is reflected in the amount of interest paid by the borrower,
Islamic finance requires sharing of both profit and loss and hence sharing
the risk in general. The classical equity sharing transactions in Islamic law
require partnership and profit sharing to which the contemporary
structures of venture capitalism, investment management and project
financing can be compared.
There are several methods of Islamic financing. However, in the world of
commercial financing and more particularly, project financing, certain
methods are more commonly encountered than others. These are set out
below.
1. Debt Creating Modes:
1. Murabaha:
It may be defined as a sale at an agreed profit margin. It is one
of the most common forms of Islamic financing, and although it
11
12. is most applicable to trade financing transactions requiring
short-term liquidity instruments, it can also be used for longer-
term investments. In its modern day use, murabaha involves
the purchase of a specific commodity by a financial institution
upon the request of client. The client then purchases the
commodity from the financial institution on a deferred payment
basis at an agreed mark-up that is structured to cover the cost
of purchasing the commodity, the risk undertaken in financing
the client and profit margin.
This mark-up profit has been widely used as a substitute for the
charging of interest by parties or institutions that wish to adapt
interest-based banking to Islamic finance requirements. The
calculation of the mark-up or profit may be in the form of a
fixed lump sum or it may be calculated as a percentage (often
not dissimilar to the market rate of interest at the time) of the
financed amount. Nonetheless, this type of financing is deemed
compliant with the sharia because the financial institutions
initially takes title to the commodity (albeit briefly) at a risk to
itself as well as to the buyer. The compliance with the sharia is
thus deemed indisputable on the basis that a murabaha
transaction involves a sale and the passing of title on the basis
of a literal reading of the Quran that: ‘…. They [non-Muslims]
say that trade is like riba, but God hath permitted trade and
forbidden riba’.
Example for Murabaha transaction:
A customer approaches bank with request of financing to
purchase a specific commodity. The bank purchases it and
receives the title of its ownership from the vendor. The
bank then makes payment to the vendor. The bank
transfers the title over to the customer upon payment and
then the customer makes payment up-front or on
deferred basis in addition to agreed mark-up this mark-up
constitutes the bank’s profit and interestingly has been
widely used as a substitute for the charging of interest by
institutions that wish to adapt interest-based banking to
Islamic requirements.
Some banks today prefer murabaha to mudharaba which they
deem to be less risky. They argue that in a murabaha, there is
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13. no element of riba (as currently defined) because the element of
assuming business risk in murabaha justifies the profit margin
charged and distances the transaction even further from riba.
The Accounting and Auditing Organization of Islamic Financial
Institutions (AAOIFI) allows the acquisition of assets that will
be sold under murabaha contracts. One sold, however, the
certificates or sukuk may not be resold as the asset will then
become ownership interests in debts (deemed similar in
concept to money) and hence dealing in riba.
2. Bai Salam:
Bai Salam is a contract is which payment is made in advance for
goods to be delivered later on. Importantly, parties of the contract
have to determine exactly in the contract the quality and quantity
of the commodity intended to be purchased with no ambiguity
leading to dispute. This kind of contract mostly used in the
agriculture financial transactions.
Conditions of Bai El Salam:
1. The buyer has to pay the full price at the time of
contracting.
2. Exact determination to the quality and quantity of the
commodity.
3. Exact determination of the date and the place of the
delivery.
Salam as a Mode of Financing:
The Salam contract can be used by modern banks and financial
institutions in many areas, especially agriculture sector. For
example: the price in the contact may be fixed at a lower rate
than the price of those commodities delivered at the spot. In
this way the difference between the two prices may be valid
profit for the bank or the financial institution. In order to
ensure that the seller shall deliver the commodity on the agreed
date, they also can ask him to furnish a security, which may be
in the form of a guarantee or in the form of mortgage or
hypothecation. In the case of default in delivery, the guarantor
may be asked to deliver the same commodity by purchasing it
from the market or to recover the price advanced by him.
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14. How a financial institution would benefit from Salam
contract?
There are two ways of benefiting from the contract of Salam:
First, after purchasing a commodity by way of Salam, the
financial institution may sell them through a parallel contract of
Salam for the same date of delivery. The period of Salam in the
second (parallel) transaction being shorter, the price may be a
little higher than the price of the first transaction and the
difference between the two prices shall be the profit earned by
the institution.
Second: if a parallel contract of Salam is not applicable for one
reason or another, they can enter into a promise to sell the
commodity to a 3rd party on the date of the delivery. Being
merely a promise, and not the actual sale, their buyers will not
have to pay the price in advance. Therefore, a higher price may
be fixed and as soon as the commodity is received by the
institution, it will be sold to the 3rd party on pre-agreed price
according to the terms of the promise.
3. Istisna:
Istisna is the similar to Bai Al Salam except that there are some
differences between the two contracts:
• Istisna is a contract for the commodity that needs to be
manufactured and Salam can be on anything whether it
needs manufacturing or not.
• The price has to be paid in advance in the Salam contact
but it is not the same case in the Istisna contract.
• The contact of Salam once it is effected cannot be
cancelled while the Istisna contact can be cancelled before
the manufacture stats the work.
