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NewHorizon_pages_NewHorizon 07/10/2010 15:46 Page 1      NEWHORIZON                                                       ...
NewHorizon_pages_NewHorizon 07/10/2010 15:46 Page 2          Our standards.           Your values.                        ...
NewHorizon_pages_NewHorizon 07/10/2010 15:46 Page 3       NEWHORIZON Shawwal-dhu al Hijjah 1431                           ...
NewHorizon_pages_NewHorizon 07/10/2010 15:46 Page 4       EDITORIAL                                                       ...
NewHorizon_pages_NewHorizon 07/10/2010 15:46 Page 5       NEWHORIZON Shawwal-dhu al Hijjah 1431                           ...
NewHorizon_pages_NewHorizon 07/10/2010 15:46 Page 6       NEWS                                                           N...
NewHorizon_pages_NewHorizon 07/10/2010 15:47 Page 7       NEWHORIZON Shawwal-dhu al Hijjah 1431                           ...
NewHorizon_pages_NewHorizon 07/10/2010 15:47 Page 8       NEWS                                                            ...
NewHorizon_pages_NewHorizon 07/10/2010 15:47 Page 9       NEWHORIZON Shawwal-dhu al Hijjah 1431                           ...
NewHorizon_pages_NewHorizon 07/10/2010 15:47 Page 10       IIBI Retrospective                                             ...
NewHorizon_pages_NewHorizon 07/10/2010 15:47 Page 11       NEWHORIZON Shawwal-dhu al Hijjah 1431                          ...
NewHorizon_pages_NewHorizon 07/10/2010 15:47 Page 12       IIBI Retrospective                                             ...
NewHorizon_pages_NewHorizon 07/10/2010 15:47 Page 13       NEWHORIZON Shawwal-dhu al Hijjah 1431                          ...
NewHorizon_pages_NewHorizon 07/10/2010 15:47 Page 14       ANALYSIS                                                       ...
NewHorizon_pages_NewHorizon 07/10/2010 15:47 Page 15       NEWHORIZON Shawwal-dhu al Hijjah 1431                          ...
NewHorizon_pages_NewHorizon 07/10/2010 15:47 Page 16       ACADEMIC ARTICLE                                               ...
NewHorizon_pages_NewHorizon 07/10/2010 15:47 Page 17       NEWHORIZON Shawwal-dhu al Hijjah 1431                          ...
New horizon oct dec 2010
New horizon oct dec 2010
New horizon oct dec 2010
New horizon oct dec 2010
New horizon oct dec 2010
New horizon oct dec 2010
New horizon oct dec 2010
New horizon oct dec 2010
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New horizon oct dec 2010

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New horizon oct dec 2010

  1. 1. NewHorizon_pages_NewHorizon 07/10/2010 15:46 Page 1 NEWHORIZON ISSUE NO. 177 OCTOBER–DECEMBER 2010 SHAWWAL-DHU AL HIJJAH 1431 PUBLISHED SINCE 1991 GLOBAL PERSPECTIVE ON ISLAMIC BANKING & INSURANCE IIBI RETROSPECTIVE: CELEBRATING 20 YEARS OF THE IIBI ANALYSIS: FX FORWARD ACADEMIC ARTICLE: ORGANISED TAWRRUQ IN PRACTICE POINT OF VIEW: ISLAMIC OR ETHICAL FINANCE IIBI CAMBRIDGE WORKSHOP REVIEW
  2. 2. NewHorizon_pages_NewHorizon 07/10/2010 15:46 Page 2 Our standards. Your values. Dow Jones Islamic Market IndexesSM The Dow Jones Islamic Market (DJIM) IndexesSM are the world’s most renowned Shari’ah-compliant indexes. Developed with input from an esteemed board of Islamic scholars, they take a systematic, rules-based approach to screening for halal securities. Like all Dow Jones Indexes, the DJIM IndexesSM are subject to our stringent standards for quality and accuracy. Globally adopted, they are licensed to financial institutions worldwide for the creation of index-linked investment products and to benchmark Shari’ah-screened portfolios. Find out more about the Shari’ah-compliant indexes that investors have known and trusted for more than a decade. Visit www.djislamicmarkets.com today. “Dow Jones Indexes” is a licensed service mark of CME Group Index Services LLC (“CME Indexes”). “Dow Jones®”, “Dow Jones Indexes” and “Dow Jones Islamic Market Indexes” are service marks of Dow Jones Trademark Holdings LLC (“Dow Jones”), and have been licensed for use by CME Indexes.
  3. 3. NewHorizon_pages_NewHorizon 07/10/2010 15:46 Page 3 NEWHORIZON Shawwal-dhu al Hijjah 1431 CONTENTS Features 16 9 Celebrating 20 Years of the IIBI Mohammad Ali Qayyum looks back at the first 20 years of the IIBI and lays out the Institute’s plans for the future, supporting the UK as a centre of Islamic finance and providing training, education and research services. 14 Islamic Perspectives on Islamic FX Forward Dr Asyraf Wajdi Dusuki examines the recognition and use of hedging in Islamic finance, focussing particularly on the FX Forward structure based on wa`dan. 16 Organised Tawarruq in Practice Dr Salman H. Khan, Head of Shari’ah Office (Dubai) at Abu Dhabi Islamic Bank analyses organised tawrruq. He comes to the conclusion that, as practised today, it contravenes the principles laid down by both AAOIFI and ICFA. He suggests that both organisations and many other stakeholders in Islamic commerce would be comfortable with its eradication. 9 27 Islamic or Ethical Finance Usman Hayat ponders the question of whether the future in European retail markets lies with Islamic or ethical finance. He compares ethical and Islamic finance and asks whether the promotion of Islamic finance in European retail markets on an ethical basis would offer the best prospects for future growth. 39 Book Review Raficq Abdulla reviews ‘The Islamic Moral Economy’ by Shafiel Karim. Regulars HSBC 31 IIBI NEWS AND DIARY IIBI launches takaful certificate; Amanah Cambridge Workshop report; IIBI Bank awards post graduate diplomas; diary. 37 TECHNOLOGY NEWS Cambridge Workshop Path launch new cash flow monitoring 22 IIBI LECTURES capability to support liquidity 05 NEWS July and August Lectures reviewed; A round-up of the important stories management; SWIFT automates October lecture preview. Murabahah Messaging; Mashreq from the last quarter around the globe. 30 APPOINTMENTS Bank implement Oracle FLEXCUBE. www.newhorizon-islamicbanking.com IIBI 3
  4. 4. NewHorizon_pages_NewHorizon 07/10/2010 15:46 Page 4 EDITORIAL NEWHORIZON October–December 2010 Deal not unjustly, and ye shall not be dealt with unjustly. Executive Editor’s Note Surat Al Baqara, Holy Quran As we contemplate the first 20 years of the Institute’s work, the Islamic finance industry, if not at a crossroads in its development, certainly seems to be indulging in a bit of soul-searching. In this edition of NewHorizon, the first published by our new partners, Cambridge Corporate Management, some of this self-examination EXECUTIVE EDITOR Mohammad Ali Qayyum, comes to light. Director General, IIBI EDITORS Our book review is on ‘The Islamic Moral Economy’ written by Andrea Wharton Shafiel Karim, an IIBI graduate. He challenges whether our industry Sue Dobson lives up to the demands of Islamic morals and ethics, and asks IIBI EDITOR whether it is bound to fail due to the contemporary pressures of Mohammad Shafique world financial markets. Usman Hayat’s ‘Point of View’ is that in PUBLISHER secular economies, Islamic finance should emphasise its ethical Humphrey Tizard foundation in order to have broader appeal than just to the Muslim IIBI EDITORIAL ADVISORY PANEL community. There are also challenges to the validity of specific Mohammed Amin widespread practices – organised tawarruq is decried by Dr Salman Richard T de Belder Khan and the limitation of Islamic FX Forward transactions to true Ajmal Bhatty Stella Cox hedging operation is demanded by Dr. Asyraf Wajdi