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A (58)

  1. 1. Legal Risks and Good Governance for theGrowing Islamic Finance Industry Hamid Yunis PartnerKarachiDecember 2006
  2. 2. Contents1. Fundamentals of Islamic (Shariah Compliant) Finance  Basic requirements and philosophy2. Overview of Islamic Finance Market  Types of Islamic Finance Products  Basic Assumptions  Additional Matters3. Use of Islamic Finance in Different Market Sectors4. Governance  Background  Products and processes  Regulator/operator issues  Specific issues  International Guidance  Basel  IFSB Standards5. General Principles  Non executive functions6. Conclusion 1
  3. 3.  Fundamentals Islamic (Shariah) Finance:  Quranic (Shariah Law) principles;  Riba (“interest/unjustified rewards/unlawful gain”);  Gharrar (“uncertainty, risk, speculation”);  Halal (“religiously permissible”);  Haram (“not religiously permissible”);  Qard Hasan – (“good loan”);  Al-Wadia – (“safekeeping”). 2
  4. 4.  Basic Requirements and Philosophy  true risk sharing;  no exploitation of a weaker position;  not socially unproductive;  not economically wasteful;  promotes economic and social development; and  charitable (“zakat”). 3
  5. 5. Overview of Islamic Finance Market Islamic and Dual Banking Systems Retail Islamic finance products offered for a number of years, some low key e.g. Middle Eastern banks, others high profile e.g. HSBC Islamic Windows in major Global Banks Islamic Bank of Britain Primary Market: initially basic finance products Compatibility with conventional products 4
  6. 6.  Types of Islamic Finance Products:  Equity;  Trade Financing;  Asset Financing  Lending;  Wholesale & Retail Products: • loans; • partnership investments; • forex; • fund transfers; • letters of credit; • securities safe keeping; • investment management and device; 5
  7. 7.  Islamic Finance (Cont’d):  Al-Wadia (safekeeping): usually not remunerated;  Takaful (Insurance);  Funds Work;  SUKUK/Securitisation (Capital & Secondary Markets); and  Derivatives/Funds Management. 6
  8. 8.  Basic Assumptions  Underlying asset must be acceptable  Different interpretations on what proportion of asset must not be “haraam”  Proposed structure of transaction has to be acceptable  No prohibited activities (proportionate approach)  Need to account for regulatory requirements and comply with two sets of law (Shariah and law of country) 7
  9. 9.  Additional Matters  Zakat (specified amounts to be allocated from disposable income);  Shariah Boards – competition, pragmatic approaches;  Urf (custom);  Darura (overriding necessity);  Maslaha (general interest to justify);  Hiyal (ruse) 8
  10. 10. Use of Islamic Finance in Different Market Sectors Real Estate Project Financing  Co-financings (Power, LNG, Oil & Gas) Retail Banking  Depositors  Investment Account Holders General Leasing  Ijara Asset Finance Bond (SUKUK) Issuance Private Equity Funds Insurance (Takaful) Capital Markets (Sukuk/Arboun/Salaam) 9
  11. 11. GovernanceBackground Developing, structuring and marketing Shariah compliant financial products can be cumbersome and complex IIFS needs to account for regulatory requirements and comply with two sets of jurisprudence/law (Shariah and the law and regulations of relevant jurisdiction) 10
  12. 12. Products and Processes Products and Processes need to be effective from the following viewpoints:  Understandable  Competitively priced  Tax effective  Available and transparent  Not administratively burdensome  Not “alien” to regulatory requirements Governance of institution offering Islamic financial services needs to be the same 11
  13. 13. Regulator/Operator Issues Scope for the continuing development of good corporate governance in the field of Islamic finance No inconsistency with Shariah 12
