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Isra Bulletin Dec08

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ISRA\'s quarterly publication. Summary of Shariah issues and research

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Isra Bulletin Dec08

  1. 1. www.isra.my WHY IS ISRA IN TOWN? ISRA – the International Shari`ah Research western experience, the financial industry Academy is the new kid in town. As with developed based on a very concrete any new organization, people would be framework or building blocks. Likewise, anxious to understand its role and the in Islamic finance we need to develop the concrete theoretical framework that value proposition it brings. In conjunction underlie the whole practice (fundamental with the launch of our maiden ISRA Bulletin, research) besides addressing the day to we would like to shed light unto our day issue (applied research),” Dr. Asyraf background, why we are here and what Wajdi Dusuki, ISRA’s Head of Research we offer. We will also take this opportunity Affairs, clarified. In other words, at ISRA to dispel some of the misconceptions we have both the fundamental and or queries that lingers in the mind of our applied research because both are customers. important. Applied research will help the industry resolve short term issues while Why is ISRA here? fundamental research will help propel the Amongst the most frequently asked industry towards orderly development. question is “Why is ISRA here”? The best With regards to these pressing issues person to answer this question is of course in the industry, one must wonder, isn’t that our executive director, Dr. Akram Laldin. what Shari`ah advisory boards do i.e. help “ISRA is here to fill up the gap that we address these pressing issues? Having have in the industry. On the ground i.e. been a Shari`ah advisor himself, Dr. Akram people in the industry may have certain pointed a simple concerns, how to address this issue, how reason why to address that issue. However, there is relying no dedicated institution that is doing this on the job. We do have universities conducting Shari`ah research, but of course in higher advisors education institution, the research done alone is not focused on Islamic finance alone. would What we need is a focused research not be where you address the burning issues in the market. Therefore, in ISRA, this is the mandate that is given to us, to identify the pressing issues in the market, co-operate with the academic and do research on the area,” he explained our role in simple terms. Does that mean we only focus on applied research at ISRA? “When we talk about Islamic finance, we cannot confine ourselves to only focus on research that addresses the issue of the day. From the Dr Akram Laldin, Executive Director
  2. 2. COVER STORY International Shari’ah Research Academy for Islamic Finance scattered here and there and it is not sufficient to help the industry with these Within the six month of our operation classified. This is one of the challenges that pertinent issues. “We have to understand we have embarked on 15 research projects we are taking. We are extracting, without that the Shari`ah board, even though and seven of these have been completed. jeopardizing the intellectual property, they exist within the financial institutions, For an update on our research projects and make the information accessible there are many limitations. One, Shari`ah please refer to the Research Update according to topics. “Lets say you want to advisors are part-timers. They have their Section. One example of the pressing find something on Musharakah, you can core-business; sometimes it’s teaching, issue that we addressed in the banking go to the Musharakah section and find while some are attached to administrative sector for instance is the dispute resolution details – what are the products, what is posts. So definitely their full time focus will mechanism in Islamic banking. This is one of Musharakah Mutanaqisah, what are the be more on their core job. Secondly and the issues that sometime haunt people in issues, what will happen upon default etc. more importantly, even based on my own the industry. Whenever there is any dispute We will try to make it as comprehensive experience being on the Shari`ah advisory and there is a need to bring the matter as we can and furthermore we will try to board, there is no in-depth research that to court, players are not sure about the link this information with the fatwa that is being done to address the issue that outcome. They are concerned if the judge is available on the different issues,” Dr. is brought to us in the Shari`ah board has proper awareness and knowledge with Akram provided a glimpse of his vision for meeting. Probably there might be some of regards to the details of Islamic banking. ISRA’s research portal. This will facilitate the scholars that sit on the board that do How shall we address this issue? One of information gathering by the industry and research, but these are more ad-hoc kind the alternatives that we are proposing is to academia, and they can be assured that of an arrangement. When you have an strengthen the arbitration framework where the information are from a reliable source. issue, you try to see a number of references the parties have the option to appoint an Of course we need to develop this bit by and discuss the various views and fatwa arbitrator that they are comfortable with. bit. and try to come out with a solution by This will minimize the concern on whether Besides the research portal, ISRA would adapting to certain views. However there the deciding person has the expertise. ISRA