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    Islamic Financial System Islamic Financial System Document Transcript

    • Islamic Financial System By Mohamed Elian University of Minnesota Law School May 2011 Copyright ©Please do not reproduce or translate in any manner without written Permission from the author. The author’s email: Mohamedmamdouhelian@gmail.com 1
    • Islamic Financial SystemIn the second half of nineteen eighteens; the term globalization has arisenin the international community. S ince then a lot of concepts, strategies,models and structures appeared in the business world, every culture orcountry tries to add its own touch to the international business system tohelp it to become better. And each of these cultures tries to add which itbelieves is the best to the business world. One of these tries was the IslamicWorld try; which is known by “The Islamic Financial System”. The IslamicFinancial System comes from the Muslim world to help/add to the Businessworld what it thinks would help the business world to become better andwhich it thinks would match more with the Islamic beliefs. Thus, it’s asystem not only made for Muslims and Islamic world, but it’s a systemmade 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 yemay know each other (not that ye may despise (each other). Verily the mosthonored 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).QuranChapter 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. 2
    • 5- Governance and Regulation 6- Challenges which Islamic finance facesIn this paper I will introduce the Islamic religion, with a promise to notmake the research religious, and then I will explain major common valuesprinciples of Islamic finance with a view on the prohibited transactions inthe Islamic finance system. Then we will take a look at the Islamic modes offinance and governance and regulation. At the end of the research we willdiscover the challenges that Islamic finance faces.Introduction about Islam:I believe that it is necessary before talking about Islamic finance, it is reallyimportant to explain what Islam is which would show a full picture of theMuslim mentality and would help to understand where Muslims who seekto apply the Islamic financial system are coming from:“Islam is the monotheistic religion articulated by the Qur’an, a textconsidered by its adherents to be the verbatim word of God (Arabic: ‫,ﷲ‬Allah), and the teachings and normative example (called the Sunnahcomposed of Hadith) of Muhammad, often considered by the adherents ofIslam as the last Prophet of God. In addition to referring to the religionitself, the word Islam means submission to God, peace, and way topeace. An adherent of Islam is called a Muslim.1Muslims believe that God is one and incomparable. Muslims also believethat Islam is the complete and universal version of a primordial faith thatwas revealed at many times and places before, including through theprophets Abraham, Moses and Jesus. Muslims maintain that previousmessages and revelations have been partially changed or corrupted overtime, but consider the Quran to be both unaltered and the final revelationfrom God. Religious concepts and practices include the five pillars ofIslam, which are basic concepts and obligatory acts of worship, andfollowing Islamic law, which touches on virtually every aspect of life and1 http://en.wikipedia.org/wiki/Islam 3
    • society, encompassing everything from banking and welfare, to warfareand the environment.”Based on the Islamic teaches, Islamic law regulates many aspects in theMuslim’s life, starting with his relationship with his god, his relationshipwith his self, his relationship with the others; whether Muslims or non-Muslims and his relationship with the creatures around him/her such asplanets and Animals. Also, Islamic law regulates many areas in the person’slife such family law, business law, international public law, Internationalprivate law, Inheritance law, environment law, human rights, Animal law.…And because Muslims believe Quran is the last message from god to theearth, they believe that these laws are applicable until the end of the days.Therefore, according to the Islamic teaches, Allah provided the world andMuslims the main rules, which are flexible to be applied anytime andanywhere.The Islamic Business law:Although Muslims have been conduction business and financial affairs inaccordance with the Sharia for over 1,400 years, the modern Islamicfinance industry is a fairly young sector. Its conceptual roots can be tracedback to the 1950s, with modern Islamic financial institutions beingestablished in the 1960s, 1970s and thereafter. The sector has gainedsizable market share, especially in the Gulf region in the 2000s and isconsidered to be an integral part of the overall financial system in a numberof Muslim countries. In addition, Islamic finance has emerged as a fast-growing niche industry in countries in which there are significant Muslimminority communities, including United States, the United Kingdom,Germany, Hong Kong, Singapore, and many more. [Aamir A.Rehman: GulfCapital & Islamic Finance: the rise of the new global players] Islamic finance is depicted as (and, in essence, ought to be) an ethical andequitable mode of financing that derives its principles from the sharia(Islamic law). Therefore, Islamic Finance is governed by two mainprinciples: • 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. 4