  14. 14. Specific Issues Islamic finance industry needs to, in particular, focus on issues regulators will be concerned with Remember that Shariah-compliance will not normally be an issue for non-Islamic countries or where Shariah is not part of a general legal framework Shariah Supervisory Board presence and scrutiny therefore essential 13
  15. 15. Specific Issues (cont…) Islamic finance industry regulators need to consider regulation of Shariah Supervisory Board Islamic financing industry need for a unified front to regulators Standardisation of models used, terminology and treatment Dissemination of codes of best practice Practical Adaptability 14
  16. 16. Guidance Many forms of International and National Guidance available OECD principles UK Stock Exchange Combined Code  Cadbury Report  Hempel Report  Higgs Report 15
  17. 17. Guidance (cont…) France/Germany: different forms of governance models US: Sarbannes-Oxley Other/Corporate Governance Standards  Country Specific  Accounting and Industry Specific IFSB guidance  Principles outlined  “Comply or Explain” 16
  18. 18. Basel Basel Committee on Banking Supervision  1999 paper  2006 paper 17
  19. 19. General Principles Establish Good Governance Policy as a principle of Shariah Monitoring and work of  Board Committees  Executive Management  Shariah Supervisory Board  Internal and external auditors  Different Stakeholders Mechanisms of balancing the roles of different stakeholders i.e.) shareholders, management, IAHs 18
  20. 20. Non Executive Functions Role of non-executive directors/managers  Guidance  Oversight  Compliance issues  Future compliance policy 19
  21. 21. Contact: HAMID YUNIS Taylor Wessing Carmelite 50 Victoria Embankment Blackfriars London EC4Y 0DX Tel: 0207 300 7000 Fax: 0207 300 7100 Direct: 0207 300 4088 E-mail: h.yunis@taylorwessing.com Web: www.taylorwessing.com 20
  22. 22. Taylor Wessing OfficesBerlin Brussels Cambridge Düsseldorf Frankfurt Hamburg London Munich ParisRepresentative offices: Alicante ShanghaiAssociated office: Dubaiwww.taylorwessing.com Düsseldorf / Neuss London Representative offices:Berlin CarmeliteJägerstrasse 51 Königsallee 92a Alicante D-40212 Düsseldorf 50 Victoria Embankment Paseo Explanada de EspañaD-10117 Berlin BlackfriarsGermany Germany No. 1, 4-Izda Tel +49 (0)211 83 87 0 London EC4Y 0DX E-03002 Alicante, SpainTel +49 (0)30 88 56 36 0 United KingdomFax +49 (0)30 88 56 36 46 Fax +49 (0)211 83 87 100 Tel +34 (0)96 51 42 805 duesseldorf@taylorwessing.com Tel +44 (0)20 7300 7000 Fax +34 (0)96 52 00 248berlin@taylorwessing.com Fax +44 (0)20 7300 7100 alicante@taylorwessing.com Am Krausenbaum 42 london@taylorwessing.comBrusselsTrône House D-41464 Neuss4 Rue du Trône Germany Shanghai Tel +49 (0)2131 7 40 30 0 Munich 15th Floor United PlazaB-1000 Brussels Isartorplatz 8Tel +32 (0)2 289 60 60 Fax +49 (0)2131 7 40 30 50 Unit 1509 neuss@taylorwessing.com D-80331 Munich No. 1468 Nanjing West RoadFax +32 (0)2 289 60 70 Germanybrussels@taylorwessing.com Frankfurt a. M. 200040 Shanghai Senckenberganlage 20-22 Tel +49 (0)89 2 10 38 0 China D-60325 Frankfurt a. M. Fax +49 (0)89 2 10 38 300 Tel +86 (21) 6247 7247Cambridge muenchen@taylorwessing.com24 Hills Road Germany Fax +86 (21) 6247 7248Cambridge CB2 1JW Tel +49 (0)69 971 30 0 shanghai@taylorwessing.comUnited Kingdom Fax +49 (0)69 971 30 100 frankfurt@taylorwessing.com Paris Associated office:Tel +44 (0)1223 446400 42 avenue MontaigneFax +44 (0)1223 446401 Dubai Hamburg 75008 Pariscambridge@taylorwessing.com Tel +33 (0)1 72 74 03 33 Neuer Wall 44 D-20354 Hamburg Fax +33 (0)1 72 74 03 34 21 Germany Tel +49 (0)40 3 68 03 0 Fax +49 (0)40 3 68 03 280 hamburg@taylorwessing.com

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