Dusuki. Dr Humayon Dar Iqbal Khan Dr Imran Ashraf Usmani To have a sound footing on which to develop, Islamic finance must go beyond the mimicry of conventional financial services engineered to comply with Shari’ah principles. That said, it should also meet PUBLISHED BY Cambridge Corporate Management Ltd the personal needs of Muslims and the business needs of those who Ickenham Manor may have competitors using conventional finance. Above all, it Ickenham Uxbridge should be practiced with a professional rigour that provides UB10 8QT excellence in financial services as well as meeting the standards Tel: + 44 (0)1895 625555 Email: newhorizon@cambcorp.co.uk being established within the industry. Website: www.cambcorp.co.uk So as the Institute looks forward to its next 20 years of service to CONTACT Advertising the industry, these challenges re-enforce our conviction that the Cambridge Corporate Management Ltd development of professional standards based around a moral code Ickenham Manor Ickenham should remain the cornerstone of our work. We also hope, however, Uxbridge to engage in research activities, which will lead to the development UB10 8QT of products and practices, which will meet not only the letter, but Tel: + 44 (0)1895 625555 Email: newhorizon@cambcorp.co.uk also the spirit of the Shari’ah. Website: www.cambcorp.co.uk SUBSCRIPTION Mohammad Shafique Institute of Islamic Banking and Insurance 7 Hampstead Gate Mohammad Ali Qayyum 1A Frognal Director General IIBI London NW3 6AL United Kingdom Tel: + 44 (0) 207 2450 404 Fax: + 44 (0) 207 2459 769 Email: iibi@islamic-banking.com This magazine is published to provide information on developments in Islamic finance, and not to provide professional advice. The views ©Institute of Islamic Banking and expressed in the articles are those of the authors alone and should not be attributed to the organisations they are associated with or their Insurance management. Any errors and omissions are the sole responsibility of the authors. The Publishers, Editors and Contributors accept no ISSN 0955-095X responsibility to any person who acts, or refrains from acting, based upon any material published in the magazine. The Editorial Advisory Panel exists to provide general advice to the editors regarding matters that may be of interest to readers. All decisions regarding the published content of the magazine are the sole responsibility of the Editors, and the Editorial Advisory Panel accepts no responsibility for the content. 4 IIBI www.newhorizon-islamicbanking.com
  5. 5. NewHorizon_pages_NewHorizon 07/10/2010 15:46 Page 5 NEWHORIZON Shawwal-dhu al Hijjah 1431 NEWS First Turkish Sukuk International law firm Hogan issued out of Turkey. The The Hogan Lovells’ team was landmark sukuk not only for Lovells has acted as transaction was oversubscribed led by Hogan Lovells’ Global Kuveyt Türk but also for international counsel to and has attracted a lot of global Head of Islamic Finance, Turkey. Structuring the sukuk Citigroup Global Markets interest, including from the Rahail Ali, who was assisted by was challenging – the parties Limited and Liquidity Turkish Government. Mehmet Senior Associate Roger had to reconcile requirements Management House for S ¸ek, Turkish Finance ¸ims Fankhauser and Associates under the Turkish civil law, Investment Company KSCC on Minister, recently described the Sema Kandemir and Mark English common law and the inaugural US$100m sukuk transaction as ‘a turning point’ Brighouse. Rahail Ali Shari’ah principles. Turkey has for Kuveyt Türk Katılım and expressed his hope that commenting on the issue of the always been a favoured Bankası A. S. (“Kuveyt Türk”). ¸ sukuk as an alternative financial sukuk, said: destination for Islamic financial tool ‘will make important institutions. This sukuk Kuveyt Türk’s US$100m sukuk contributions to the ‘It’s really pleasing to advise Citi promises to open up a whole due 2013 is the first sukuk ever development of the country’. and Liquidity House on such a new market.’ Volaw Judged to be Best Islamic Administrator/Trustee Volaw Trust & Corporate at University of London at the which has previously been During the course of Services Limited have been Summit’s Gala Dinner. It was presented to multi-national the Summit, Mr Norman awarded the Best Islamic accepted on behalf of Volaw by companies such as Deutsche participated as a panellist Administrator/Trustee Award in Trevor Norman, Volaw’s Bank and CIMB Islamic Bank, in the key debate between the Islamic Finance Awards at Director of Islamic Finance and Malaysia. The award recognises Shari’ah Scholars and the recent Sukuk Summit held in Funds Group. the work my team has done in Islamic finance practitioners, London on 9–10 June 2010. structuring and administering this being the third year in Now in its fourth year, the Commenting on the award Mr Islamic capital markets succession that he had Summit is generally regarded as Norman said, ‘It is a great products for more than 15 been invited onto this the leading Islamic Capital honour to receive this award, years.’ panel. Markets forum in Europe and was attended by over 200 delegates, with attendees from the Middle East and the Far East as well as Europe. The Sukuk Summit Awards panel of judges is made up of respected industry experts from across the GCC, Europe and the South East Asia, who are responsible for nominating those institutions and individuals that they deem to have attained outstanding achievements, success and excellence over the past 12 months. The Award was presented by Abdul Aziz Al Hinai, Vice President of the Islamic Development Bank and Dr Catherine Cowley, Senior Lecturer in Ethics and Finance www.newhorizon-islamicbanking.com IIBI 5
  6. 6. NewHorizon_pages_NewHorizon 07/10/2010 15:46 Page 6 NEWS NEWHORIZON October–December 2010 HSBC Amanah opens its first dedicated Islamic banking branch in Qatar HSBC Amanah recently opened its first branch dedicated to Shari’aah compliant products and services in Qatar. The branch, HSBC’s first dedicated Islamic banking branch in the MENA region outside Saudi Arabia, will serve retail and corporate customers. Speaking at the opening ceremony in Doha, Michael Geoghegan, HSBC Group Chief Executive Officer said: ‘As the leading international bank in the Middle East, HSBC is strongly placed for the tremendous growth opportunities in providing Islamic banking services here in Qatar and across the region. By combining our Islamic banking customers in many parts of the being the first bank to install bank in Qatar, offering retail, expertise in Saudi Arabia and world.’ an ATM in 1986 and lead commercial, institutional and Malaysia with our international managing Qatar’s first private banking services reach, we can meet the Over the past 50 years, HSBC Islamic sukuk for the through a network of six increasingly sophisticated has reached a number of government in 2004. HSBC is branches, 22 ATMs and 550 requirements of Islamic banking milestones in Qatar such as currently the biggest foreign employees. Two More Family Takaful Licenses Announced in Malaysia Improving economic conditions AMMB Holdings Berhad (70%) Tentera Malaysia Berhad enhance the development of and the growth potential for and Friends Provident Group (30%); the family takaful industry insurance in the region have plc, UK (30%); in Malaysia, in particular encouraged Bank Negara In granting the licenses the in penetrating untapped Malaysia to grant two further applicants’ financial soundness areas of business within ING Management Holdings family takaful licenses. The and resilience, track record, the family takaful industry (Malaysia) Sdn Bhd (60%), original two licenses were expertise, business plan and including microtakaful, Public Bank Berhad (20%) granted in April 2009. The four contribution towards financial medical and retirement and Public Islamic Bank approved organisations are: sector development in products. Perhaps more Berhad (20%); Malaysia, were taken into importantly, this move American International consideration. It is believed plays to Malaysia’s ambitions Assurance Berhad (70%) and The Great Eastern Life that the new family takaful to establish itself as an Alliance Bank Malaysia Berhad Assurance Company Limited operators have strong value international Islamic financial (30%); (70%) and Koperasi Angkatan propositions that will further hub. 6 IIBI www.newhorizon-islamicbanking.com
