Is Islamic Finance really the value proposition it claims to be? Assessment and Opportunities<br />Sayd Farook<br />Senior...
About Dar Al-Istithmar<br />Our Services<br />	Established in 2004, Dar Al Istithmar is a venture between Russell Wood and...
Track Record<br />Shari&apos;a Structures<br />Our work has involved the use of Murabaha, Mudarabaha, Wakala, Musharaka, I...
&quot;Law is in Islam a process of discovery. Just as the physical scientist believes that the laws of physics exist as an...
Where are we coming from?<br />2001-2010<br />Structured Sukuk<br />Mega Project Finance <br />Large Commercial Banks<br /...
Historical Growth Factors<br />1975-1990<br />Resource Boom<br />Academic and scholarly encouragement and experiments<br /...
Where are we going to? Short to medium term growth <br />2002-2005 Growth: 44 % YOY (Islamic) compared to 18.2% YOY (conve...
Short to medium term growth<br />8<br />
Where are we going to?Long Term Growth <br />2011-2040<br />Sophisticated Private Equity, Mega Islamic Commercial, Full Se...
Long term growth?<br />Stellar?<br />Steady?<br />Negative?<br />10<br />
Long Term Growth?<br />Stellar?<br />Value proposition for both Islamic and conventional populace<br />Limited competition...
Long Term Growth?<br />Steady?<br />No value proposition beyond Muslim states and populations<br />High competition betwee...
Long Term Growth?<br />Negative?<br />Reputation risk associated with terrorism<br />Failure to achieve economies and effi...
14<br />Long Term Growth?<br />Stellar?<br />Value proposition for both Islamic and conventional populace<br />Limited com...
15<br />Market Dynamics of Islamic Retail<br />Significant driver of commercial banking and capital market activities when...
16<br />16<br />Continuing stellar growth?<br />Three factors will determine competitive edge for Islamic Finance:<br />Pr...
Are we facing an existential threat?<br />On a repeated basis, we are facing attacks from our own ranks:<br />Mahmoud El-G...
Are we facing an existential threat?<br />Islamic Finance CANNOT be: <br />only about “Shari’a arbitrage”<br />only about ...
So what will keep Islamic Finance going?<br />GCC Petro liquidity slack isn’t certainly going to last forever.<br />There ...
Shari’a Contract Governance<br />The process of ensuring that a contract is Shari’a compliant<br />Avoid Main Prohibitions...
AVOIDANCE OF HARAMTRANSACTIONS<br />Avoiding all forms of unethical  activities such as financing casinos, drugs, illicit,...
Contractual Ethics<br />Even in its core rules, Islam is propagating ethics in contracts.<br />The prohibition of riba, gh...
Contractual Ethics<br />Fairness and just treatment of other people’s property<br />‘God does command you to render back y...
Are we facing an existential threat?<br />In short, NO, we are not!<br />On balance of activities, we are still safe. <br ...
Ability based moral responsibility?Isn’t Zakat fulfilling moral responsibility?<br />Zakat is only ordained for seven type...
Ability based moral responsibility?Isn’t Zakat fulfilling moral responsibility?<br />26<br />
Ability based moral responsibility?Are we talking about social business?<br />27<br />
Ability based moral responsibility?Are we talking about social business?<br />ISLAMIC FINANCE CANNOT BE JUST A SOCIAL BUSI...
Ability based moral responsibility?Are we talking about social business?<br />YET ISLAMIC HAS A DEFINITE PLACE FOR SOCIAL ...
Also incorporate such objectives into ther business activities
Set aside part of profits for charitable distribution</li></ul>	Prof. Yunus sees social business and normal businesses co-...
Ability Based Moral Responsibility?<br />Did any form of responsibility exist prior to modern conceptions of CSR?<br />Ex-...
Principles of Islam:Articulating moral responsibility<br />31<br />
Defining moral or social responsibility?<br />The west has its own definition of social responsibility based on society’s ...