also like to a certain extent, harmonize is no deep analysis to determine which is will conduct further research on this option the different interpretation and views of the best view, the strongest view and the and hopefully this can help the industry Shariah that exists in the industry in the long most practical view for example? So we address the issue of dispute resolution. run. We will achieve this via the Shari`ah here at ISRA, it is our aim to provide the “Besides addressing the burning issues parameter that we are developing. “ISRA Shari`ah scholars the research findings and in the short run, our immediate aim is to is not a Shari`ah standard setting body. We resources in order to assist them in making recruit the new breed of Shari`ah scholars,” do not issue fatwa, nor do we issue Shari`ah their decision,” Dr. Akram elaborated. Dr. Akram highlighted. By new breed of standards. How we are different from the Shari`ah scholars, we refer to those that standard setting body is that, standard have the competency in Shari`ah, finance What are our aims? setting body will come out with a particular and legal knowledge. “This will start from standard. But we are looking beyond that. next year when we have our scholarship We have chartered our short term and long We will try to set the parameter. We will fund. We have budgeted for five term aims. As Dr. Akram pointed out in the give the different alternatives that are scholarships next year and we will identify beginning, in the short run we are trying to available which is within the parameter potential candidates who will major in address the immediate issues that need (i.e. boundary) of Shari`ah. We are not Shari`ah, minor in finance and law. So they to be resolved. We have three research confining to just one school of thought will be having these three specializations, units under Research Department at ISRA but we will provide all the views that are meaning that they will have good – banking, Takaful and capital markets, and within the Shari`ah boundary. We are knowledge in Shari`ah and reasonable for the short run we focus on research in currently also working closely with BNM knowledge in finance and law. So we pertinent issues in these different units. Our to come up with something similar. With hope that when these people graduate, approach in doing research is unique. As our that, hopefully to a certain extent this will they will be the new breed of Shari`ah core business is to focus on applied research, guide the market and nobody can claim scholars; probably the second generation from the very beginning we engage with that they are superior or more Islamic than of the Shari`ah scholars who will have the the industry to ensure that we are focusing others as these practices are all within the ability to understand finance as well as on the right areas. “Before embarking on a Shari`ah parameter, Dr. Akram pointed out Shari`ah and law,” Dr. Akram shared how research we would first obtain feedback from the features of the Shari`ah parameter. ISRA would help the industry tackle the the industry via the ISRA-Industry discussion This is the harmonization that ISRA aiming daunting issue of limited Shari`ah scholars. series. Based on their feedback we will to achieve. In the long term, one of our aims prioritize the research areas and assemble With regards to the geographical is to develop ISRA’s research portal; a our research team that comprise of experts location that we focus on, as an one-stop centre that people can refer from the industry and the academia. ISRA’s international establishment ISRA will not to. On the internet you can find variety researcher will be spearheading the team,” only to look at local issues but we will of information, but the information are Dr. Asyraf provided the workings of ISRA’s research department.
  3. 3. COVER STORY also look at international issues. “In doing As a proactive regulator, BNM has also human resource, we have to we have so, for next year we are trying to get set up the Islamic Banking and Finance included outsiders (both academicians strategic alliances with other research Institute Malaysia (IBFIM). Some people and practitioners) to be part of our organizations. For the past few months, we are also curious as to how ISRA and research team. Even when we coordinate, have been in good contact with Bahrain IBFIM are different? “IBFIM is also a body we are the authority in the output that we Institute of Banking and Finance (BIBF), established under BNM, but the main get. Sometimes even we at ISRA forget Islamic Research and Training Institute focus of IBFIM is training and advisory. that we are just 6 months old,” Dr. Asyraf (IRTI), Research Department of Emirates That’s why they have the different training pointed out. The expectation on ISRA is Islamic Bank, Shariah Compliant Division programmes for the industry. In ISRA we high. But we take that as a motivation of Ar-Rajhi Saudi and Durham University don’t conduct training, except for the to achieve our aims. In charge of the in the UK where they have a pool of Shari’ah advisors where we will give them research affairs, Dr. Asyraf elucidated PhD students doing research on Islamic updates and specific trainings. Besides that the co-ordinating role of ISRA will finance,” Dr. Aysraf enlightened on ISRA’s that we don’t have a structured training always continue in the future because strategic alliances thus far. “Insha’Allah programme for anyone. On top of that, we want every sphere of the system to next year we plan to have at least two IBFIM is also doing advisory work; advising develop; not only the market, but also