  7. 7. NewHorizon_pages_NewHorizon 07/10/2010 15:47 Page 7 NEWHORIZON Shawwal-dhu al Hijjah 1431 NEWS Could Malaysia Rival the UK in the Resolution of Islamic Financial Disputes? In a July address to the 21st Conference of Presidents of Law Associations in Asia in Kuala Lumpur, Datuk Muhammad Ibrahim, the recently appointed Deputy Governor of Malaysia’s central bank, made a bid to position Malaysia as an alternative to the UK as the legal system of choice for resolving Islamic financial disputes. He commented that recent cases tried in the English courts have highlighted the hesitancy of UK judges to deliberate on issues concerning Shari’ah principles in Islamic finance transactions. He also highlighted the fact that while evidence on Shari’ah matters can be admitted in UK courts, such evidence or advice is not binding. Harmonisation Committee, accept Malaysian laws and different interpretations of In Malaysia, on the other hand, comprising key government particularly the thorny issue of Shari’ah. there is a dedicated High Court stakeholders, including the for Islamic finance-related cases, Attorney General’s Chambers as where judges can refer to the well as industry players and SAC (Shari’ah Advisory experienced Islamic finance legal European Finance House Council) on questions relating practitioners. He also to the Shari’ah and the rulings announced that Tun Abdul Rebrands as QIB UK are then binding. The next step Hamid bin Mohamad, the for Malaysia would be to former Chief Justice of Malaysia harmonise existing laws to and a member of Bank Negara’s Qatar Islamic Bank’s (QIB) EFH obtained authorisation accommodate and facilitate Shari’ah Advisory Council subsidiary, European Finance from the UK Financial Islamic finance in the most would chair the committee. The House (EFH) has recently Services Authority in 2008 legally efficient way possible, remit of the Law Harmonisation rebranded as QIB UK in order and operates as a full service, because the future of Islamic Committee is to position and to reinforce its positioning stand alone Islamic finance depended on its agility strengthen existing laws as the within QIB’s expanding global investment banking and innovativeness in laws of choice for Islamic network. The primary institution located in Berkeley developing new products. He financial transactions. motivation behind the Square, London. QIB UK believed that clear and easily rebranding is to further bring benefits from having enforceable laws would serve At the end of the day, the EFH under the umbrella of immediate access to QIB’s to benefit the industry success or otherwise of this QIB’s well-established identity extensive network of worldwide. move will depend on the as one of the regions foremost correspondent financial willingness of other countries, Islamic banking institutions institutions throughout To that end he announced the particularly the major financial and the world’s 4th largest the Islamic world and formation of a Law centres in the Middle East, to Islamic bank in terms of assets. beyond. www.newhorizon-islamicbanking.com IIBI 7
  8. 8. NewHorizon_pages_NewHorizon 07/10/2010 15:47 Page 8 NEWS NEWHORIZON October–December 2010 Islamic Bank of Britain – Weathering the Storm The Islamic Bank of Britain (IBB) Our customers will be reassured products. These two new pro- employee numbers imply, but opened its doors to a great that one of our founding ducts launched in August are a perhaps it really needs to be fanfare in 2004. Six years later in shareholders has continued to 3.99% fixed rental rate product examining its basic proposition the summer of 2010, The Times commit to us for the long term until January 2012 and a variable and appealing to the larger newspaper described the venture and work with IBB to achieve its rental rate product at 4.99%. ethical banking market rather as a flop. This is perhaps a harsh exciting objectives.’ than just the 2 million Muslims judgment on a brave attempt at a Having weathered the financial in the UK. The Co-operative totally new type of UK institu- For the record, IBB claims to crisis of the last two years, albeit Bank’s 2009 Ethical Consumer- tion, a retail bank targeting the have grown its deposits, assets with the help of QIIB, can they ism Report estimated that ethical Muslim community – other and customers every year since look forward to calmer waters? banking in the UK had grown by Islamic banks in Britain had its launch in September 2004. It One of the issues with which more than 225% between 1999 largely limited their businesses to reported customer deposits of they have to come to grips is and 2008. That sounds like a managing the wealth of private more than £186 million, whether their position as a UK tempting market for a bank that individuals from areas such as customer financing at £46 million Islamic bank is tenable. They will is finding the going a little tough the Gulf States and Malaysia. and nearly 50,000 customers in also have to deal with a more with the rather limited market it its 2009 financial statements. It rigorous regulatory system. It has is currently targeting, but again It may also have been somewhat had, however already raised been suggested that one of the they will need more capital to premature. A couple of weeks £7.5 million of additional capital reasons why IBB needed the fund this growth and after The Times article appeared, in January 2009 and losses rose £20 million capital injection in unfortunately, because of the IBB had secured a £20 million to £9.5 million in 2009, an July was to comply with current issues with liquidity instruments, capital injection from founding increase of more than 75% over FSA regulations on capital this will probably have to be held shareholder Qatar International the previous year. Despite the adequacy; those regulations are as non-revenue-producing cash. Islamic Bank (QIIB), taking capital injection, IBB has warned about to get a whole lot tougher. QIIB’s stake in the bank to over that it may have to moderate its Add to that the fact that liquidity IBB has resolved its immediate 80% via the issue of 2 billion 1p growth plans and possibly management can be a problem financial problems, and with the shares. Commenting on the reduce the numbers of branches for Islamic banks in the UK, support it clearly enjoys from its refinancing of IBB, Sultan and employees. because many of the liquidity principal backer, has every Choudhury, Commercial instruments approved by the FSA chance of achieving its laudable Director said, ‘This investment in That said, within weeks, IBB are not Sharia’ah compliant. aims. If despite everything, IBB allows us to grow our announced that the additional however, they do not succeed, it business and remain the pioneer capital would help to underpin IBB will no doubt be looking will be a major setback for in providing innovative Islamic their plans to grow their Islamic carefully at their cost base, as the Islamic retail banking, not only in finance products to retail mortgage alternative, the Home banks comments about cuts to the UK, but across Europe, which customers in the UK and beyond. Purchase Plan and release new growth plans, branches and is watching to see what happens. 