• The time of delivery is an essential part of the sale in
Salam but it is not in the Istisna contract.
Istisna can be used in many modes of financing, especially in
the sector of house financing. For example, if the client seeking
financing for the construction of a house on his own land, the
financier may undertake to construct the house for him on the
basis of Istisna. And if the client does not have land the
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15. financier can purchase it for him as well. The client will not
have to pay the financer in advance; however, she can pay it in
installments. On the other hand the financer doesn’t have to
construct the house; he can also enter into a parallel contract of
Istisna with a third party (contractor). Also there are modes,
such as installing a machinery plant in a factory or building for
the industry.
2. Ijara
Ijara or leasing is very similar to and shares many
characteristics with lease financing and/or hire purchase. A
typical ijara structure involves a lessor (financial institution)
purchasing an asset and renting it to a lessee for a specific time
period at an agreed rental or receiving a share of the profits
generated by the asset.
There are two main types of lease under the irjara structure.
One involves a longer-term lease that usually ends with transfer
of ownership in the property to the lessee (ijara wa iqtina’)
which is similar to common law hire purchase contracts. The
second type is short term and will normally end with the
financial institution retaining ownership of the asset which is
similar to an operating lease. In accordance with the sharia, the
leased item should not be prohibited item and must be used in
ways permissible is the sharia (for example, the lease of a
warehouse or premise for purposes of storing pork products or
to operate a casino or bar is prohibited)
Apart from the above modes, Islamic finance also permits
investing in certain stock and equity funds as long they conform
to certain guidelines (that are similar in many respects to
ethical or socially responsible investment). Generally, equity
investments that discourage speculation and preclude short
selling are deemed sharia compliant while conventional debt
equities and derivatives are not.
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16. 3. Partnership Based Modes1:
1. Musharaka:
It may be defined as equity participation or profit sharing and
simply means partnership. It is the umbrella financial structure
of financing that encompasses other partnership arrangements
like Mudharaba. In the common form of musharaka, both
parties provide capital and the contractual conditions are
flexible enough to allow the creation and sale of participation
notes to the investors or Islamic bank that provide the funding,
which represents their share of their investment. The technique
is therefore suitable for joint venture investments and can be
used to package portfolios of assets whose returns, real property
lease payments for example, are subsequently shared among
the partners.
In Musharaka each partner has a right to participate in the
management and the partners may appoint a managing partner
by mutual consent. Regarding the termination, each partner has
the right to terminate the Musharaka at any time after giving
prior notice to the other partners.
Musharaka could be structured as a permanent Musharaka,
temporary (Redeemable) musharaka or diminishing
musharaka. In the later structure one of the partner promises
to buy the equity share of the other partner gradually until the
title of the equity is completely transferred to him.
2. Mudharaba:
Mudharaba or participation financing is a special form of
partnership that has been developed and is now used by
modern Islamic Financial institutions to provide fund
management services. It falls within and utilizes the Islamic
1
Islamic finance and law: theory and practice in a globalized world Maha-Hanaan Balala oxford
university.
16
17. principles of profit and risk sharing and is characterized by one
party (rabb al mal) entrusting his money to another party
(mudharib) who is akin to fund manager and whose
contribution in the partnership is the provision of skill,
managerial expertise or the necessary experience. The
mudharib (fun manager) uses the capital in a mutually agreed
fashion and subsequently returns the capital and profit (if any)
to the rab al maal (financier) and retains a predetermined
share (as opposed to amount) of the profit for himself.
Important principles of mudharaba:
• The profits are divided on a predetermined proportional
basis.
• Any loss is borne by the rab al mal only to the extent of
the principle amount;
• The mudharib bears the loss of his time and effort in the
enterprise.
A mudharaba transaction may be entered into for a single
investment or on a continuing basis with the financial
institution acting as a fiduciary. Mudharaba investment may
also be made of a fixed term and arranged through negotiable
instruments called investment deposit certificates or
mudharaba certificates and in such situations, may have
characteristics akin to shares. A number of Islamic banks have
formed funds applying the rules of mudharaba to buy real
estate assets.
4. Takaful (Insurance):
Takaful is an Islamic insurance system which has been practiced in various
forms for over 1400 years. It is based on the concept of social solidarity,
cooperation and mutual indemnification of losses of members. It is a pact
among a group of people who agree to jointly indemnify the loss or damage
that may inflict upon any of them, out of the fund they donate collectively.
The Takaful contract usually involves the concepts of Mudharaba, and
mutual sharing of losses with the overall objective of eliminating the
element of uncertainty.
17
18. Quran and Sunnah have always asserted to important role of Muslim in the
community and always called for the strength of the relationship between
the people in the Muslim community. The prophet Mohamed-peace be
upon him- said
• “Allah will always help His servant for as long as he helps others.1”
• “Basis of Responsibility The place of relationships and feelings of
people with faith, between each other, is just like the body; when one
of its parts is afflicted with pain, then the rest of the body will be
affected.2”
• One true Muslim (Mu’min) and another true Muslim (Mu’min) is just
like a building whereby every part in it strengthens the other part. 3
Following the assertions of the Quran and Sunnah to the importance of
providing the help and the assistance to the members of the community,
Muslim scholars and jurists had to create an insurance system to provide
that to the community and on the other hand replace the conventional
insurance system who contradicts with the Islamic teachings.