overseas thematic workshops which will on unit trust for example. In ISRA we don’t the academia. “Insha’Allah even when discuss international pressing issues,” he do that. In addition, IBFIM is also a profit ISRA has grown to a full fledge research gave a glimpse of what ISRA has on the making body, but ISRA is a non-profit academy, having maybe 30 to 50 of table for next year in the international making institution because we have our our own researchers, we will still provide forefront. endowment fund,” Dr. Akram pointed out grants for universities to conduct applied the different role of ISRA and IBFIM. research. We will still request the university How are we Simply put, ISRA is where Shari`ah and to discuss the research area with the market integrates. This is our niche. “I think industry. This is part of our mandate,” he different from other we have the combination of Shari`ah reminded. institutions? people and the people in the industry that Simply put ISRA is here to assist is working together. This is the wonderful everyone. “I always emphasise on the As there are increasing numbers of thing that we have at ISRA. We have need for all of us to work together. Whether institutions set up to develop this growing the opportunity to bring these people the Shari`ah scholars, the academician, industry it is therefore imperative that together so we can tap into their resources the market players and the regulators. All ISRA clarifies where we fit in the big and expertise. This is the ultimate goal at of us should be together. I believe that picture. What is our niche? How are we ISRA because without the co-operation when we are in a team, we can produce different from other organizations? First of Shari`ah and market, there will be a lot wonders and we can become the best in and foremost it’s important to establish of hindrances in the development of the the global industry,” Dr. Akram concluded how ISRA and INCEIF complement each industry,” our executive director stressed. our vision, mission and hope for the future other as both are under the umbrella of to come, Insha’Allah. BNM. Nonetheless INCEIF and ISRA focus Our aspiration on different realms of the industry. “First of all I have to clarify that ISRA is within Some people may perceive ISRA as the set-up of INCEIF. However we are an only a co-ordinating body, linking up autonomous body within INCEIF. We meet the academic and the industry. “That is with INCEIF at certain level of governance. partially our role,” says Dr. Akram. “We We share the same governing council are here to bridge what never happened and BOD. As it is now we also share the before. This is an avenue that we are same EXCO with INCEIF. We meet there. opening for both the academic world However we are autonomous in terms of and the market.” he added. administration as well as funding. We have Nonetheless ISRA does not our own fund,” Dr. Akram crystallized the only do co-ordinating organization structure and ISRA’s meeting work. We have our in- point with INCEIF. The major difference house research as between INCEIF and ISRA is that, INCEIF well. is a university which offers academic “For the time qualification. At ISRA we do not offer being, due to the academic qualification, we only conduct limitation that research. We work closely with INCEIF we have now, definitely but we don’t offer any academic e s p e c i a l l y Dr Asyraf Wajdi, qualification. w i t h Head of Research Affairs
  4. 4. SECTOR REPORT • banking International Shari’ah Research Academy for Islamic Finance Novation Agreement from the Islamic Perspective By Dr. Uzaimah Ibrahim Research Consultant, ISRA In the recent 12 court cases judgement involving BBA house financing facilities in Malaysia, the high court judge, Dato’ Wahab Patail, classified the BBA cases into two broad categories; BBA with novation agreements and BBA without the novation agreements. The learned judge said that BBA with the novation agreements are bona fide sales transaction while those without the novation agreements are not bona fide sales transaction. During the initial days of Islamic banking in Malaysia, there was a novation agreement involved in house financing but this is not the case any longer. Some opine that novation should never have been scrapped out from the Islamic home financing facility, as it offers fairness to both parties, namely the banks and their customer. This article aims to discuss the features of a novation agreement from the common law perspective and compare this to the Shari`ah viewpoint. stipulated date. As such, the bank shall What is novation? case of non-performance by the new be bound by all terms and conditions obligor; Novation is a settled principle of the therein and shall perform all obligations • The obligee maintain the same status common law. It is an agreement that on the part of the purchaser/customer. as in the original contract; and enables substitution of either an obligation In return, the bank is entitled to receive • The original contract is terminated. to perform or a party of an existing the transfer of the property to affect the contract. It also includes a substitution bank’s ownership over the said property. Novation agreement of a new debt for an old one, where the Executing the novation agreement old debt is extinguished by the new debt. in Islamic financing does not intend to terminate the original In some instances, novation may take contract, i.e. the SP. The original contract facilities place when the original parties continue remains enforceable and binding, except their obligation to one another, but a new In the Islamic banking industry, initially, that