Key Islamic moral responsibility principles<br />33<br />
Ability Based Moral Responsibility<br />Public goods and wealth redistribution ALSO responsibility of individuals<br />Isl...
Ability Based Moral Responsibility<br />However:<br />“On no soul doth Allah Place a burden greater than it can bear….”<br...
36<br />Islamic Social Responsibility and Corporate GovernanceThe differentiated strategy<br />The only real value proposi...
Technical Challenge<br />How do we incorporate such behaviour into our corporate culture?<br />How do we engender a system...
Conclusion<br />GOLDEN OPPORTUNITY <br />The world of finance is looking at us for direction. <br />WAKE UP CALL<br />This...
Corporate Social Responsibility and Islamic Finance: The Way Forward<br />Sayd Farook <br />39<br />
Vision without action is a dream. <br />Action without vision is simply passing the time. <br />Action with Vision is maki...
Vision without action is a dream.<br />41<br />
The chronological life of an AAOIFI Governance standard<br />42<br />
CSR and AAOIFI<br />43<br />Series of studies verified that there was a disjoint between the perceived ethical stance of I...
Action without vision is simply passing the time. <br />44<br />
Misconceptions of CSR<br />Is Islamic CSR:<br /><ul><li>Paying donations to charities?
Providing Qard al-Hasan loans for poor?
Donating a percentage of profits from depositors (2%) for eco-sustainability ventures?</li></ul>Operating on a non-profit ...
Social responsibility for Islamic financial institutions<br />46<br />
Do IFIs need to be socially responsible?<br />Representing themselves as complying with Shari’a rules<br />Representatives...
Do IFIs need to be socially responsible?<br />48<br />Investors<br />Shareholders<br />Investment Account Holders<br />Ove...
Technical Challenge<br />Remember my questions before:<br />How do we incorporate such behaviour into our corporate cultur...
Defining social responsibility for IFIs<br />On no soul doth Allah Place a burden greater than it can bear….<br />Baqara (...
Conceptualizing social responsibility for IFIs<br />51<br />
Core Activities<br />Are central to the operations of the financial institution, i.e. the day to day running of the busine...
Supplementary Activities<br />Are NOT central to the operations of the business and the day to day running of the business...
Distinction between Mandatory and Recommended<br />Broadly based on the principles of Maslaha articulated by al-Ghazzali<b...
Mandatory VS Recommended<br />55<br />
Action with Vision is making a positive difference.<br />56<br />
What are we doing?<br />Maqasid Al-Shari’a CSR Survey and Awards<br />	(Dar Al Istithmar-Dinar Standard-AAOIFI) <br />Oxfo...
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Is Islamic Finance really the value proposition it claims to be? Assessment and Opportunities

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This presentation provides a stocktake of where the Islamic Finance industry is currently positioned and what are the long term prospects for the industry. It also provides a short-medium term broad overview of what can be expected from Islamic Finance.