    • 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 Financeis to be applied in compliance with the objectives (maqasid) of the sharia.Among the objectives of the sharia is the creation of ease (maslaha), bothin this world and the hereafter (i.e. the material and spiritual spheres ofexistence), 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 hardshipin the practice of the religion as the report by Tirmidhi about the prophetMuhammad that ‘you [Muhammad] have been sent in order to make thingseasy, 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 notprofit from something immoral, one’s financial activities must be consistentwith her overall ethics and values. For example, if an investor believes that 5
    • gambling is wrong, it would be inappropriate for her to profit fromgambling by owning a casino.This principle is very rarely applied in the world of contemporaryinvestment. For example, teachers’ unions may unknowingly be investingpart of their pension funds in tobacco stocks through diversified mutualfunds, although these teachers might consider tobacco industry unethical.Similar to the Islamic back-ground institutions, there are someconventional financial institutions who adopted what’s called “Sociallyresponsible investments” (SRI) where these institutions avoid businessesinvolved in alcohol, tobacco, gambling, weapons, and/or the military.In the case of Islamic investments, the ethical screens are rooted inprinciples and directives from Sharia. The bulk of the “prohibited” sectorsin the Islamic investments is bigger than the bulk in the SRI funds.Therefore there are some investments are permitted in the SRI funds andare not permitted in the Islamic investments such as consuming pork. Onthe other hand not all the SRI funds screen out alcohol.When investing in publicly listed stocks, Islamic funds apply three types ofscreens 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 conventionalinterest which is called riba in Arabic. It’s prohibited –as we will discuss1 Gulf Capital & Islamic finance Aamir A.Rehman 6
    • later- in the Quran and is considered one of the major sins in Islam. Ribaincludes all forms of guaranteed return on moneylending in excess of theprincipal amount lent. Demanding repayment of $105 next year for $100lent today would be considered an impermissible arrangement.In addition to the prohibition of riba in Quran, there’s a moral critique ofinterest-based lending is that it’s unfair to the borrower because of themisallocation of risk and reward. Regarding this point Aamir A.Rehman theauthor of “Gulf Capital & Islamic Finance: the rise of the new globalplayers” 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 doesnot own. This principle has significant implications for investmentpractices in contemporary capital markets. Therefore, short selling isimpermissible, which explains why most of the Sharia scholars considershort 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
    • 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 largeGCC institutions:In addition to the values and ethical reasons that I mentioned above, thereare many reasons explain why Muslims want to apply Islamic financeprinciple in their financial system and explain why large GCC institutionsbecame 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 permissibleexcept the one has been prohibited. Therefore the permissible ring is bigger 8
    • than the prohibited ring. However, the problem comes because most of theconventional financial services are interest-based services, which puts theburden on Muslims to find and create alternative products that avoidinterest. The prohibited ring contains main prohibited transactions, mostlythose who interest-based transactions which is known as riba. However,prohibited transactions are not only those who contain riba, also anytransactions which contain gambling, uncertainty, in addition to otherprohibited transactions. 1. Riba:The word Riba means increase or addition which means the interest in themodern finance system. Riba is a loan with the condition that the borrowerwill return to the lender more than and better than the quantity borrowed."And it’s considered the fundamental distinction between Islamic andconventional finance systems.Prohibiting Riba does not only exist in the Islamic religion, however, it’sexisted 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 thatexplains why Islamic finance is based on avoiding interest-basedtransactions. 2. Gambling (maysir) 9