it is now binding on the new obligor, agreement is substituted for the old one. novation agreement was part and parcel i.e. the bank. Perhaps such a difference Thus, a Novation Agreement is the legal of the Islamic home financing facility. The does not really matter in common law but instrument executed by all parties involved executed documents for such facility is a vital aspect that must be considered for the said substitutions. mainly include; from Shari`ah point of view. A novation agreement is completed • Sale and Purchase Agreement, i.e. and valid if all parties of the original SP (between the vendor/contractor Novation agreement contract give their consent. The obligee and the purchaser/bank’s customer); vis-à-vis Shari`ah (the party who benefits from the novation) • Novation Agreement (signed by must be given notice about the novation. principles the vendor/contractor, purchaser/ In addition, the obligor (the party who customer and the bank); and Many claim that this agreement is similar to makes the novation) must make the new • Property Sale Agreement (between the Shari`ah principles on Buyu’ al-amanah obligee aware and ensure that the latter the bank and the purchaser/ (trust sales) that include Murabahah (mark- gives his consent. customer). up sale), Tawliyyah (sale at cost price) and According to common law practices, Wadhi’ah (discounted sale). Some others once a novation agreement is executed, By executing the Novation Agreement, view novation as resembling Hiwalah it shall have the following effects; the bank agrees to become a party to the (transfer of debt), since it involves transfer • Transfers all duties, obligations or Sale and Purchase Agreement, in place of of contractual obligations. However, none benefits arising from the original the purchaser. This will be immediately be of these contracts fit well within the ambit contract from the original obligor to followed by the Property Sale Agreement, of novation agreement, as shown in the the new obligor; whereby the bank sells the property to table below: • The original obligor is free from the the customer on deferred payment terms. obligations that arise from the original Being in place of the customer, the bank contract; is deemed to have been a party to the • The original obligor cannot be sued in Sale and Purchase Agreement from the
  5. 5. SECTOR REPORT • banking Table 1: Comparison between novation and Buyu’ al-amanah EDITORIAL TEAM Novation Agreement Buyu’ al-amanah (trust sales) Advisors: It does not constitute a new contract These are sales at either mark-up Dr. Mohamad Akram Laldin of sale; it is merely an agreement to price, cost price or at a discount. substitute a contracting party of an The terms may be different from the Abu Bakar Sidek existing sale; first sale; Dr. Asyraf Wajdi Dato’ Dusuki The terms and conditions of the Since these sales are independent original contract (SP) are binding from the first ones, the latter do not Editor on the new obligor (the bank); and bind the parties of the second sale; Shabnam Mokhtar and shabnam@isra.my It requires the consent of the original The consent of the vendor of the obligee (the vendor/contractors). first sale is not required. Features Editor Thus, this makes him a party of the Mohammad Ashadi Mohd Zaini agreement. ashadi@isra.my Zaharuddin Muhamad zaharuddin@isra.my Table 2: Comparison between novation and Hiwalah Nusaibah Mohd Parid Novation Agreement Hiwalah nusaibah@isra.my Coordinating Producers It is an agreement allowing a It is an agreement to substitute a debtor to transfer his debt. Thus, it Haji Abdul Rahim Haji Sairan contracting party who is purchasing is required that the transferor be a a property. Thus, there is no rahim@isra.my debtor to transferee; requirement of a party being a debtor; Wan Aznira Wan Abdullah The transferee may still have a right The original party (purchaser) is free aznira@isra.my of recourse against the transferor from the obligations arising from the in cases of death and liquidation/ original contract; and Coordinating Photographer bankruptcy of the payer; and Noor Aznir Nizam Noordin The transfer of debt shall take effect The new obligor becomes the aznir@isra.my immediately upon the conclusion party of the original contract of the contract. retrospectively from the date of the contract. Disclaimer: While every care is taken in the preparation of this publication, no responsibility can be accepted for any errors. Conclusion Copyright: All or any other portion of this Property Sale Agreement only, which The above list of differences is not bulletin may be reproduced provided are executed by the bank and its exhaustive. There may be other acknowledgement of the source customer. Moving forward, research differences between a novation is made. Notification of such use is needs to be carried out to better agreement and Buyu’ al-amanah or required. All rights reserved. understand novation from Shari`ah Hiwalah. Shari`ah compliance was not Address: perspective. Is it sufficient to use the reason why novation agreement 2nd Floor, Annexe Block existing contracts in Islamic finance was no longer used in the house Menara Tun Razak to achieve the effect of novation or financing. Instead, the reason cited Jalan Raja Laut is there a need to explore into new was that the vendors/contractors felt 50350 Kuala Lumpur contracts? If we need new contracts, uneasy when they have to sign two MALAYSIA what shall be the features, rights and agreements, as well as to deal directly General Line : +603-2781 4000 obligation that it will carry? These with the banks. Hence, it is no longer Fax : +603-2692 4094 aspects need further research and in use and the standard Bai’ Bithaman Email : info@isra.my ISRA will certainly keep you posted Ajil home financing facility consists of a with the updates! Property Purchase Agreement and a Website: www.isra.my