The policyholders (Takaful partners) pay subscription to assist and
indemnify each other and share the profits earned from business conducted
by the company with the subscribed funds. Takaful companies normally
divide the contributions into two parts, i.e. donations for meeting mortality
liability or losses of the fellow policyholders and the other part for
investment. Both the accounts are invested and returns thereof distributed
on Mudharaba principle between the participants and the Takaful
operators.
Conventional insurance contradicts with the Islamic teachings because it
contains:
1
(Narrated by Imam Ahmad bin Hanbal and Imam Abu Daud)
2
(Narrated by Imam al-Bukhari and Imam Muslim)
3
(Narrated by Imam al-Bukhari and Imam Muslim)
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19. • Al-Gharar (Uncertainty)
• Al-Maisir (Gambling)
• Riba (interest)
Conventional insurance companies invest their funds in interest-based
avenues but on the other hand, Takaful companies undertake only Sharia
compliant business and the profits are distributed in accordance with the
Takaful agreement.
Takaful could be used for family solidarity in place of conventional life
insurance and also there are many other products of Takaful, such as,
General Takaful, Education/Medical Takaful, etc.
There are various models of Takaful:
1. Wakalah (agency):
Wakalah Takaful is the model applied in Sudan. Every policyholder is
also the shareholder of the Takaful Company and there is a board that
runs the business on behalf of all the participants and there is no
separate entity managing the business.
2. Mudarabah:
The Mudarabah model is similar to the Wakalah model With respect
to the Mudarabah model as we mentioned above except that in the
Mudarabah model the company acts as a separate entity.
As a result of the need for Islamic insurance over the years, particularly
within the GCC countries and other areas of the Middle East, a lot of
companies started to offer Islamic insurance products in these markets.
The majority of these companies are fully fledged Takaful operators but
some conventional insurance companies have also Takaful ‘window’
operations.
5. Securitization1:
1
Securitization is a method of funding a variety of receivables, including mortgage debts, leases and loans; it
involves the issue of bonds in which the payment obligations under the bond are secured against a portfolio of
receivables and its related cash flow stream. The bonds are freely traded and are generally rated. The basic technique
requires the rights over receivables to be transferred from the owner (originator) to a special purpose vehicle
(issuer/SPV). The SPV then issues bonds and incorporates into the securitization structure certain credit enhancing
features. There are numerous securitization structure that are commonly used in the conventional market.
19
20. Islamic financing generally requires the advancement of funds to be
linked to the performance of various types of assets. This is typical
feature of securitization. However, in order for the securitization to be
comply with the Sharia, the nature of the assets being securitized and the
scheme of arrangement between the originator and lender must both
comply with the Sharia. For example, conventional mortgages and credit
cards do not comply with the Sharia. On the other hand, there are
schemes that comply with the Sharia, such as
• Inventory and trade finance securitizations (which could be
structured as a Mudarabah contract, therefore the SPV would be
purchasing goods and selling them at a pre-agreed profit margin,
rather than having a pool of interest-bearing loans.
• Equipment Securitizations: because this structure involves leases
or leased-back underlying assets, it could be structured as an Ijara
contract. 1
6. Sukuk (Islamic bonds)
In May 2003, the sharia board of the Accounting and Auditing
Organization for Islamic Financial Institutions (AAOIFI) adopted sharia
Standard No.17 on Investment Sukuk. Therein, investment sukuk is
defined as: ’certificates of equal value representing undivided shares in
ownership of tangible assets, usufructs and services or (in the ownership
of the assets of particular projects or special investment activity’.
The standard makes it clear that sukuk must be asset backed and subject
to a sharia compliant contract. It is worth stressing here that the key
concepts are:
• Transparency and clarity of rights and obligations;
• Income from securities must be related to the purpose for which
the funding is used and simply not comprise interest; and
• Securities should be backed by real underlying assets, rather than
being paper derivatives and the assets must be halal (permissible)
in nature and being utilized as part of the a halal activity.
1
Islamic finance (Sharia, Sukuk and Securitization) Lovells 2004
20
21. Models of Islamic financial services1:
Within the landscape of institutions offering Islamic financial services,
there are four main categories of business models, as well as an
emerging fifth model that has arisen in recent years and may potentially
have a transformative impact on the sector.
1. Local banks
2. Regional banks
3. Multinational windows.
4. Specialist firms
5. Highly capitalized new entrants.
1. Local Banks:
Local banks is the largest category of institutions offering Islamic
financial. 1970s was the beginning of the Islamic banking to be created
in each country to serve the local market. Dozens of local Islamic banks
remain to this day, such as Bahrain Islamic Bank, Bank Islam Malaysia,
Qatar Islamic Bank, Faisal Islamic Bank in Egypt, and many more in
reaction to the need of Islamic banks in the Muslim cMoountries.
Local banks are able to mobilize local deposits and have deep insight
into local market but on the other hand often struggle to achieve scale
and global systems like other small banks around the world.