    • The caution against gambling (maysir) in the Quran is the basis uponwhich the sharia prohibits any form of speculation. This has essentiallydeterred many Islamic Financial Institutions from participating inderivative transactions. Speculative investments on the capital market ingeneral are viewed suspiciously by sharia committees and avoided byfinancial institutions. Caution must; however, be taken not to confuse riskwith speculation. Risk taking is inevitable in commercial and investmenttransactions (the basis for making a profit/increased returns). Speculationmay 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 muchwider than uncertainty and encompasses speculation, excessive risk, andignorance and generally hints at consumer/investor protection. As aconcept, it is predicated on the principles of equity and efficiency intransactions. The current position on gharar is that its existence is acontract is prohibited and may render the contract void. Hence, contractingparties 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 ofimmorality such as pornography.Example for Islamic investment caribouCaribou Coffee (America’s second-largest coffeehouse chain) is owned by aBahrain-based Islamic investment firm (Arcapita Inc.) Therefore thecompany does not invest in any businesses which offer credit orcharge interest, or sell pornography, alcohol, or pork products. 10
    • Islamic mode of financing:Islamic finance is said to prefer equity financing over debt financing andthat it is fundamentally asset-based because, according to the prevailinginterpretations of Islamic law, profit and loss sharing (equity) contracts arenot only consistent with Islamic beliefs, they are also superior to debt basedfinancial instruments. Conventional debt financing (interest-based lendingor conventional bonds) is deemed not to have a place in Islamic financewhere the risk is reflected in the amount of interest paid by the borrower,Islamic finance requires sharing of both profit and loss and hence sharingthe risk in general. The classical equity sharing transactions in Islamic lawrequire partnership and profit sharing to which the contemporarystructures of venture capitalism, investment management and projectfinancing can be compared.There are several methods of Islamic financing. However, in the world ofcommercial financing and more particularly, project financing, certainmethods are more commonly encountered than others. These are set outbelow. 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
    • is most applicable to trade financing transactions requiringshort-term liquidity instruments, it can also be used for longer-term investments. In its modern day use, murabaha involvesthe purchase of a specific commodity by a financial institutionupon the request of client. The client then purchases thecommodity from the financial institution on a deferred paymentbasis at an agreed mark-up that is structured to cover the costof purchasing the commodity, the risk undertaken in financingthe client and profit margin.This mark-up profit has been widely used as a substitute for thecharging of interest by parties or institutions that wish to adaptinterest-based banking to Islamic finance requirements. Thecalculation of the mark-up or profit may be in the form of afixed lump sum or it may be calculated as a percentage (oftennot dissimilar to the market rate of interest at the time) of thefinanced amount. Nonetheless, this type of financing is deemedcompliant with the sharia because the financial institutionsinitially takes title to the commodity (albeit briefly) at a risk toitself as well as to the buyer. The compliance with the sharia isthus deemed indisputable on the basis that a murabahatransaction involves a sale and the passing of title on the basisof a literal reading of the Quran that: ‘…. They [non-Muslims]say that trade is like riba, but God hath permitted trade andforbidden 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 theydeem to be less risky. They argue that in a murabaha, there is 12
    • 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 forgoods to be delivered later on. Importantly, parties of the contracthave to determine exactly in the contract the quality and quantityof the commodity intended to be purchased with no ambiguityleading to dispute. This kind of contract mostly used in theagriculture 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. 13
    • 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 14
    • 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. 15
    • 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 Islamic1 Islamic finance and law: theory and practice in a globalized world Maha-Hanaan Balala oxforduniversity. 16
    • 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 variousforms for over 1400 years. It is based on the concept of social solidarity,cooperation and mutual indemnification of losses of members. It is a pactamong a group of people who agree to jointly indemnify the loss or damagethat may inflict upon any of them, out of the fund they donate collectively.The Takaful contract usually involves the concepts of Mudharaba, andmutual sharing of losses with the overall objective of eliminating theelement of uncertainty. 17