  6. 6. SECTOR REPORT • capital market International Shari’ah Research Academy for Islamic Finance The relationship between Going back to our original apprehension in the introduction, what leakage in commodity leakage are we referring to? How can commodity Murabahah cause leakage in Murabahah and the Islamic finance industry? Is the whole operation or activities of commodity Sukuk pricing Murabahah susceptible to leakage? These are some vital points that we must clarify to help enhance our comprehension of By Shabnam Mokhtar the matter and avoid creating confusion R e search Consultant, ISRA in the market. bank buys commodities (metals on LME or Commodity Murabahah has been Diagram 2: Commodity Murabahah CPO as for the case in Malaysia) and sells extensively applied in the Middle employed in deposit mobilization this commodity to the client on a deferred Eastern market while it is a relatively new basis. The client as the owner of the product in Malaysia. Although much 1. Client buys commodity on spot basis commodity now sells the same commodity from broker A has been discussed and written about 2. Client sells the commodity to Islamic to another broker so he could obtain the commodity Murabahah (also known as bank using Murabaha on deferred cash he was looking for and utilize it in his Tawarruq or reverse Murabahah), this basis (cost + profit) operation. The ability to give the client the 3. Islamic bank sells the metal to Broker article aims to shed light into how the cash he was looking for renders popularity B on spot basis and obtain cash leakage in commodity Murabahah may to commodity Murabahah. 4. Islamic bank makes the payment of affect the pricing of Sukuk. selling price upon maturity On the other hand, when using commodity Murabahah as a deposit mobilizing instrument, since the client has Leakage in commodity the money and is looking for avenues to Murabahah 1 place the fund and earn return, he would Broker A Client $ first buy the metal (using the bank as his AAOIFI Shariah Standard No. 30 defines agent) and then sell it to the Islamic bank Tawarruq as purchasing a commodity on a deferred basis. Effectively the client for a deferred price and selling it to a 2 has made a placement that resembles third party for a spot price so as to obtain 4 1. Islamic bank buys 1 Islamic commodity on spot basis Broker A 3 Islamic bank from broker A $ Broker B bank 2. Islamic bank sells the $ commodity to Client using Murabaha on 2 deferred basis (cost + 4 profit) “The concern of abuse that allows 3. Client sells the metal to Broker B on spot basis leakage of Islamic funds into conventional and obtain cash financial market only arises from the 4. Client makes periodic 3 deposit taking activities,” Badlisyah Abdul Client Broker B payment to Islamic $ Ghani, the CEO of CIMB Islamic clarified. bank He highlighted that it is important to know that there is nothing wrong with commodity Diagram 1: Commodity Murabahah employed in financing Murabahah as a financial product from Shari`ah perspective. It is valid under the Shari`ah principle of Tawarruq. cash. It can be applied to facilitate true a fixed income deposit since now he will “There are many commodity commodities trading or can be employed be receiving a fixed return i.e. the mark Murabahah products out there that are as a financing and deposit instrument up charged in the selling price of the genuine and are managed in a 100% in the Islamic finance industry. Diagram commodity. The Islamic bank would now Shari`ah compliant manner; including 1 below illustrates a basic structure on-sell the commodity to another broker, the utilization of the proceeds from such of commodity Murabahah used in a gets the cash and invests it elsewhere. This product. The wrongness of commodity financing transaction. Simply put, if the is illustrated in Diagram 2 below. Murabahah arises only when the product client is looking for funding, the Islamic
  7. 7. SECTOR REPORT • capital market abusing bank’s commodity Murabahah is abused to facilitate collection of Islamic funds for usage in activities that ultimately product. When the banks who have these involves non-Shari`ah compliant activities and worst, investments in riba-based financial commodity Murabahah products is asked instruments. This abuse leads to the leakage of Islamic funds into the conventional riba- where the funds are actually utilized and based financial industry,” the well-known banker elaborated. for them to disclose their matching Islamic Avenues that lead to leakage of assets they would respond that they are not required to do so under law or regulation. Islamic fund Many of them even refused to include a provision in the commodity Murabahah One must wonder how this leakage could creep into the deposit taking leg of agreement that states the proceeds are commodity Murabahah? Referring to Diagram 2 above, when the Islamic bank has to be used for 100% Shari`ah compliant sold the commodity to Broker B, it will obtain cash. The next question is, what does the purposes because they do not want to be Islamic bank do with the cash? Does it invest in its own operation (which is of course trapped by the requirement,” Badlisyah Shari`ah compliant) or does it enter into a back to back commodity Murabahah shared his experience in the market. transaction with a conventional bank? If the Islamic bank enters into parallel commodity Murabahah arrangement with a conventional