As the Islamic finance sector evolves, local banks have become attractive
acquisition targets for larger institutions that are seeking to expand their
businesses. For example, Bank Islam Malaysia is now 40 percent owned
by Dubai Islamic Investment Group.
2. Regional Banks:
Regional banks are financial institutions exist in more than one country.
They expended from their home countries into new markets and thereby
become regional players that local ones. Such as Dar Al-Maal Al-Islami
(DMI) Trust and the Al-Baraka banking Group, the later has subsidiaries
and affiliates in 12 countries with presence in three continents. (Bahrain,
1
Gulf Capital & Islamic Finance ‘The Rise of The New Global Players’ Aamir A.Rehman
21
22. Jordan, Lebanon, Syria, Algeria, Egypt. South Africa, Sudan, Tunisia,
Indonesia, Pakistan and Turkey)
More recently a number of Gulf-based Islamic banks that are leaders in
their home markets have begun expanding abroad. Al Rajhi bank of
Saudi Arabia, the kingdom;s dominant Islamic bank, has expanded into
Malaysia. Kuwait Finance House (also the dominant Islamic bank in
Kuwait) has similarly expanded strongly into Malaysia. Dubai Islamic
Bank is now in Pakistan as well.
Regional banks have the ability to achieve the scale and global levels that
are hard to achieve by the local small banks.
3. Multinational Windows:
Since the 1990s, leading global banks have entered the Islamic finance
market. For example, Citi Islamic investment bank was established by
Citigroup in 1996 in Bahrain. In 1998 HSBC formed HSBC Amanah. In
mid-2003 HSBC became the first UK High Street lender to offer home-
buying products in compliance with Sharia (Islamic) law, which
prohibits the charging or payment of interest. The range now includes a
bank account and home insurance policy (Takaful) as well as home
finance.
Conventional banks customarily serve Islamic clients through Islamic
Windows, which are Sharia complaint business units within the overall
bank. Under the window model, the Islamic business unit is not a
separate legal entity and does not have separate balance sheet. Although
as much as Islamic Windows provide several business advantages such
as allowing the Islamic business to build off the strength of the
conventional business and facilitating the sharing of resources across
Islamic and conventional operations, they also have disadvantage; since
many customers are skeptical of an institution’s Sharia compliance if
they know that their Islamic deposits will be mixed with conventional
deposits and will be used for conventional loans.
Windows of global banks are not only copying Islamic finance models
from other banks but some of them try to invent different and new
models or transactions which are complaint with Sharia. For example,
HSBC Amanah introduced Sukuk (Islamic bonds) which was a major
innovation that has since been adopted by both conventional and fully
Islamic institutions worldwide.
22
23. 4. Specialist Entities:
Specialist entities are investment and advisory firms that focus on
specific areas within financial services. For example: Arcapita an
investment bank located in Bahrain, Unicorn an Investment Bank
located also in Bahrain and Gulf Investment House located in Kuwait.
5. Highly Capitalized New Entrants:
This category is formed of local banks that have very strong capital base
and the potential for significant investment. In the coming years, these
banks can be expected to actively seek growth through heavy investment
in their businesses.
These banks are mostly located in the Gulf such as: Alinma Bank in
Saudi Arabia with $2.8 billion in capital, Al-Rayan Bank in Qatar with $1
billion in capital, Noor Islamic Bank in UAE (Dubai) with $1.09 billion
in capital, and Al Hilal Bank in UAE (Abu Dhabi) with $272 million in
capital. These banks are supported by the governments of their
countries.
The conventional institutions approach to the Sharia-Compliant
Financial services:
Over the past decades, the conventional institutions started to offer Sharia-
Compliant financial services as a method to attract Gulf and Muslims
investors. These approaches can be summarized as three core models:
1) Product Model
Under this model the conventional institution offers Sharia-compliant
products and services alongside with the conventional ones. For
example, Deutsche Bank created an Islamic investment platform called
Al Mi’yar in 2009. Also, Morgan Stanley participates in Islamic finance
through, for example, a family of Islamic indexes but it did not establish
a dedicated Islamic finance unit. In this model the employees do not
have to be specialists in Islamic banking, however, they do so in addition
to their conventional responsibilities.
2) Window Model:
23
24. In this model the financial institution creates a specialist Islamic finance
team and develops a distinct Islamic finance brand while continuing to
distribute products and services through its conventional channel. For
example, Citi group created Citi Islamic investment bank and HSBC
created HSBC Amanah.
3) Subsidiary Model:
In the subsidiary model, the financial institution creates a separate
entity ‘Islamic subsidiary’ has its own governance processes. (For
example, a board of directors) For example, Maybank created Maybank
Islamic and CIMB created CIMB Islamic in Malaysia.
Governance and regulation:
The regulation of Islamic finance is naturally different from county to
country, and it depends on a number of factors, such as, the country’s
overall legal framework and tradition, the relative size and importance of
Islamic finance.
At the beginning of establishing Islamic banks, banks were not governed
or supervised by higher authority. However, at the beginning of 1970s
Sharia scholars got more involved in the Islamic banking industry. For
example: Faisal Islamic Bank of Egypt and the Jordan Islamic bank
established a formal Sharia Supervisory Board especially to gain
credibility among potential clients.