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Is Islamic Finance really the value proposition it claims to be? Assessment and Opportunities

  1. 1. Is Islamic Finance really the value proposition it claims to be? Assessment and Opportunities<br />Sayd Farook<br />Senior Consultant, Dar Al Istithmar<br />Research Advisor, Oxford Islamic Finance<br />Disclaimer: The views presented herein are the author’s own and do not necessary represent the views of Dar Al-Istithmar or Oxford Islamic Finance<br />1<br />
  2. 2. About Dar Al-Istithmar<br />Our Services<br /> Established in 2004, Dar Al Istithmar is a venture between Russell Wood and Oxford Islamic Finance. Independent from its shareholders Dar Al Istithmar offers:<br />Shari’a Structures<br />Shari&apos;a Consultancy Services<br />Shari&apos;a Monitoring / Purification Services<br />Shari’a Compliance Reviews <br />Global Investment Products / Investment Banking<br />Asset and Fund Management<br />Islamic Finance Arranging and Advising *<br />Academic and Educational Work<br /> <br />Shari’a Supervisory Board <br /> <br /> DI’s Shari’a Supervisory Board comprises world renowned scholars<br /> <br />Dr. Hussein Hamed Hassan (Chairman)<br />Dr. Mohammed DaudBakar<br />Dr. Abu Sattar Abu Ghuddah<br />Dr. Ali Al Qaradaghi<br /> <br />Management Team<br /> <br />Asim Khan ACA Executive Director<br />Sayd Farook Phd FCIPA Senior Consultant<br />Saud SiddiquiFCCA CIA CISA Senior Consultant<br /> <br /> <br />2<br />Euromoney “Best Islamic Assurance and Advisory Services” 2006 <br />Euromoney “Best Islamic Advisory Services” 2007<br />
  3. 3. Track Record<br />Shari&apos;a Structures<br />Our work has involved the use of Murabaha, Mudarabaha, Wakala, Musharaka, Istisna’a, Ijara, Intifah, Salam, Wa’ad structures (to name a few) and these structures have been used in products such as equity funds, hedge funds, private equity funds, real estate development projects, home finance, personal finance, deposit accounts, credit cards, capital markets sukuk. <br /> <br />Real Estate<br />We acted as the Global Shari&apos;a Advisor for a mega tower project, part of the Al-Haram scheme being developed in the heart of the holy city of Makkah.<br />We have developed real estate investment funds (using vehicles in a number of different jurisdictions)<br /> <br />Academic and Educational Work<br />We write professional reports and articles on Islamic Finance and Islamic Capital Markets<br />Through our affiliation with Oxford Islamic Finance, we produce contemporary research on innovations in Islamic Finance.<br />We give presentations at numerous International Conferences, Seminars and Forums on Islamic Finance<br />We have conducted a global educational road show on Shari&apos;a and innovation in Islamic finance<br /> <br />Asset and Fund Management<br />Designed an innovative Shari&apos;a-compliant technique for short selling for an Islamic long-short hedge fund<br />Shari&apos;a advisor to one of the largest banks in the world for an umbrella structure to set up a number of Islamic funds covering a wide range of asset classes<br />Shari&apos;a advisor to a number of Middle East asset managers on regional equity and Sukuk funds<br />Shari&apos;a advisor for an Islamic private equity fund to invest in science, health and technology products <br /> <br />Investment Products / Investment Banking<br />Shari&apos;a advisor to one of the largest banks in the world on a new range of Shari&apos;a-compliant derivative products. This is arguably the most sophisticated range of Islamic investment products. <br />We have structured a Shari&apos;a-compliant overdraft facility, housing finance, and deposit accounts for one of the largest retail banks in the United Arab Emirates<br />Shari&apos;a advisor to a major index provider on a new range of Islamic indices<br />Equity Structured Products<br />3<br />