    • Quran and Sunnah have always asserted to important role of Muslim in thecommunity and always called for the strength of the relationship betweenthe people in the Muslim community. The prophet Mohamed-peace beupon 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. 3Following the assertions of the Quran and Sunnah to the importance ofproviding the help and the assistance to the members of the community,Muslim scholars and jurists had to create an insurance system to providethat to the community and on the other hand replace the conventionalinsurance system who contradicts with the Islamic teachings.The policyholders (Takaful partners) pay subscription to assist andindemnify each other and share the profits earned from business conductedby the company with the subscribed funds. Takaful companies normallydivide the contributions into two parts, i.e. donations for meeting mortalityliability or losses of the fellow policyholders and the other part forinvestment. Both the accounts are invested and returns thereof distributedon Mudharaba principle between the participants and the Takafuloperators.Conventional insurance contradicts with the Islamic teachings because itcontains: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) 18
    • • Al-Gharar (Uncertainty) • Al-Maisir (Gambling) • Riba (interest)Conventional insurance companies invest their funds in interest-basedavenues but on the other hand, Takaful companies undertake only Shariacompliant business and the profits are distributed in accordance with theTakaful agreement.Takaful could be used for family solidarity in place of conventional lifeinsurance 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, particularlywithin the GCC countries and other areas of the Middle East, a lot ofcompanies started to offer Islamic insurance products in these markets.The majority of these companies are fully fledged Takaful operators butsome 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; itinvolves the issue of bonds in which the payment obligations under the bond are secured against a portfolio ofreceivables and its related cash flow stream. The bonds are freely traded and are generally rated. The basic techniquerequires 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 enhancingfeatures. There are numerous securitization structure that are commonly used in the conventional market. 19
    • 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
    • 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
    • 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 intheir home markets have begun expanding abroad. Al Rajhi bank ofSaudi Arabia, the kingdom;s dominant Islamic bank, has expanded intoMalaysia. Kuwait Finance House (also the dominant Islamic bank inKuwait) has similarly expanded strongly into Malaysia. Dubai IslamicBank is now in Pakistan as well.Regional banks have the ability to achieve the scale and global levels thatare hard to achieve by the local small banks.3. Multinational Windows:Since the 1990s, leading global banks have entered the Islamic financemarket. For example, Citi Islamic investment bank was established byCitigroup in 1996 in Bahrain. In 1998 HSBC formed HSBC Amanah. Inmid-2003 HSBC became the first UK High Street lender to offer home-buying products in compliance with Sharia (Islamic) law, whichprohibits the charging or payment of interest. The range now includes abank account and home insurance policy (Takaful) as well as homefinance.Conventional banks customarily serve Islamic clients through IslamicWindows, which are Sharia complaint business units within the overallbank. Under the window model, the Islamic business unit is not aseparate legal entity and does not have separate balance sheet. Althoughas much as Islamic Windows provide several business advantages suchas allowing the Islamic business to build off the strength of theconventional business and facilitating the sharing of resources acrossIslamic and conventional operations, they also have disadvantage; sincemany customers are skeptical of an institution’s Sharia compliance ifthey know that their Islamic deposits will be mixed with conventionaldeposits and will be used for conventional loans.Windows of global banks are not only copying Islamic finance modelsfrom other banks but some of them try to invent different and newmodels or transactions which are complaint with Sharia. For example,HSBC Amanah introduced Sukuk (Islamic bonds) which was a majorinnovation that has since been adopted by both conventional and fullyIslamic institutions worldwide. 22
    • 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-CompliantFinancial services:Over the past decades, the conventional institutions started to offer Sharia-Compliant financial services as a method to attract Gulf and Muslimsinvestors. 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
    • 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
    • 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 programs1 http://www.aaoifi.com/aaoifi/TheOrganization/Overview/tabid/62/language/en-US/Default.aspx 25
    • (notably CIPA, the Sharia Adviser and Auditor "CSAA", and thecorporate compliance program) are presented now by AAOIFI in itsefforts to enhance the industry’s human resources base andgovernance structures.AAOIFI was established in accordance with the Agreement ofAssociation which was signed by Islamic financial institutions on 26February, 1990 in Algiers. Then, it was registered on 27 March, 1991in the State of Bahrain.As an independent international organization, AAOIFI is supportedby institutional members (200 members from 45 countries, so far)including central banks, Islamic financial institutions, and otherparticipants from the international Islamic banking and financeindustry, worldwide.AAOIFI has gained assuring support for the implementation of itsstandards, which are now adopted in the Kingdom of Bahrain, DubaiInternational Financial Centre, Jordan, Lebanon, Qatar, Sudan andSyria. The relevant authorities in Australia, Indonesia, Malaysia,Pakistan, Kingdom of Saudi Arabia, and South Africa have issuedguidelines that are based on AAOIFI’s standards andpronouncements.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