The duties of the Sharia Supervisory Board are to advise and review the
related contacts and provide an opinion regarding its permissibility
under Islamic law.
A Sharia Board is not a substitute for a Sharia court. Therefore it cannot
enforce the rules of a contract between the client and the financial
institution.
Infrastructure of Islamic Institutions:
1. International Islamic Financial Market (IIFM)1:
1
http://www.iifm.net/default.asp?action=article&id=126
24
25. IIFM is the global standardization body for the Islamic Capital &
Money Market segment of the IFSI. Its primary focus lies in the
standardization of Islamic financial products, documentation and
related processes.
IIFM was founded with the collective efforts of the Central Bank of
Bahrain, Bank Indonesia, Central Bank of Sudan, Labuan Financial
Services Authority (Malaysia), Ministry of Finance (Brunei
Darussalam) and the Islamic Development Bank (a multilateral
institution based in Saudi Arabia).
Besides the founding members, IIFM is supported by its permanent
member State Bank of Pakistan. Moreover, it’s also supported by a
number of regional and international organizations and financial
institutions such as Dubai International Financial Centre Authority,
ABC Islamic Bank, Bank Islam Malaysia Berhad, Crédit Agricole CIB,
European Islamic Investment Bank, Kuwait Finance House, National
Bank of Kuwait, Standard Chartered Saadiq as well as other market
participants as its members.
IIFM benefits to the Islamic Financial Services Industry:
• Addressing the standardization needs of the industry
• Providing universal platform to market participants through
'Global Working Groups' for the development of Islamic Capital
and Money Market
• Sharia harmonization in documentation, products and
processes
• Sharia Advisory Panel consisting of renowned scholars, hence,
ensuring wider Sharia acceptance.
2. The Accounting and Auditing Organization for Islamic
Financial Institutions (AAOIFI)1:
The Accounting and Auditing Organization for Islamic Financial
Institutions (AAOIFI) is an Islamic international autonomous non-
for-profit corporate body that prepares accounting, auditing,
governance, ethics and Sharia standards for Islamic financial
institutions and the industry. Professional qualification programs
1
http://www.aaoifi.com/aaoifi/TheOrganization/Overview/tabid/62/language/en-US/Default.aspx
25
26. (notably CIPA, the Sharia Adviser and Auditor "CSAA", and the
corporate compliance program) are presented now by AAOIFI in its
efforts to enhance the industry’s human resources base and
governance structures.
AAOIFI was established in accordance with the Agreement of
Association which was signed by Islamic financial institutions on 26
February, 1990 in Algiers. Then, it was registered on 27 March, 1991
in the State of Bahrain.
As an independent international organization, AAOIFI is supported
by institutional members (200 members from 45 countries, so far)
including central banks, Islamic financial institutions, and other
participants from the international Islamic banking and finance
industry, worldwide.
AAOIFI has gained assuring support for the implementation of its
standards, which are now adopted in the Kingdom of Bahrain, Dubai
International Financial Centre, Jordan, Lebanon, Qatar, Sudan and
Syria. The relevant authorities in Australia, Indonesia, Malaysia,
Pakistan, Kingdom of Saudi Arabia, and South Africa have issued
guidelines that are based on AAOIFI’s standards and
pronouncements.
AAOIFI benefits to the Islamic Financial Services Industry:
1. Developing accounting and auditing thoughts relevant to Islamic
financial institutions;
2. Disseminating accounting and auditing thoughts relevant to
Islamic financial institutions and its applications through training,
seminars, publication of periodical newsletters, carrying out and
commissioning of research and other means;
3. Preparing, promulgating and interpreting accounting and
auditing standards for Islamic financial institutions; and
4. Reviewing and amending accounting and auditing standards for
Islamic financial institutions.
26
27. 3. Islamic Financial Services Board (IFSB)1:
Islamic Financial Services is an international standard-setting body of
regulatory and supervisory agencies that issues guiding principles
and standards within the banking, insurance
and capital market sectors in order to promote stability in the Islamic
financial services industry. IFSB is located in Kuala Lumpur and
founded in 2002.
As at March 2011, the 191 members of the IFSB comprise 54
regulatory and supervisory authorities, seven international inter-
governmental organizations and 130 market players, professional
firms and industry associations operating in 43 jurisdictions.
Malaysia, the host country of the IFSB, has enacted a law known as
the Islamic Financial Services Board Act 2002, which gives the IFSB
the immunities and privileges that are usually granted to
international organizations and diplomatic missions.
The objectives of the IFSB are:
1. To promote the development of a prudent and transparent
Islamic financial services industry through introducing new, or
adapting existing, international standards consistent with
Sharia
2. principles, and recommending these for adoption
3. To provide guidance on the effective supervision and regulation
of institutions offering Islamic financial products and to
develop for the Islamic financial services industry the criteria
for identifying, measuring, managing and disclosing risks,
taking into account international standards for valuation,
income and expense calculation, and disclosure.
4. To liaise and cooperate with relevant organizations currently
setting standards for the stability and the soundness of the
international monetary and financial systems and those of the
member countries.