  4. 4. &quot;Law is in Islam a process of discovery. Just as the physical scientist believes that the laws of physics exist as an absolute, waiting to be discovered rather than invented, so the Muslim legal scholar believes that the shariah has been created by God and his role is to discover and articulate it rather than invent it” -Imad-ad-Dean Ahmad <br />4<br />
  5. 5. Where are we coming from?<br />2001-2010<br />Structured Sukuk<br />Mega Project Finance <br />Large Commercial Banks<br />Islamic Derivatives<br />1991-2000<br />Hard Asset Private Equity<br />Fund Management<br />1975-1990<br />Commercial Banking <br />Trade Finance<br />Syndications<br />Islamic Conglomorates<br />Market Exposure: 250m<br />Conversions, Islamic Windows & Subsidiaries of Mega Banks, <br />Establishment of Islamic Finance in Non-Muslim states<br />Muslim populated states getting interested Syria, Libya, CIS<br />Market exposure: 100m<br />Concentrations of Islamic Banks growing in GCC, Malaysia, Pakistan and Bangladesh<br />Market exposure: 20m<br />One or Two Islamic Bank in each Muslim state <br />Inefficient Command SOEs in Iran and Sudan<br />Timeline 1975-2010<br />5<br />5<br />
  6. 6. Historical Growth Factors<br />1975-1990<br />Resource Boom<br />Academic and scholarly encouragement and experiments<br />Arab Entrepreneurs<br />1991-2000<br />Regulatory Recognition and Encouragement<br />Growth of tiger economies<br />Efficient interbank markets<br />Development of infrastructure<br />2001-2010<br />Resource wealth and surplus liquidity<br />Sukuk<br />Islamicisation and Religiosity<br />Real Estate Asset classes<br />Further infrastructural developments<br />6<br />
  7. 7. Where are we going to? Short to medium term growth <br />2002-2005 Growth: 44 % YOY (Islamic) compared to 18.2% YOY (conventional)<br />See no signs of interest in Islamic Finance abating<br />Increased interest of the western world<br />Growth rates of 20-30 percent for the next five to ten years<br />Islamic Finance will truly be part of the global banking system<br />7<br />
  8. 8. Short to medium term growth<br />8<br />
  9. 9. Where are we going to?Long Term Growth <br />2011-2040<br />Sophisticated Private Equity, Mega Islamic Commercial, Full Service Investment Banks<br />Market exposure: 6000m<br />Competition with Mega Banks, Concentrations in Muslim states, Conversions in Muslim states, Growth in Non-Muslim states ?<br />Market exposure: 1500-2000m<br />No further growth beyond core Muslim constituency?<br />Market exposure: 500m-1500m<br />Reputation Risk ?<br />Timeline 2011-2040<br />9<br />
  10. 10. Long term growth?<br />Stellar?<br />Steady?<br />Negative?<br />10<br />
  11. 11. Long Term Growth?<br />Stellar?<br />Value proposition for both Islamic and conventional populace<br />Limited competition presented by conventional financial institutions<br />11<br />
  12. 12. Long Term Growth?<br />Steady?<br />No value proposition beyond Muslim states and populations<br />High competition between Islamic and conventional megaliths<br />Efficiencies and economies achieved in Islamic transactions<br />12<br />
  13. 13. Long Term Growth?<br />Negative?<br />Reputation risk associated with terrorism<br />Failure to achieve economies and efficiencies<br />Loss of confidence of core customers: Shari’a sensitivity<br />13<br />
  14. 14. 14<br />Long Term Growth?<br />Stellar?<br />Value proposition for both Islamic and conventional populace<br />Limited competition presented by conventional financial institutions<br />Steady?<br />No value proposition beyond Muslim states and populations<br />High competition between Islamic and conventional megaliths<br />Efficiencies and economies achieved in Islamic<br />Negative?<br />Reputation risk associated with terrorism<br />Failure to achieve economies and efficiencies<br />Loss of confidence of core customers: Shari’a sensitivity<br />14<br />