bank, now the Islamic fund is placed with a conventional bank. Implication from The follow-up question would be, where does the conventional bank place this leakage of Islamic fund? Does it have a Shari`ah compliant asset to invest in or does the conventional bank utilize the Islamic fund to finance its conventional asset? The problem of leakage funds would slither in when the conventional bank uses the proceeds it has obtained from Why should the leakage of commodity commodity Murabahah to finance its conventional activities or invest in non-Shari`ah Murabahah be an important concern compliant activities. Simply put, the counterparty of the commodity Murabahah deposit to the Islamic capital (ICM) market opens the avenue for leakage (via the utilization of proceed). The same problem may participants? What will be the implication occur if a client places the fund directly to an Islamic window of a conventional bank. from this leakage? According to Badlisyah, The phenomenon is depicted in Diagram 3 below. ICM products are seen as tools to facilitate effective liquidity management for Diagram 3: Leakage in commodity Murabahah deposit placement Islamic banks and Islamic investors and it competes directly with commodity Murabahah products. ICM’s growth 1 Client/ Broker A and success will replace commodity Islamic bank $ Murabahah and prevent the leak while the failure of ICM will benefit the commodity 1. Client/IB buys commodity Murabahah abuser. We can thus say that on spot basis from broker A 2 there is negative relationship between 2. Client/ IB sells the commodity to conventional bank using the demand for commodity Murabahah Murabaha on deferred and ICM instruments because both are basis (cost + profit) 3 substitute product. Conventional 3. Conventional bank sells the Broker B Bank “The leakage essentially causes the $ metal to Broker B on spot demand for ICM product to be weak. Both basis and obtain cash ICM product and commodity Murabahah Leakage: provides fixed income return however Where is this commodity Murabahah typically provides proceed better return than ICM products as banks invested can simply quote a higher return while the return on ICM products depends on credit rating and appetite of investors. As such, more Islamic banks and Islamic How deep is the leakage? In other more than half of the amount is estimated investors prefer to place their investment in words, how severe is this problem? Although being managed by conventional banks commodity Murabahah, thus causing the a full fledge research would be needed to with Islamic window under the commodity majority of Islamic funds to be placed in ascertain the exact depth of the problem, Murabahah products, which can be in the conventional banks with Islamic windows. Badlisyah provided some estimate of the form of a fund or a treasury product. This inadvertently will cause the market outflow. He noted that out of the reported “The situation becomes worst when demand for ICM product to become US$1.3 trillion Islamic funds currently Islamic banks who genuinely take smaller,” Badlisyah enlightened. managed in the Islamic finance industry, Islamic funds innocently place it in the
  8. 8. SECTOR REPORT • capital market International Shari’ah Research Academy for Islamic Finance He further explained that since the conventional banks are now middleman for the Islamic funds, the issuer of ICM product is then dependent on the conventional bank to take up any offering of new ICM products. “As a result the expected higher price tension that you would expect from a larger investor base (i.e. both conventional and Islamic investors) is lost. The cost of ICM products becomes higher and becomes less attractive. Data shows that the price for ICM product particularly Sukuk are now about 20bps to 50bps more expensive than conventional bonds in the Badlisyah Abdul global debt capital market,” Badlisyah Ghani, CEO, quoted. CIMB Islamic Contrary to the global Sukuk market, the Sukuk pricing in Malaysia has been cited to be tighter than the conventional Conclusion bond. Badlisyah upholds that this is the affecting pricing in the Middle East Sukuk Sukuk pricing is certainly an area that positive impact resulting from no leakage market. One needs to keep in mind that the warrants attention for research and will in commodity Murabahah. “All commodity leakage may not be a direct independent benefit the issuer and investor in the Murabahah products in Malaysia have to variable that affects Sukuk pricing, it may Islamic capital market. The broader be managed in line with the Islamic Banking however be an intervening i.e. indirect research topic may look into factors Act 1983 which requires 100% Shari`ah variable that affects the demand (or affecting Sukuk pricing. While there may compliance in business operations. With investor base) for Sukuk. Therefore, besides be a number of other determinants that no leakage into the conventional market, studying the determinants of Sukuk influence pricing, research should be Islamic funds are forced to find Islamic pricing, one could also embark on a study carried out to explore if the non-leakage assets. As a result, it adds to the demands to determine factors influencing Sukuk in commodity Murabahah is one of the for ICM products on top of demands from demand, where the leakage may have a reason contributing to tighter pricing in conventional investor base. That is why in more direct impact. Wait for ISRA’s findings Malaysia. A comparative analysis could Malaysia Sukuk is 3-20bps cheaper than on the topic! then be undertaken to evaluate factors conventional bond,” he reasoned. Interested to buy copies of ISRA books? By DR . ASYR AF WA JDI D ATO’ DUSUKI Contact Haji Abdul Rahim Sairan for further info and price! rahim@isra.my