5. To enhance and coordinate initiatives to develop instruments
and procedures for efficient operations and risk management.
1
http://www.ifsb.org/background.php
27
28. 6. To encourage cooperation amongst member countries in
developing the Islamic financial services industry.
7. To facilitate training and personnel development in skills in
areas relevant to the effective regulation of the Islamic financial
services industry and related markets.
8. To undertake research into, and publish studies and surveys on,
the Islamic financial services industry.
9. To establish a database of Islamic banks, financial institutions
and industry experts.
10. Any other objectives which the General Assembly of the
IFSB may agree from time to time.
The IFSB consists of:
• The general assembly, which includes all members of the ISFB
• The council, which acts as the policy making body of the
IFSB and includes the senior executive of each full member of
the organization
• The technical committee, which advises the council on issues
and consists of up to 15 persons appointed by the council
• The working group, which drafts standards and guidelines and
reports to the technical committee
• The secretariat, which acts as the permanent administrative
body and is headed by a secretary-general appointed by the
council
4. Islamic International Rating Agency (IIRA): 1
Islamic International Rating Agency is a sole rating agency started
operations in 2005. The sole goal of the agency is to provide rates to
Islamic and conventional banks, financial institutions and products,
Mutual funds, Insurance and Takaful companies. IIRA has been
sponsored by many Islamic financial institutions such as multilateral
development finance institutions (Islamic Development Bank and
Islamic Corporation for Development of the Private Sector),
commercial and investment banks, Takaful companies, and credit
rating agencies.
1
http://www.iirating.com/about_profile.asp
28
29. IIRA provides credit rating, corporate governance rating and
sovereign rating, in addition to, researches and analysis. The location
where IIRA is located helps it to have better overview on the financial
institutions in the Middle and Far East regions and especially
Bahrain.
IIRA’s Sharia board consists of 19 scholars. They have been selected
from different countries based on their knowledge and experience in
Sharia, and Islamic Finance, and their integrity and reputation.
5. Gulf Bond and Sukuk Association (GBSA):
The Gulf Bond and Sukuk Association is an independent membership
body solely devoted the region’s fixed income market officially
launched its operations early 2010.
GBSA has four main subcommittees, Investor Relations and
Development Subcommittee Trading Subcommittee, Regulatory
Affairs Subcommittee, and Government Issuance Subcommittee.
GBSA has many objectives:
1. Acting as a focal point for the bond and sukuk community in the
Gulf region.
2. Contributing in the developing process of bond market and
regulation.
3. Providing regular input to regulators across the region on
market trends and current developments.
4. Providing advises to government agencies on policies and
practices in their roles as issuers.
5. Facilitating continuing education for industry professionals.
The GBSA steering committee is composed of number of big member
firms in the finance and law industry, such as HSBC, Latham &
Watkins LLP, Clifford Chance, and Moody’s Middle East Ltd, DIB
capital Ltd, Citibank, and Barclays Bank. Interestingly the president
of GBSA Michael Grifferty was a US Department of Treasury advisor
for sovereign debt management and market development.
6. Islamic Fiqh Academy:
29
30. Islamic Fiqh Academy is a body of the Organization of the Islamic
Conference (OIC) an academy located in Jeddah, Saudi Arabia and
concerned of providing the researches and fatwas to the Muslim
countries regarding the new problems presented by the contemporary
world and propose Islamic answer to those problems. The academy
does not only answer the financial questions, however, it is concerned
of answering questions in more aspects in life.
Challenges Islamic finance faces1:
Islamic Finance as a demand of the Muslim in the Middle East:
Although Islamic finance has been grown and adopted impressively, it faces
fundamental challenges. Talking about Islamic finance challenges cannot
ignore what is happening in the Middle East this year. I believe that these
revaluations if it worked out as it meant to be, it will be a fundamental
distinction in the history of the Middle East. For the first time since the fall
of the Ottoman Empire the people did what they want to and I believe this
is one of the issues that most of the writers about Islamic Finance did not
mention, the importance of the will of the people in the Middle East.
Because even though most of the Middle East countries are “free countries”
which means they are not under the occupation of other countries, but
actually they are under the culture occupation of the countries who used to
occupy then. Simply none of these countries are able to take a fundamental
decision without asking for permission from bigger country whether USA,
UK or even Israel2 (which is consider unfriendly country to most of the
people of the Middle East).
Considering Islamic Finance system was a demand of a lot of Muslims in
the Middle East. But because of the lack of the democracy, it was very hard
to do what the people want and it was always what or how the dictators
want. Dictators of these countries forced the people in dealing with
1
Gulf Capital & Islamic Finance ‘The Rise of The New Global Players’ Aamir A.Rehman
2
A lot of media resource mentioned that during the revolution in Egypt, the former president Mubarak was in
connections with the Israeli government seeking their advice towards the revolution.
30
31. conventional banks, which is against the desire of a lot of Muslims and
which was avoided by a lot of conservative Muslims.
Therefore I believe after the fall of two important regimes in the Middle
East (Tunisia and Egypt)1; especially Egypt considering its essential role in
Middle East, it would be easier than before for the people to adopt Islamic
Finance schemes. Actually some presidential candidates who decided to
run for president, to attract voters, started to talk about a possible
economic federal union between Egypt, Sudan, Libya and Tunisia; which
was a demand to the Arab peoples.