  15. 15. 15<br />Market Dynamics of Islamic Retail<br />Significant driver of commercial banking and capital market activities when emerging markets become wealthier<br /><ul><li>Shariah Loyalists:</li></ul>Becoming price sensitive due to sustained competition<br />Growing in mass and wealth ?<br /><ul><li>Floating:</li></ul>Price and feature sensitive <br />Largest population but unconvinced ?<br />High growth in emerging economies ?<br /><ul><li>Conventional: Lured by features/price?</li></ul>Purely price and feature sensitive?<br />ShariahFloatingConventional <br />LoyalistsLoyalists<br />
  16. 16. 16<br />16<br />Continuing stellar growth?<br />Three factors will determine competitive edge for Islamic Finance:<br />Pricing<br />Shari’ah Compliance<br />Features<br />Pricing<br />Islamic Banks are still less efficient than conventional banks but will eventually achieve economies<br />Shari’ah Compliance<br />Remains a major challenge since many floaters are of the opinion that Shari’a compliance is a wider definition than Shari’a arbitrage<br />Features<br />Product features must differentiate the value proposition to capture the conventional and floaters markets<br /> Stellar growth beyond Shari’ah Loyalists can only be achieved if a differentiated strategy is adopted for the industry<br />
  17. 17. Are we facing an existential threat?<br />On a repeated basis, we are facing attacks from our own ranks:<br />Mahmoud El-Gamal (PhD), Professor, Rice University <br />Omar Farooq (PhD), Professor, Royal University for Women<br />FehmySaddy (PhD), FS Partners<br />MudassirSiddiqui Islamic Finance Global Head, Partner, Denton Wilde Sapte(Shari’a Scholar, IDB) <br />NEXT??: Sayd Farook, Oxford Islamic Finance<br />17<br />
  18. 18. Are we facing an existential threat?<br />Islamic Finance CANNOT be: <br />only about “Shari’a arbitrage”<br />only about meeting the needs of conventional financing or capital markets<br />constrained by the traditional nominate contracts<br />all just commodity murabaha<br />YET, ALL OF THIS EXISTS AND CANNOT BE AVOIDED AT THIS STAGE.<br />In reality, the first is a blessing in disguise!<br />18<br />
  19. 19. So what will keep Islamic Finance going?<br />GCC Petro liquidity slack isn’t certainly going to last forever.<br />There are essentially three value propositions in Islamic Finance, which we need to capitalise on:<br />Evolution of Islamic Finance as an industry<br />19<br />
  20. 20. Shari’a Contract Governance<br />The process of ensuring that a contract is Shari’a compliant<br />Avoid Main Prohibitions<br />Riba<br />Gharar<br />Maysir<br />Avoid Subsidiary Prohibitions<br />Permissibility of subject matter (evaluability) consideration and process<br />Ownership and possession of assets<br />Cannot combine two contracts (with exceptions)<br />Cannot defer both counter-value or have bilateral promises<br />Cannot have twin sales<br />Cannot have tying contracts<br />This ensures that:<br />All transactions are asset linked: first degree of separation only allowed i.e. trading of debts and money not allowed<br />Mal is generally conservatively defined i.e. financial rights do not give rise to assets.<br />20<br />
  21. 21. AVOIDANCE OF HARAMTRANSACTIONS<br />Avoiding all forms of unethical activities such as financing casinos, drugs, illicit, immoral or dubious transactions<br />AVOIDANCE OF <br />QIMAR<br />Gambling and Chance based (zero-sum) games<br />AVOIDANCE OF<br />JAHALA<br />Clarity of intentions and transparency is imperative in all dealings<br />AVOIDANCE OF RIBA<br />Risk-free or <br />guaranteed rate of <br />return on loaned <br />money or investment<br />AVOIDANCE <br />OF GHARAR<br />Excessive uncertainty<br />in contracts – e.g. entering<br />into a transaction whose<br />consequence is out of<br />usual trade norms – E.G.:<br />a) Financial derivatives<br />b) Insurance contracts<br />c) Sale of debts<br />ISLAMIC<br />CONTRACTUAL <br />GOVERNANCE<br />AVOIDANCE <br />OF EXPLOITATION<br />relationship to <br />reflect justice<br /> and fairness.<br />