  9. 9. SECTOR REPORT - takaful The Concept of Insurable Interest from Shari`ah Perspective By Zaharuddin Muhamad A s s ociate Researcher, ISRA The term insurable interest was originally Shari`ah compliant. We have to evaluate Life Insurance coined in 1774, in conjunction with the Life the operation of claims in the Takaful Insurance Act in Britain. Insurable interest • Everyone is considered to have an sector for us to further understand this. is an important pre-requisite for insurance insurable interest in their own lives as The Takaful buyers pay certain premium contract because an insurance contract well as the lives of their spouses and (money) in order to enjoy certain benefit without insurable interest is technically dependents. or protection in future. If the benefit in null and void for all purposes. This article • The insurable interest only needs future is paid in monetary forms, and there aims to give some background on the to exist at the time the policy is was no property damages (life insurance origin of the insurable interest concept in purchased. for example), this would result in exchange the conventional space and evaluate the of money for money and thus stumble into concept from Shari`ah perspective. the problem of riba. The Life Assurance Act of 1774 in Britain In cases that involves property Background of the was enacted at a time when wagering damages, the exchange of money is concept (gambling) contracts were still enforceable allowed because the payment of money at common law since it was passed before There is no formal and authoritative was actually a compensation for the the enactment of the Gaming Act of 1845. definition of insurable interest. In general, damage suffered. This is allowed by the The purpose of the Life Insurance Act was a person who may suffer financial loss from Maliki school and is known as Hibah therefore to prevent wagering under the an event has an insurable interest in the Bitthawaab. Nonetheless, in my opinion, veil of insurance. Before the enactment property or event. A common example payment of money to compensate for of the Act, there were instances where always cited to exemplify the concept is future damages, physical damages to a some prominent leaders’ and celebrities’ as follows. “If your house (that you own) is person’s body or any other payment that life were insured and eventually these damaged by fire, the value of your house is compulsory in Islam, does not qualify as figures were found dead mysteriously. Just has been reduced, and thus you have property damages that is specified in the imagine, if anyone could buy insurance suffered a financial loss resulting from the Maliki school. Therefore payments for these on a celebrity’s life for example, the fire. By contrast, if your neighbour’s house types of claims should not come from the person would obtain a sum of money if the (which you do not own), is damaged by participant’s premium pool. celebrity dies. This would open up avenue fire, you have not suffered a financial loss.” for life threatening moral hazards. The Insurable Interest You therefore have an insurable interest in person who bought the insurance could and Takaful Act in your own house but not in your neighbour’s arrange for the death of the celebrity. house. Thus you can insure your house, but Malaysia The Act wanted to curb the risky moral not your neighbour’s house. Diagram 1 hazard that could prevail in the society if In Malaysia, the concept of insurable below illustrates the concept of insurable just anyone could take insurance on any interest has been included in the interest in the general and life insurance unrelated person’s life or property. Conventional Insurance Act 1996 to ensure category. this Act conforms to the Contracts Act Insurable interest from 1956. On the contrary, as far as the Takaful Shari`ah perspective Diagram 1: The concept of insurable interest Act 1984 is concerned, the concept of insurable interest has yet been included in The concept of insurable as described General Insurance the Act. above does not contradict with the In order to avoid the same legal requirement of Shari`ah. However, for a • You have an insurable interest in any reparation that happened in the recent Takaful contract to be Shari`ah compliant, property you own or which in your BBA cases, it is proposed that the Takaful insurable interest is not the only element possession. Act include clauses on the importance of that must be present. In other words, • The insurable interest must exist the concept of insurable interest and a the concept of insurable interest alone both at the time the insurance is Shari`ah guide to insurable interest. would not make a Takaful contract purchased and at the time a loss occurs.
  10. 10. 10 EVENT UPDATES International Shari’ah Research Academy for Islamic Finance This year was a relatively short year for ISRA, as we had only half year to charter our beginning. Nonetheless every month was filled with activities reflecting the enthusiastic spirit of the team behind the scene. Established on March 26th this year and after running the errands to assemble the team, we first organized ISRA Tea Talk in July for AIBIM members and with a group of Shari`ah advisors, to introduce ISRA and garner support from both the market players and the Shari`ah scholars. Other major events organized by ISRA include among others the Thematic Workshops, Luncheon Talks, Islamic Finance Seminar, MoUs’, besides ISRA’s participation in events organized by the industry.