Standardization:
One of the challenges that Islamic Finance faces is standardization. The
lack of the standardization of terms among countries offering Islamic
financial instruments is considered a fundamental major challenge.
Examples of standardization problems includes issues such as the need
for standardization of Sharia rulings and Islamic financial products,
across various geographical and sectorial jurisdictions; the need to
enhance the authenticity and credibility of Sharia Boards that advise
banks and other institutions on compliance; the need to develop
regulatory guidelines and audit customer rights and protections of
Islamic financial transactions; the need to develop legal and regulatory
frameworks that support dispute resolution in the Islamic financial
context, especially in the Western world.
However, AAOIFI is playing a crucial role in standardization of Islamic
commercial banking. Compared to the rest of the Islamic finance
industry, Islamic commercial banking has been around for the longest
time (approx. 35 years) and this is due to the efforts of the Accounting
and Auditing Organization for Islamic Financial Institutions (AAOIFI)
which has issued a combination of more than 80 Sharia, accounting,
auditing and governance standards; which became the majority of core
Islamic banking fundamental contracts. In addition, the AAOIFI has
1
Hopefully this will happen in Libya, Syria and Yemen.
31
32. issued standards on specialist commercial banking issues such as credit
and charge cards, currency trading and documentary credits.
Notwithstanding, AAOIFI could play an important role in standardizing
the documentation, layout and disclosures required for the most
common contracts such as property finance, auto finance, Personal
finance, investment accounts, credit and charge cards and current
accounts.
The same can be applied to Takaful products to ensure that Takaful
members receive a uniform level of disclosures and sign the same
contract (with minimal differences).
Also, the International Swaps and Derivatives Association (ISDA) is
working in standardize regulation across the GCC. ISDA intends to make
a template contract available for Islamic over-the-counter (OTC)
derivatives. This move is expected to enhance growth opportunities for
Islamic finance and to provide a useful tool for risk management. On the
other hand, the availability of such template contract would make time-
to-market for Islamic OTC derivatives faster, by standardizing legal
terms and allowing parties to focus on the commercial side of the deal.
Authenticity:
Although Islamic finance has been developed in the last three decades
but it is still not able to come out of the straitjacket of Conventional
finance.1
As I mentioned before most of Muslim countries were either occupied or
under the influence of the countries that used to occupy it, which made
these countries consumers/followers of the G8 countries. As much as
these countries lacked democracy it lacked the ability to invent as well.
Therefore, Islamic Finance didn’t have the space to develop. After
liberation of most of these countries, they didn’t have the ability to
create its own financial system, however, they followed the conventional
1
Innovation and Authenticity in Islamic Finance by M. Umer Chapr Eighth Harvard University Forum on Islamic
Finance 2008.
32
33. financial system which made it hard for them to start over and create its
own Islamic financial system.
Also, one of the indispensable needs of Islamic finance for realizing
greater authenticity is to have a centralized Sharia Board. Because every
bank hires its own sharia board members, in addition to being costly,
especially for small banks, this practice leads to conflicting opinions
which create inconsistency and uncertainty.
One of the major factors of Authenticity challenge is customer
expectations; only a small amount of Islamic financial institutions
customers are willing to pay a significant premium for Islamic financial
services compared to conventional ones. Therefore, Islamic financial
institutions had to offer Islamic products that replicate the features,
benefits and pricing of conventional alternatives.
Another challenge to greater Sharia authenticity is competitive pressures
within the Islamic finance sector. When one institution provides a
product or service, it becomes difficult for competitors to refuse to
match it-even if the second institution’s sharia preference would be to
not provide the product. Because customers trust Islamic banks and
therefore they do not need to assess the Sharia authenticity of each
product or services, they expect the other banks to have the same service
or product.
Another challenge that often contributes to Islamic finance’s
authenticity is staffing and incentives. As much as the Islamic finance
sector grow, as much as the need of staff increases. The most readily
available talent pool for staffing Islamic financial institutions is the
conventional banking market. These professionals already have the
experience in the financial field. But on the other hand, they lack the
Sharia- complaint financial system, which takes time and efforts to
prepare and teach them about Islamic financial system.
Regulation challenge:
One of the challenges Islamic finance faces is the lack of regulation base
that supports Islamic finance. And this is because most of the countries,
33
34. including Islamic countries, created banking laws with conventional
banking in mind. Therefore these laws have to be reformed in order to
fully enable Islamic finance services.
For example, stamp duties transactions charges, usually regimes apply a
tax when property is transferred from one owner to another. In the case
of Islamic transactions, there can sometimes be additional steps that
lead to double taxation. In this case it would be better to treat Islamic
finance transactions as a single transfer and therefore waive the second
stamp duty.
However, some countries such as Malaysia have a double regulatory
system. Malaysia has two banking regulation laws; one for conventional
banks and one for Islamic banks. However, disputes on Islamic banking
and Takaful transaction fall under the jurisdiction of the civil courts.
Education:
One of the main challenges that Islamic finance faces is education.