  22. 22. Contractual Ethics<br />Even in its core rules, Islam is propagating ethics in contracts.<br />The prohibition of riba, gharar and maysiris there to avoid the unjust exploitation/enrichment of one party over another.<br />But beyond this, Islam ALSO has a position on all aspects of contractual fairness, including representations, disclosures, insider trading, <br />22<br />
  23. 23. Contractual Ethics<br />Fairness and just treatment of other people’s property<br />‘God does command you to render back your trusts to whom they are due…’ -Women (Surat An-Nisa) 58<br />Fair trade practices<br />‘And, O my people! Give full measure and weight fairly, and defraud not men their things, and do not act corruptly in the land, making mischief: What remains with Allah is better for you if you are believers, and I am not a keeper over you’ -Hud (SuratHud 85,86)<br /> “On the day of Judgment, the Honest Muslim merchant will stand side by side with the Martyrs” <br /> -Saying of the Prophet Muhammad (SAW)<br />Full disclosure<br />“When a person sells a defective thing, and he does not describe that fault to the buyer, the angel of Allah will always curse him.” -Saying of the Prophet Muhammad (SAW)<br />Misrepresentation/Deceptive trade practices<br />‘He who cheats is not one of us’ -Saying of the Prophet Muhammad (SAW)<br />Anti-Trust Insider Trading<br />“…don’t outbid one another in order to raise the price…don’t enter into a transaction when others have already into that transaction and be as brothers one to another.”-Saying of the Prophet Muhammad (SAW)<br />Speculative activities<br />‘Verily, the prophet prohibits the trading of gharar(uncertainty)’ -Narrated by a companion of the Prophet Muhammad (SAW)<br />23<br />
  24. 24. Are we facing an existential threat?<br />In short, NO, we are not!<br />On balance of activities, we are still safe. <br />24<br />
  25. 25. Ability based moral responsibility?Isn’t Zakat fulfilling moral responsibility?<br />Zakat is only ordained for seven types of charitable purposes<br />Zakat is essentially the minimum safety net for the bare essentials. <br />25<br />
  26. 26. Ability based moral responsibility?Isn’t Zakat fulfilling moral responsibility?<br />26<br />
  27. 27. Ability based moral responsibility?Are we talking about social business?<br />27<br />
  28. 28. Ability based moral responsibility?Are we talking about social business?<br />ISLAMIC FINANCE CANNOT BE JUST A SOCIAL BUSINESS…<br />No restriction on wealth accumulation<br />Does not require donation of all wealth<br />Businesses can have profit maximisation objectives(Shari’a compliant activities)<br />28<br />
  29. 29. Ability based moral responsibility?Are we talking about social business?<br />YET ISLAMIC HAS A DEFINITE PLACE FOR SOCIAL BUSINESS… <br /><ul><li>Businesses may have objectives other than to create profit for shareholders
  30. 30. Also incorporate such objectives into ther business activities
  31. 31. Set aside part of profits for charitable distribution</li></ul> Prof. Yunus sees social business and normal businesses co-existing, <br /> Islamic business integrates social values into a business model.<br />29<br />
  32. 32. Ability Based Moral Responsibility?<br />Did any form of responsibility exist prior to modern conceptions of CSR?<br />Ex-post facto, does CSR have any legitimacy in Islam?<br />Most importantly, does this form of social responsibility have any roots in Islamic principles?<br />30<br />
  33. 33. Principles of Islam:Articulating moral responsibility<br />31<br />
  34. 34. Defining moral or social responsibility?<br />The west has its own definition of social responsibility based on society’s contemporary conception of what is right and wrong. Hence, casinos and alcohol are all acceptable, if conducted “responsibly”!<br />Islam has a different perspective:<br />What is beneficial for us and what is harmful for us cannot be left to human reasoning, because of its inherent limitations –Al-Shatibi<br />Rational faculties can and should only be used to complement, support and strengthen ethics and morality defined by Shari’a<br />32<br />