  11. 11. 11 EVENT UPDATES Following this, the month of August was eight papers presented during the seminar as highlighted in Table 1 below. Sheikh Esam filled with ISRA-Industry discussion series M Ishaq, a well known Shari`ah advisor also joined the panel discussion during the seminar to gauge the experts’ view on pressing together with Badlisyah Abdul Ghani, CEO of CIMB Islamic and Dr. Aznan Hassan. The issues in the market. The Takaful unit kick papers, power points and video of the presentations can be downloaded at ISRA’s started the discussion series on August 19th website: www.isra.my – go to our download section! Don’t forget to pay us a visit! followed by the Banking unit on August 28th. After a short break in September Fiqh Aulawiyyat in reTakaful - Risk- Azman Ismail due to the month of Ramadhan, ISRA Based Capital (RBC) Standards in CEO, Independent Islamic Financial organized its first thematic workshop on Islamic Institutions. Planners Sdn. Bhd Dispute Resolution in Islamic Banking on Shari`ah Inspection in Surplus Dr. Younes Soualhi 30th October. The thematic workshop Distribution – Islamic Views and its Deputy Dean, IIUM Institute of Islamic involved a focused group discussion Current Implementation Banking and Finance approach where Mohamed Ismail Ownership and Hibah Issues in Takaful Dr. Azman Mat Nor Mohamed Shariff, a renowned lawyer - Classical Discourse and Current Assistant Professor, Kuliyyah Of from SKRINE presented a paper on the Implementation Economics Management Sciences, recent judgement of 12 BBA cases in the IIUM first session followed by three discussion What is the Future Outlook for Shari`ah Dr. Muhammad Syafii Antonio sessions. The participants in the thematic Harmonization? Member, Shariah Advisory Council, workshop were selected experts in the BNM industry, former judge, Shari`ah panel and Shari`ah Audit for Islamic Financial Dr. Abdul Rahim Abdul Rahman academician to ensure feedbacks and Services: The Needs and Challenges Associate Professor, IIUM Institute of inputs collated are concrete and relevant Islamic Banking and Finance to the market. ISRA would soon publish a The Status of Wa’ad and its Implications Dr. Nurdianawati Irwani Abdullah monograph that captures the presentation in Contemporary Islamic Banking Assistant Professor, Kuliyyah Of and discussions of the Dispute Resolution Economics Management Sciences, thematic workshop. Make sure you keep IIUM your eyes on this! We welcome feedback The Importance of Islamic Fixed Shamsun Hussain from the broader market participants and Income Securities in Developing the Director, Global Markets, CIMB academia alike! Islamic Financial Markets Islamic November was the month of the “Shari`ah-Compliance or Shari`ah- Dr. Aznan Hassan year as we had the inaugural ISRA Islamic Driven Approach?: Towards Full Shariah Advisor, Bursa Malaysia Finance Seminar (IIFS) and ISRA Launching Appreciation of the Philosophical Roots officiated by the honourable prime minister of Islam of Malaysia, Datuk Seri Abdullah Ahmad Badawi who was represented by the Last but not least, in the final month of the year ISRA organized the Council of Scholars Minister in the Prime Minister’s Department meeting and the International Shari`ah Scholars Dialogue (ISSD) gathering about 70 Datuk Seri Ahmad Zahid Hamidi. The prominent Shari`ah scholars from around the globe. The objective of the dialogue is governor of Bank Negara Malaysia, Tan to enhance the existing collaboration efforts on Shari`ah matters and strengthen the Sri Dr Zeti Akhtar Aziz was also present framework for cooperation and harmonisation amongst Shari`ah scholars. It will thus for the launching which was held on the provide the opportunity to deliberate and exchange ideas on the latest development in November 11th. During the launch, ISRA Islamic finance. The Islamic capital market also held its ISRA-industry meeting discussing also took the opportunity to sign a MoU issues in the Sukuk market. with AIBIM to co-operate on expanding research and training development model in Islamic Finance. Earlier in August ISRA has already signed another MoU with MNRB Re-Takaful to work together in developing an alternative model for reTakaful. The seminar received overwhelming responses. We could still recall how we had to explain to callers one day before the event how we were already overbooked. IIFS and the launching attracted around 400 participants from market players, regulators and academia. There were

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