4th Annual Takaful Summit 2010 The Takaful and Re-Takaful increasing asset-based, Shari’ah- ‘Making Takaful Fit for Purpose’ as Sudan, Malaysia, GCC and industry is one of the most compliant financing are fuelling was the theme of this year’s Europe. The Takaful Summit is vibrant sectors in the Islamic the demand for Islamic insurance. summit, which took place in becoming a ‘must not miss’ in finance space. It has been grow- London in July. Subjects covered the Islamic finance events’ ing at a rate of 30% year on The industry, however, is still ranged from banctakaful and calendar, where takaful year and this expansion shows worth less than US$5 billion and technology problems through industry experts from around little sign of slowing. High with the global insurance market Halal insurance in the UK to the the globe gather to exchange economic growth, increasing valued in excess of US$3.5 growth of ikhlas takaful ideas, discuss the challenges awareness, a greater desire for trillion, there are good prospects operators in Malaysia. The and how to tackle the obstacles Shari’ah-compliant offerings and for significant expansion. speakers came from as far afield faced by this burgeoning sector. 8 IIBI www.newhorizon-islamicbanking.com
  9. 9. NewHorizon_pages_NewHorizon 07/10/2010 15:47 Page 9 NEWHORIZON Shawwal-dhu al Hijjah 1431 IIBI Retrospective Celebrating 20 Years of the IIBI As the Institute of Islamic Banking and Insurance (IIBI) reaches its 20th anniversary, Mohammad Ali Qayyum, current director general and executive editor of NewHorizon, reflects on the organisation’s achievements over this period and its support for the burgeoning Islamic finance sector, in line with the vision of its founder and Islamic finance pioneer, the late Mr Muazzam Ali. The IIBI’s roots were planted firmly in the DMI and of the International Association of mid-1980s when Mr Muazzam Ali set up Islamic Banks. the International Centre for Islamic Studies (ICIS) in London to promote Islamic Mr Muazzam Ali was also an important teachings, history and culture and, in contributor as a thinker and educator on the particular, the application of these to subject. In setting up the IIBI, he provided contemporary problems. Gradually, the the earliest forum for western bankers to emphasis moved to Islamic banking and learn about Islamic finance and to network insurance, with a focus on education, with those involved. This contributed training and research. The activities directly to the opening of Islamic windows associated with Islamic finance began to in banks and ultimately to the setting up of operate under the current name in 1990 and dedicated Islamic banking subsidiaries by in 1994 moved on to be formally major western banks. incorporated as a company limited by guarantee in the UK. Qayyum’s own involvement with the IIBI began in 2003, when he was asked by a A Pioneering Organisation mutual friend to help Mr Muazzam Ali with the management of the IIBI’s premises and The IIBI was probably the first organisation his involvement increased until he was of its kind and, since it was not closely persuaded to accept his present full-time affiliated to any particular group or country, role in 2004. ‘Since my own background it had a high degree of independence. This was in conventional banking, Mr Muazzam allowed it to set its own agenda. Mr Ali would use me as a sounding board for Muazzam Ali was the source of governance his ideas and shared with me his passion for and he surrounded himself by qualified the Institute and for Islamic finance in people and advisory groups that continue to general,’ he recalls. The late Muzzam Ali assist to this day. Qayyum saw the contribution Mr Muazzam He had been associated with Dar Al Maal Ali was making to the developing industry. Al Islami Trust (DMI), a pioneer in the field ‘I recognised his stature in the market and of Islamic banking, since its inception in the the great respect he enjoyed among early 1980s, becoming DMI’s vice-chairman professionals and with the UK regulator. He and was also involved with other financial was consulted by many, many people – even organisations. He was keenly aware that a by the late Lord Eddie George on occasion, successful move to Islamic banking would the then governor of the Bank of England.’ depend heavily on education, training and research; a realisation that ultimately led Broader than Religious Beliefs him to set up the IIBI, with the full endorsement of His Royal Highness, Prince The IIBI’s mission is to pursue original Mohamed Al Faisal Al Saud, chairman of research and run programmes of education www.newhorizon-islamicbanking.com IIBI 9
  10. 10. NewHorizon_pages_NewHorizon 07/10/2010 15:47 Page 10 IIBI Retrospective NEWHORIZON October–December 2010 and training, which will help to develop a consumers and HNWIs. This comes in underlying Islamic finance; it is not enough wider knowledge base and deeper response to widening interest among simply to develop Islamic financial products understanding of the world of finance, Muslim communities, whose members want that mimic conventional products. As these based on those principles emphasised in to ensure that aspects of their daily life, products become more complex, ensuring Islamic economics that promote equity, including their commercial dealings, are in that this is the case is increasingly difficult. socio-economic justice and inclusiveness in tune with their religious beliefs. They are all dealings. not the only audience for IIBI services, IIBI training and education programmes however. have helped hundreds, if not thousands, to ‘Mr Muazzam Ali wanted to maximise the develop their knowledge of and skills in coverage we could give, so we worked with ‘Many of our students are non-Muslims,’ applying theory to practice and identifying students from all over the world,’ says says Qayyum. ‘They are attracted to the how best to meet their clients’ requirements. Qayyum. ‘At our peak we had students moral code that governs Islamic finance and enrolled from 80 different countries. We to its ethical basis – the avoidance of Warren Edwardes, CEO of Delphi Risk subsidised fees for disadvantaged students interest; the avoidance of links to prohibited Management, the product development and from developing countries and our activities like speculation, gambling and risk management consulting firm and a information services could also be accessed alcohol and the fact that it must be used for member of IIBI Islamic Banking Advisory free of charge via our website. We continue a productive purpose, rather than for the Group, feels that the IIBI’s greatest and most to operate in this way today.’ generation of money for its own sake. Such lasting contribution to Islamic finance has prohibitions are not unique to Islam. been to facilitate the exchange of ideas and The demand for education and training in Throughout history people have therefore encourage development. ‘It has Islamic finance grew rapidly, in line with the endeavoured to create a fair and prosperous been my privilege to chair lectures and development of the industry, as it became economic system, based on the bedrock of speak on various themes at IIBI meetings in evident that there was an acute worldwide certain core human values such as London, going back to my first lecture in shortage of appropriately skilled personnel. truthfulness, honesty, fairness, justice and 1995, right up to my most recent in At that time there was no institution geared the rule of law. These values are not September 2010. The networking and to producing people who were well-versed confined to religion alone, but encompass fellowship at meetings has created a strong in the principles and concepts of Islamic care for people, nature, creation and the bond amongst participants with a common finance. This led the Institute to first environment.’ purpose of taking Islamic finance forward, develop a diploma, which was later whilst keeping to its roots and basic upgraded to the post graduate diploma Mohammed Amin, Islamic Finance principles.’ course in Islamic banking and insurance. Consultant and previously UK Head of Islamic Finance for PricewaterhouseCoopers The IIBI monthly lectures, which started in In the early days the growth in Islamic LLP, has worked closely with the Institute October 1994, continue today to benefit finance tended to be top-down, driven over the years and supports the important City professionals and instruct the wider primarily by governments or government role it plays in the growing market, ‘The UK community in the concepts and applications agencies in the Gulf and Middle East, which has grown rapidly in Islamic finance and is of Islamic finance, while more in-depth had excess liquidity. The movement, now ranked eighth worldwide in terms of instruction can be gained through the IIBI’s however, was also driven by the desire of Shari’ah-compliant banking and takaful three-day residential workshop held at the high net worth individuals (HNWIs) in the assets. Training and education are essential University of Cambridge – the last GCC region to invest in a manner that was to the UK’s ability to compete in Islamic workshop was attended by Islamic and Shari’ah-compliant. Importantly, the Al finance and have been pioneered by the IIBI, conventional bankers, fund managers, Baraka Banking Group in Bahrain, led by whose independence from financial regulators, accountants, lawyers and risk Sheikh Saleh Abdullah Kamel and Prince institutions and from Muslim majority managers. Mohamed Al Faisal Al Saud’s Switzerland- countries has enabled it to concentrate on based DMI Trust contributed substantially the quality of its programmes without being ‘Going forward,’ adds Mr Edwardes, ‘I to the development of Islamic finance from constrained by commercial or political would hope the IIBI continues to develop the early 1980s onwards, taking considerations.’ and strengthen its education and training shareholdings in leading Islamic banks and programmes to provide a solid foundation, investment companies. IIBI Achievements but also continues to encourage and facilitate debate.’ More recently there has been rapid growth In the courses and training that it runs the in the retail sector and wealth management, IIBI emphasises the need for Islamic bankers The IIBI has played a key role in promoting with Islamic offerings competing with and members of the Shari’ah advisory London as a leading hub of Islamic finance. conventional banking products for boards to be committed to the principles In order to further strength London’s role in 10 IIBI www.newhorizon-islamicbanking.com
  11. 11. NewHorizon_pages_NewHorizon 07/10/2010 15:47 Page 11 NEWHORIZON Shawwal-dhu al Hijjah 1431 IIBI Retrospective Islamic finance it signed an agreement with interest in Islamic finance has grown around the Chartered Institute for Securities and the world; similar institutions have been Investment (CISI) in 2009 based on the set up in various countries, forming mutual promotion of each other’s useful forums where members can exchange qualifications. ideas. The Institute also works closely with ‘The Institute is striving hard to develop industry organisations to promote Islamic these standards and to reach out to more finance globally. It is closely involved with and more people who want to be trained in global, standards-setting bodies in the the principles of Islamic finance,’ says industry such as the Accounting and Qayyum. ‘This is reflected in the gradual Auditing Organisation for Islamic Financial improvements we are making in the key Institutions (AAOIFI) and provides support functions of education and training. We to their students from the UK and EU. It has have recently introduced new courses like a similar working agreement with the Diploma in Islamic Banking and the Malaysia’s International Shari’ah Research Certificate in Takaful to widen the choice Academy for Islamic Finance (ISRA) with for potential students and we have also whom a second one-day conference is being increased the frequency and range of our held on 29 November 2010 in London. training programmes and conferences.’ Feedback from students and colleagues in As Islamic financial transactions become the industry suggests that IIBI qualifications more widespread and more complex, are well accepted by employers, with the Qayyum would also like to see the IIBI Institute’s graduates serving in all of the become a centre of expertise, where major markets including GCC, Europe, the interested parties could come and seek help Indian Sub-continent and Malaysia. in analysing Islamic product offerings. ‘In the future, we would also like to add the Professor Rodney Wilson, from Durham role of advocacy to the IIBI’s activities,’ he University’s School of Government and comments. International Affairs confirms that, ‘the IIBI has played a major role in Islamic finance in Of course, increased activity and the greater London through its lectures, seminars and interest in the education offered by the IIBI courses. Its diplomas are internationally puts a constant strain on resources, which recognised, and have been taken by are in any case limited. The Institute has hundreds of Muslims and non-Muslims applied for charitable status and looks to interested in Islamic finance.’ He is have this confirmed before the end of the confident that, with London likely to year. ‘This will enable us to reach out to remain the leading centre for Islamic finance patrons and potential donors; to bring in in the West, ‘the IIBI will continue to play a extra resources to help us run additional His was the vision of what could pivotal role with the support of the banking programmes and carry out more original be achieved and, in the and financial community in the UK.’ research for the public benefit,’ affirms intervening period, his Institution Qayyum. Into the Future has provided not only a forum Islamic finance has an established niche now and meeting place where the Mr Muazzam Ali was undoubtedly a in many countries around the world and principles of Islamic finance pioneer. His vision was for the IIBI to have a there are even moves at an international permanent role in setting professional level to coordinate and standardise activities could be shared, discussed and standards; in promoting education, training so setting it on a firmer foundation – set out for the future, but a key and research and in information sharing through AAOIFI, for example. educational and research about Islamic finance. This, combined with his stature in the industry, has left the IIBI It is perhaps worth remembering, however, resource to demonstrate to with a legacy that has inspired its members that when the IIBI (and its precursor) was Muslims and the wider and helped it to move forward over the last founded by Mr Muazzam Ali, more than 20 community that a fairer financial 20 years. Its role has been replicated too; as years ago, this was done at time when system is possible. www.newhorizon-islamicbanking.com IIBI 11