Surprisingly this is not only the case in the western countries but also in
some of the Muslim/Middle Eastern countries such as North African
Countries. Middle East countries have been working in conventional
banking system for decades and because of the lack of Islamic finance
education, it became hard for a lot of them to adopt system they don’t
know a lot about it. For example, although universities in Egypt are
considered the best in the Middle East, most of them do not provide
Islamic finance programs that match the market needs. Therefore, most
of the staff working in the Islamic finance career in Egypt has educated
themselves.
Education problem does not appear only in the lower levels of staffing
but also it appears in the executive levels. Most of the Islamic financial
institutions in the Middle East hire executives who used to work in
conventional financial institutions, which make it difficult from
moneywise and time consuming point of view, in addition to the risk
34
35. possibilities because of the lack of these executives experience in the
Islamic finance field.
Moreover, education challenge doesn’t come in the staffing level only but
to a lot of the investors as well, especially in the western countries. A lot
of investors do not know a lot about Islamic finance system whether
because the geographical reasons or because of the lack of the Islamic
finance programs that provides investors with the knowledge they need.
Although, there are a lot of universities around the world provide Islamic
finance programs such as universities in Malaysia, Pakistan, UEA, or
even Europe (especially UK) and recently the GCC countries but still
USA (the biggest financial market in the world) comes in the end of the
list of the countries that provide Islamic finance programs.
I believe that providing Islamic finance programs would help a lot to
educate all levels of the financial services whether executives, staff or
even customers. Unfortunately, in the United States of America there are
few schools that provide General Islamic Law classes and even less who
provide Islamic finance programs, with respect to Harvard Law School
program which is considered only research program, on the other hand,
in UK for example, there are a lot of schools that provide Islamic finance
programs such as MBA in Islamic finance, which explains why Islamic
finance has evolved a lot in London (the second largest financial market
in the world) compering to the United States of America.
Islamic financial institutions understood the importance of providing
conventional bankers or regulators with knowledge and education
regarding Islamic finance system. Therefore, some of them provide
bankers and regulators with courses and training.
Providing Islamic finance classes in the business and law schools in the
USA would help a lot in my point of view especially in the states whereas
large Muslim community. For example, if University of Minnesota law
school could create an Islamic finance programs, it would be great
resource of education to very big Muslim community in the twin cities1.
And on the other hand, in the future this could attract Muslim investors-
especially GCC investors- around the world to the twin cities which could
be center of Islamic finance market. I believe that the twin cities have the
ability, infrastructure, diversity (Minnesota Nice!), human resources,
1
Twin cities are known to have large Muslim community. In addition to the Islamic university of Minnesota which
has very good reputation among Muslims in USA although it is not accredited school.
35
36. well-known education institutions and large Muslim community that
could make it an attractive market to Muslim investors around the
world.
Conclusion:
Our exploration of Islamic finance is almost completed. We provided an
introduction to the Islamic religion which helps to understand the
mentality of Muslims and explains why they are seeking to apply this
system. Then we talked about Common values principles of Islamic finance
and explained that in Islamic finance, investor cannot trade in immoral
transactions, she has to share risk as she shares profit, she cannot sell what
she doesn’t own and that she must clarify what she is trading in the
contract. Then we took a look at the prohibited transactions in Islamic
finance and we viewed that there are two rings (one and the other small)
the bigger one contains all the permissible transactions and in the smaller
one contains all the prohibited transactions which is riba, gambling,
Uncertainty and some other prohibited investments.
Deeply we talked about Islamic modes of financing, explaining how Islamic
financial institutions created alternative modes of financing to help Muslim
investors to invest in what they believe fits with their beliefs.
Then we talked about governance and regulation, presenting the Islamic
financial institutions infrastructure. In this part, we talked about Islamic
financial organizations and agencies which provide the Islamic financial
market with the needed regulation.
And finally we discussed the challenges that Islamic finance faces in the
current situation. Mentioning our expectation towards the Islamic financial
market in the Middle East; especially after the revaluations in Tunisia and
Egypt (In addition to what is happening in Libya, Yemen, Syria, Jordan,
and Morocco) , which we believe would open a new market for the Islamic
financial products and provide the Islamic finance market with new ideas
and visions. In addition, we highlighted some of the problems that might
hamper Islamic financial evolving such as the need to standardization,
authenticity, regulation and Education. At the end of the research I claimed
that the twin cities could be an attractive market to Muslim investors
considering its well-known education institutions, diversity and rich human
resources, in addition to its infrastructure.
36
37. .Recourses:
• Aamir Rehman: Relevance of Islamic Finance Principles
• Maha-Hanaa: Islamic Finance and Law: Theory and Practice in a Globalized World
oxford university.
• Aamir Rehman: Gulf Capital & Islamic Finance, The rise of The New Global Players.
• Islamic Business Ethics by Dr. Rafik Issa Beekun university of Nevada and Islamic
Training Foundation.
• Dr. Ali El Saloos: Islamic finance encyclopedia.
• Dr. Essa Abdu : Legitimate governing contracts for the financial transactions of
contemporary
• Dr. Essa Abdu: Riba in the Islamic economic structure.
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