  35. 35. Key Islamic moral responsibility principles<br />33<br />
  36. 36. Ability Based Moral Responsibility<br />Public goods and wealth redistribution ALSO responsibility of individuals<br />Islam recognizes Income disparity and makes it an obligation among those with wealth and power to redistribute it as a test<br /> “He has raised you in ranks, some above others: that He may try you in the gifts He has given you: for your Lord is quick in punishment: yet He is indeed Oft-forgiving, Most Merciful.” -The Livestock (Surat Al-Anaam) 165<br /> “(Alms are) for the poor who are confined in the way of Allah-- they cannot go about in the land; the ignorant man thinks them to be rich on account of (their) abstaining (from begging); you can recognise them by their mark; they do not beg from men importunately; and whatever good thing you spend, surely Allah knows it.” -The Heifer (Surat Al-Baqarra) 273<br />34<br />
  37. 37. Ability Based Moral Responsibility<br />However:<br />“On no soul doth Allah Place a burden greater than it can bear….”<br />Baqara (The Heifer) 286<br />The principle of ability is paramount to the extent of moral obligation placed on each individual.<br />35<br />
  38. 38. 36<br />Islamic Social Responsibility and Corporate GovernanceThe differentiated strategy<br />The only real value propositions of Islamic Finance: <br />Shari’ah Compliance (for Shari’ah Loyalists and Floaters) <br />Social Responsibility (for Floaters and both loyalists) <br />Shari’ah Compliance:<br />complying with the Shari’ah rules associated with each instrument or transaction <br />Social Responsibility:<br /> the broader manifestation of Islamic principles of equity and social justice evident in the micro rules of the Shari’ah<br />How can these be implemented?<br />Islamic Corporate Governance<br />36<br />
  39. 39. Technical Challenge<br />How do we incorporate such behaviour into our corporate culture?<br />How do we engender a system and infrastructure that encourages social responsibility in all aspects of the workplace and all aspects of our work? <br />37<br />
  40. 40. Conclusion<br />GOLDEN OPPORTUNITY <br />The world of finance is looking at us for direction. <br />WAKE UP CALL<br />This a is wake up call to the industry to identify and differentiate Islamic Finance based on principles of opportunity based moral responsibility. <br />LOOSE OUR APPEAL<br />If we don’t follow this route, we will loose our appeal tothose who don’t see any value in Shari’a governance or contractual ethics because some of these are already existent in conventional finance. <br />38<br />
  41. 41. Corporate Social Responsibility and Islamic Finance: The Way Forward<br />Sayd Farook <br />39<br />
  42. 42. Vision without action is a dream. <br />Action without vision is simply passing the time. <br />Action with Vision is making a positive difference.<br />40<br />
  43. 43. Vision without action is a dream.<br />41<br />
  44. 44. The chronological life of an AAOIFI Governance standard<br />42<br />
  45. 45. CSR and AAOIFI<br />43<br />Series of studies verified that there was a disjoint between the perceived ethical stance of IFIs and the reality of the IFIs<br />Maali, Casson and Napier (2003)<br />Farook and Lanis (2004)<br />Beydoun and Willett (2000)<br />Studies suggested that Islamic banks were attempting to PORTRAY themselves as Islamic or socially responsible through Islamic art inclined annual report disclosures without necessarily following the substantive content.<br />There is a LACK OF CONCEPTUAL UNDERSTANDING OF WHAT SOCIAL RESPONSIBILITY IS!<br />
  46. 46. Action without vision is simply passing the time. <br />44<br />
  47. 47. Misconceptions of CSR<br />Is Islamic CSR:<br /><ul><li>Paying donations to charities?
  48. 48. Providing Qard al-Hasan loans for poor?