  12. 12. NewHorizon_pages_NewHorizon 07/10/2010 15:47 Page 12 IIBI Retrospective NEWHORIZON October–December 2010 Islamic banking was in its infancy and still in general. He expressed disappointment at before it can claim to have ‘arrived’ and very fragmented. the lack of a codified, consensus-based what has been achieved so far is no more Islamic law that could be taught in than a tiny fraction of what is possible and His contributions have not gone universities the world over. He lamented the necessary. unrecognised. This year the Malaysia fact that with all the resources that Allah International Islamic Financial Centre (S.W.T.) has bestowed upon the Muslim, very In future issues of NewHorizon, we will be (MIFC), under a plan devised by Bank little financial support is given to research, trying to establish where barriers remain to Negara Malaysia (Central Bank) and the academic positions in universities and general further progress, in a ‘State of the Industry’ Securities Commission Malaysia, is scholarship on Islamic law, finance and series which will be looking in depth at each proposing to give Mr Muazzam Ali a economics. of the major challenges likely to shape the posthumous mention and put on record his future of the industry over the next 10-20 untiring contribution to the development of Mr Muazzam Ali believed that Muslims years. Islamic finance. could learn useful lessons from the financial developments in the West and expressed the Reflecting on the significance of IIBI’s view that ‘if Islamic banking has to develop, contribution, Richard T. de Belder, Partner one has to take advantage of innovative and Global Head of Islamic Finance with products wherever available.’ Equally, he Denton Wilde Sapte LLP, comments, ‘Over often admonished the Westerners to learn the last 20 years the IIBI has proved to be a from Islam for their own benefit, as he did most durable and invaluable organisation. in his opening speech to the IIBI Conference In the mid 1990s, when Islamic Finance was on the Documentation of Islamic Banking not as mainstream as it is now, it was one of Products, where he said, ‘I would suggest the very few bodies where you could get that Western bankers and financial experts information on Islamic finance. The way in shed their deep-rooted prejudice against which the IIBI has expanded its training and Islam and examine the Islamic parameters. educational programmes is to be highly You will, if you look with an open mind, commended; it is thanks to the foresight of note that therein lies the solution for most Mr Muazzam Ali, whose work has of the financial ills of the present age. For continued under the dedicated stewardship your own sake, accept anything good of Mr Qayyum, that so many people over wherever you find it. Do not stick to the years have been able to obtain stereotyped philosophies.’ knowledge about Islamic finance. The work of the IIBI has helped to raise the profile of There is no denying that Islamic banking the UK as a leading Islamic finance centre and insurance have made impressive and I am confident that it will continue to progress in a short period – some 500 be a key provider of education, training and Islamic financial institutions are functioning research services in the years to come.’ around the world today. This is no mean achievement, considering that the pioneers In the January-March 2011 State of the Industry: A Long and Winding of Islamic banking had to start from scratch issue, we begin our ‘State Road and without the benefit of past experience. of the Industry’ series by In 2004, the late Mr Muazzam Ali wrote to Western countries with significant Muslim looking at constraints on Dr Abbas Mirakhor, who was the first to populations are looking to make the the development of a truly hold the INCEIF Chair of Islamic Finance, necessary regulatory and legal reforms that global market in some following a long and distinguished career as would facilitate the market in Islamic an economist and having made a considerable financial products. There is significant financial instruments as the contribution in the field of Islamic economics, potential too in North and East African result of different finance and banking. He spoke of his sadness countries, with Kenya fast developing as the interpretations of what is that not enough was being done to realise the Islamic finance hub of East Africa and in benefits of Islamic finance for mankind. He Russia, where there are more than permissible according to was concerned with the divergence of views 30 million Muslims. Shari’ah and in the among Muslim Fuqaha (jurists) on the absence of defined permissibility of various transactions in It should not be forgotten, however, that standards across markets. Islamic finance in particular and Islamic law Islamic finance still has a long way to go 12 IIBI www.newhorizon-islamicbanking.com
  13. 13. NewHorizon_pages_NewHorizon 07/10/2010 15:47 Page 13 NEWHORIZON Shawwal-dhu al Hijjah 1431 ANALYSIS Islamic Perspectives on Islamic FX Forward Associate Professor Dr Asyraf Wajdi Dusuki is currently the Head of Research Affairs, International Shariah Research Academy for Islamic Finance (ISRA). Prior to joining ISRA he was an Assistant Professor of Islamic Banking at the Kulliyyah of Economics and Management Sciences, International Islamic University Malaysia (IIUM). He also serves as a Chairman of Affin Group Shariah Committee and Shariah consultant and advisor to several financial institutions and advisory firms including London-based Mortgage Company Chain Mender Limited, London-based Halal Industries PLC, US- based Islamic Financial Institution United Chartered Bank (UCB), Singapore-based IFIS Business Advisory Pte Ltd and AFTAAS Shariah Advisory Sdn. Bhd. He holds a Master of Science degree in Islamic Economics, Banking and Finance and a Ph.D in Islamic Banking and Finance from Loughborough University in the UK. The Recognition of Hedging in Islam 1. In Islamic financial activities, the pre- condition is that investors bear the risks. Islam recognises the concept of hedging and This is based on the principle of ‘al- its importance particularly with respect to ghunmu bi al-ghurmi’ which means that managing risk to protect wealth. One of the entitlement to profit is accompanied by most important objectives of Shari’ah (also responsibility for attendant expenses and popularly known as Maqasid al-Shari’ah) is, possible loss. This is backed by the in fact, to preserve and protect wealth from Hadith “Inna al-Kharaj Bi al-Dhaman”, being exposed to harm and damage or loss. which means the entitlement