    • 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
    • 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
    • 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
    • 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 facesfundamental challenges. Talking about Islamic finance challenges cannotignore what is happening in the Middle East this year. I believe that theserevaluations if it worked out as it meant to be, it will be a fundamentaldistinction in the history of the Middle East. For the first time since the fallof the Ottoman Empire the people did what they want to and I believe thisis one of the issues that most of the writers about Islamic Finance did notmention, 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, butactually they are under the culture occupation of the countries who used tooccupy then. Simply none of these countries are able to take a fundamentaldecision without asking for permission from bigger country whether USA,UK or even Israel2 (which is consider unfriendly country to most of thepeople of the Middle East).Considering Islamic Finance system was a demand of a lot of Muslims inthe Middle East. But because of the lack of the democracy, it was very hardto do what the people want and it was always what or how the dictatorswant. Dictators of these countries forced the people in dealing with1 Gulf Capital & Islamic Finance ‘The Rise of The New Global Players’ Aamir A.Rehman2 A lot of media resource mentioned that during the revolution in Egypt, the former president Mubarak was inconnections with the Israeli government seeking their advice towards the revolution. 30
    • conventional banks, which is against the desire of a lot of Muslims andwhich was avoided by a lot of conservative Muslims.Therefore I believe after the fall of two important regimes in the MiddleEast (Tunisia and Egypt)1; especially Egypt considering its essential role inMiddle East, it would be easier than before for the people to adopt IslamicFinance schemes. Actually some presidential candidates who decided torun for president, to attract voters, started to talk about a possibleeconomic federal union between Egypt, Sudan, Libya and Tunisia; whichwas 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 has1 Hopefully this will happen in Libya, Syria and Yemen. 31
    • 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 conventional1 Innovation and Authenticity in Islamic Finance by M. Umer Chapr Eighth Harvard University Forum on IslamicFinance 2008. 32
    • 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
    • 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
    • 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 whichhas very good reputation among Muslims in USA although it is not accredited school. 35
    • 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 anintroduction to the Islamic religion which helps to understand thementality of Muslims and explains why they are seeking to apply thissystem. Then we talked about Common values principles of Islamic financeand explained that in Islamic finance, investor cannot trade in immoraltransactions, she has to share risk as she shares profit, she cannot sell whatshe doesn’t own and that she must clarify what she is trading in thecontract. Then we took a look at the prohibited transactions in Islamicfinance and we viewed that there are two rings (one and the other small)the bigger one contains all the permissible transactions and in the smallerone 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 Islamicfinancial institutions created alternative modes of financing to help Musliminvestors to invest in what they believe fits with their beliefs.Then we talked about governance and regulation, presenting the Islamicfinancial institutions infrastructure. In this part, we talked about Islamicfinancial organizations and agencies which provide the Islamic financialmarket with the needed regulation.And finally we discussed the challenges that Islamic finance faces in thecurrent situation. Mentioning our expectation towards the Islamic financialmarket in the Middle East; especially after the revaluations in Tunisia andEgypt (In addition to what is happening in Libya, Yemen, Syria, Jordan,and Morocco) , which we believe would open a new market for the Islamicfinancial products and provide the Islamic finance market with new ideasand visions. In addition, we highlighted some of the problems that mighthamper Islamic financial evolving such as the need to standardization,authenticity, regulation and Education. At the end of the research I claimedthat the twin cities could be an attractive market to Muslim investorsconsidering its well-known education institutions, diversity and rich humanresources, in addition to its infrastructure. 36
    • .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. 37