  49. 49. Donating a percentage of profits from depositors (2%) for eco-sustainability ventures?</li></ul>Operating on a non-profit basis or giving financing for free?<br />Supporting an F3 Racing Team?<br />Establishing a sukuk fund with minimum subscription of USD 100,000?<br /> &quot;As part of our corporate social responsibility and stemming from our belief in sharing our success with all, we have decided to offer the opportunity to the largest number possible of potential investors. Therefore, we set the minimum limit of investment to US$ 100,000 and in increments of US$ 10,000 for those wishing to invest more&quot;<br />CEO- Anonymous Islamic Investment Company<br />45<br />
  50. 50. Social responsibility for Islamic financial institutions<br />46<br />
  51. 51. Do IFIs need to be socially responsible?<br />Representing themselves as complying with Shari’a rules<br />Representatives for individuals who: <br />i. invest their money as shareholders or investment account holders, <br /> ii. have co-operative, partnership or borrowing relations with the IFI, <br /> iii. are employed by the IFI, <br /> iv. have other explicit contractual relations with the IFI, <br /> v. in addition to the above, have a implicit social contract with the IFI as part of the larger community (Ummah). <br />Representative of Muslims, who are accountable to Allah (SWT)<br />In addition, IFIs have a SPECIAL POSITION in society as FINANCIAL INTERMEDIARIES, which carry with it certain responsibilities and obligations.<br />47<br />
  52. 52. Do IFIs need to be socially responsible?<br />48<br />Investors<br />Shareholders<br />Investment Account Holders<br />Overarching Accountability to Allah (SWT)<br />Taqwa centricity<br />Contractual parties<br />Clients <br />(Current A/C holders, Lessees, <br />Partners, Vendors and Buyers)<br />Employees and contractors<br />Other contractual parties<br />Society<br />(Poor, youth, elders, marginalised, <br />discriminated against, environment) <br />
  53. 53. Technical Challenge<br />Remember my questions before:<br />How do we incorporate such behaviour into our corporate culture?<br />How do we engender a system that encourages social responsibility in all aspects of the workplace and all aspects of our work?<br />How do we develop an infrastructure in line with such principles? <br />49<br />
  54. 54. Defining social responsibility for IFIs<br />On no soul doth Allah Place a burden greater than it can bear….<br />Baqara (The Heifer) 286<br />IFIs can and should do everything in their capacity to be socially responsible. <br />50<br />
  55. 55. Conceptualizing social responsibility for IFIs<br />51<br />
  56. 56. Core Activities<br />Are central to the operations of the financial institution, i.e. the day to day running of the business<br />Do not need additional resources<br />Are aligned to the present business model<br />52<br />Shareholders<br />Mobilise Funds<br />Islamic Bank<br />Investment Account Holders and Customers<br />Receive Funding<br />Clients<br />ManagementEmployees<br />Contractors<br />
  57. 57. Supplementary Activities<br />Are NOT central to the operations of the business and the day to day running of the business<br />Require additional resources and costs to implement<br />Require a re-alignment of business operations, systems and functions<br />53<br />
  58. 58. Distinction between Mandatory and Recommended<br />Broadly based on the principles of Maslaha articulated by al-Ghazzali<br />54<br />
  59. 59. Mandatory VS Recommended<br />55<br />
  60. 60. Action with Vision is making a positive difference.<br />56<br />
  61. 61. What are we doing?<br />Maqasid Al-Shari’a CSR Survey and Awards<br /> (Dar Al Istithmar-Dinar Standard-AAOIFI) <br />Oxford Islamic Micro-Finance Project<br />57<br />
  62. 62. Maqasid Al-Shari’a CSR Survey and Awards<br />Encourage financial institutions to adopt and apply CSR standards<br />Act as “civil society” to implicitly “pressure” IFIs to be socially responsible<br />Award those institutions that are socially responsible<br />58<br />
  63. 63. Oxford Islamic Micro-Finance Project<br />59<br />Intermediate funding from IFIs to make Islamic Micro-finance a viable reality<br />Target IFI charities<br />Target IFI wholesale funding<br />
  64. 64. Conclusion<br />When we have done what we can, God will do what we can’t.<br />60<br />
  65. 65. Contact<br />Dar Al Istithmar<br />Head Office: 3 George Street, Oxford, OX1 2AT, United Kingdom<br /> <br />T: +44-1865288545 F: +44-1865244762 <br />W: www.daralistithmar.com<br /> E:di.admin@oxif.co.uk<br />61<br />

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