to profit Many Quranic verses and Hadith of the from something is dependent on Prophet Muhammad (peace be upon him) responsibility for attendant expenses and have clearly indicated the importance of possible loss and defects (Hadith narrated taking every strategic measure to curb and by al-Tirmizi, Abu Dawud, Ibn Majah minimise anticipated risk that could and Ahmad). Therefore, any investment detriment one’s property. The jurists of both activities based on the separation between the past and the present have, however, ‘al-ghunm’ (profit) and ‘al-ghurm’ consistently asserted that the instruments (losses), where investors are qualified to and mechanisms used to manage risk must receive profits without bearing ‘daman’ not in any way violate a Shari’ah ruling. (responsibility for losses or risks), are not allowed. Any contracts or contractual Resolution of the 28th Dallah al-Barakah terms which are meant to guarantee Symposium investment capital and profit are contradictory to the Shari’ah. This assertion is strongly entrenched in the Shari’ah principle that ‘end does not justify 2. Minimising and avoiding risks are mean’. This was explained in detail in the permissible if managed in line with 28th Dallah al-Barakah Symposium in Jeddah Shari’ah mechanisms, contract and on September 16 2007, which specifically instruments, as long as they do not bring discussed the issue of hedging (tahawwut). about matters that contravene Shari’ah The resolution issued was as follows: principles (Resolution No. 2:28). www.newhorizon-islamicbanking.com IIBI 13
  14. 14. NewHorizon_pages_NewHorizon 07/10/2010 15:47 Page 14 ANALYSIS NEWHORIZON October–December 2010 Realising this fact, many Islamic financial exchange the currency sometime in the other countries, as they are ‘constructive institutions today have come up with future, but have already fixed a rate today, money’ according to the decision of the various Islamic versions of hedging while the contract is also sealed today. This International Islamic Fiqh Academy (based instruments to minimise the risk of market contravenes the basic Shari’ah rules in the Kingdom of Saudi Arabia). fluctuations including foreign currency governing the exchange of currency (bay’ al- exchange rate risk. Apparently the sarf). In bay’ al-sarf, it is a requirement for Consequently, Islamic FX Forward is based fluctuations in currency rates could severely an exchange which involves two different on Shari’ah principles and contracts aimed affect the profitability and sustainability of currencies to be transacted on an on spot at achieving the same objectives as its a firm. basis. conventional counterpart, which is mainly to hedge against currency rate fluctuation The Conventional and Shari’ah Viewpoints There are many Hadith which govern the risks. For the Islamic FX forward there are rules regarding the exchange of currencies. three main structures that are commonly In conventional finance, FX forward has The best known Hadith is the one reported offered in the Islamic financial market been used predominantly to manage and on the authority of Ubadah ibn al-Samit, to today. One structure is based on the hedge against the risk of fluctuations in the effect that the Prophet (peace be upon contract bay’ al-tawarruq (commodity currency exchange rates. FX forward is him) said, ‘Gold for gold, silver for murabahah transaction); the second is essentially a derivative instrument that silver’ until he said ‘equal for equal, like for structured using the concept of promise or involves an arrangement between two like, hand to hand; if the kinds of assets wa’d and the third is based on two parties to conduct a sale in future at a price differ, you may sell them as you wish, unilateral promises or wa’dan. This article fixed today. Both settlement and delivery provided it is hand to hand (spot).’ focuses on the FX Forward structure based will only happen on future agreed dates, (Reported by Muslim in his Sahih). Here the on wa’ dan. while the contract is sealed today. reference made to gold and silver is analogous to paper and coin money as a Wa’dan From the Shari’ah viewpoint, the problem medium of exchange in today’s world. The with the conventional FX forward structure currency of each country is considered as Wa’d is an Arabic word which literally arises when the parties involved want to being of a kind that is different from that of means “a promise”. The value of the wa’d Diagram 1: Islamic Currency Forward Based on Wa’dan (Two Unilateral Promises) 1 Customer Bank Promises to sell USD1 million at the rate of 3.5 if exchange rate USD/MYR >3.5 2 Bank Customer Promises to buy USD1 million at the rate of 3.5 if exchange rate USD/MYR is below or equal 3.5 14 IIBI www.newhorizon-islamicbanking.com
  15. 15. NewHorizon_pages_NewHorizon 07/10/2010 15:47 Page 15 NEWHORIZON Shawwal-dhu al Hijjah 1431 ANALYSIS in Shari’ah is similar to the value of a social second promise made by the bank, to sell Institutions (AAOIFI) in its Shari’ah promise in Common Law. The promise may the USD for MYR at the pre-agreed rate of Standard No.1 on trading currencies clearly have moral force in that breaking it may 3.50 as it will get more MYR than going states that, ‘A bilateral promise is prohibited provoke opprobrium (social blame), but it out to the market and selling at 3.40. in currency trading when it is binding upon does not entail legal obligations or legal both parties, even when it is done to treat sanctions. The Islamic Fiqh Academy has In all the possible scenarios discussed the risk of decline in a currency’s value. As decided that the wa’d is ‘obligatory not only above, therefore, the actual trade of for a unilateral promise from one party in the eyes of God but also in a court of currencies will only take place on the only, that is permissible, even if it is law’ when it is made in commercial maturity date (as in our example above binding’. transactions; it is a unilateral promise and it 2 October 2010) and hence, it is claimed has caused the person to whom the promise that the structure does not violate the Despite the criticisms, unresolved Shari’ah has been made to incur liabilities. It is also a Shari’ah requirements pertaining to matters and the complexities inherent in the requirement that the actual sale – if the currency trading, which require the issue of two unilateral promises in promise was in respect of selling a certain currencies to be traded on a spot basis. structuring the Islamic forward currency asset – be concluded at the time of exchange product, many Islamic financial institutions of the offer and the acceptance (known in The major concern pertaining to this especially in the Middle East are applying it. Arabic as majlis al-aqad) and not at the time structure is the similarity of two unilateral Few discussions have taken place related to of the wa’d. The person to whom the promises (wa’ dan) to bilateral promises this topic; however, many scholars have promise is made also has the possibility to (muwa’ adah), which has been a contentious approved it and deem it different from claim actual damages from the person Shari’ah issue for a long time. A bilateral muwaadah. making the promise, if the latter backs out promise is a promise given by two parties on a wa’d to each other on the same subject matter Conditions of Use and the effect of the promise will take On the other hand, wa’dan is two unilateral place at the same time. This promise The approvals, however, given by many promises given by two parties to each other might be associated with certain conditions Shari’ah committees of the respective in which the two promises are not or without any conditions. An example financial institutions are subject to the connected to each other and its application of such a promise is when A promises to condition that the instrument is exclusively depends on two different conditions. sell a certain commodity to B at a certain used for hedging purposes. This means that Diagram 1 on page 14 illustrates how these date and B in return promises A to buy an Islamic forward product can only be two unilateral promises are used in the same commodity on the same date. used as an insurance activity aimed at structuring an Islamic currency forward. The two promises might be connected to protecting an asset from any unexpected or The Customer promises the Bank that it will certain situations such as fluctuations in the undesirable change in the value of an asset. sell USD1 million for MYR at a USD/MYR price of the commodity at the time of This also implies that an Islamic forward exchange rate of 3.50 (i.e. for MYR 3.5 transaction. cannot be used for funding and trading million) on 2 October 2010; if the activity by means of speculation to generate USD/MYR exchange rate is above 3.50. The objection to this kind of promise is the profit as widely practiced in conventional effect of such promise is similar to a finance. The Bank promises the Customer that it will contract, taking the view that a promise is buy USD1 million for MYR at a USD/MYR binding. This means, when two unilateral To ensure this, some financial institutions exchange rate of 3.50 (i.e. for MYR 3.5 promises are agreed, it will give the effect of give a written representation to get a million) on 2 October 2010; if the a contract as the obligations of both parties guarantee and declaration from the USD/MYR exchange rate is below or equal are established at the point of the promise, counterparty subscribing to the Islamic to 3.50. which is similar to a contract. (Islamic Fiqh FX forward product, thereby making sure Academy Decision No. (3/2). In addition, that the FX forward is only used for the Let us assume the USD/MYR rate on some argue, if such a contract is binding to purpose of hedging and not speculation. 2 October 2010 is above 3.50 (example both parties, then it falls within the For other financial institutions, the FX 3.60), the bank will then exercise its right prohibition of selling a debt for a debt and forward is only used for hedging when under the first promise made by the is, thus, not permitted. If, however, it is there is a clear underlying transaction customer, to buy the USD for MYR at the not binding on either party then it is and contract, for example the ijarah agreed rate of 3.50 as it is cheaper than permitted. (First Barakah Conference, contract. This is to ensure that the going out to the market and buying at 3.60. Fatwa No. 13) underlying asset or asset foundation for the Conversely, if the rate on 2 October 2010 forward instrument is based entirely on falls below 3.50, say 3.40, then the In fact, the Accounting and Auditing actual and real economic activity and not a customer will exercise their right, under the Organisation for Islamic Financial fictitious one. www.newhorizon-islamicbanking.com IIBI 15
  16. 16. NewHorizon_pages_NewHorizon 07/10/2010 15:47 Page 16 ACADEMIC ARTICLE NEWHORIZON October–December 2010 Organised Tawarruq in Practice: A Shari’ah Non-Compliant and Unjustified Transaction The Joint Stance of the OIC Fiqh Academy, and AAOIFI By Dr Salman H. Khan, Head of Shari’ah Office (Dubai) at Abu Dhabi Islamic Bank Background Tawarruq – ICFA’s Position Organised tawarruq has been heavily used The ICFA’s Resolution 179 on organised by institutions offering Islamic financial tawarruq states: services (IIFSs) in substantial volumes for many years, largely for the purposes of ‘It is not permissible to execute both liquidity management (often referred to as organised and reverse tawarruq, because ‘commodity murabaha’) and the provision simultaneous transactions occur between the of cash-in-hand, i.e. ‘neutral’ consumer financier and the mustawriq (party seeking finance. Typically, party A purchases a finance), whether it is done explicitly or commodity on deferred payment and implicitly or based on common practice, in rapidly sells the same commodity on spot, exchange for a financial obligation. This is where the seller in the first trade is considered a deception, i.e. in order to get supposedly a different party to the buyer in the additional quick cash from the contract; the second. As a result, party A is left hence, the transaction is considered as with a cash lump sum on one hand containing the element of riba.’ and a corresponding higher debt obligation on the other. The overall Clearly, the ICFA’s concern is with a transaction will be arranged or ‘organised’ concealed buy-back transaction, where the by an IIFS. metal (or other commodity) is used as a prop to justify a transaction in which the real purpose is to exchange money now for The OIC’s (Organisation of Islamic more money later. Moreover, the phrase Conference) International Council of Fiqh ‘simultaneous transactions between the Academy (ICFA) in Makkah ruled in April financier and the mustawriq, whether it is 2009 that organised tawarruq and reverse done implicitly or explicitly’ deliberately tawarruq were not permissible, since they highlights the reality that in today’s Islamic were a ‘trick’ to get cash now for more cash financial sphere both transactions of paid later. This pronouncement has stirred purchase and sale of the tawarruq strong emotions. For some, it seemed to be commodity are in effect made between the rather hasty, not well thought out and opposed to the needs of the Islamic finance same financier and the customer, The view expressed in this notwithstanding cosmetic industry. In the view of others, however, it paper is that rather than arrangements adopted by IIFSs that was no less than a very welcome and long contradicting each other, the purport to demonstrate the use of overdue breath of fresh air for the industry. ‘brokers’ or ‘third parties’. This is ICFA’s judgement on tawarruq ‘implicitly’ done via various ‘netting and AAOIFI’s Shari’ah Among the various critics who have arrangements’. questioned the validity of the ICFA Standard 30 on tawarruq are pronouncement, some have made the To sum up, the ICFA prohibits tawarruq actually both in agreement specific point that, inter alia, the judgement where any of the following occur: with each other, even though goes against the AAOIFI’s ruling on the permissibility of tawarruq, as laid out under ❑ There are effectively only two parties, i.e. this agreement may not have AAOIFI Shari’ah Standard 30. no real, unconnected third party been explicitly stated. 16 IIBI www.newhorizon-islamicbanking.com
  17. 17. NewHorizon_pages_NewHorizon 07/10/2010 15:47 Page 17 NEWHORIZON Shawwal-dhu al Hijjah 1431 ACADEMIC ARTICLE ❑ There is concealed buy-back The key conditions laid out by AAOIFI ii) Customer A takes constructive/ Shari’ah Standard 30 are, therefore, that the real possession of the metal ❑ The transaction is a ‘trick’ with an transaction should not in essence be two embedded fixed return party (ignoring the ‘cosmetic involvement’ Sale-2 iii) Customer A sells same metal to of third parties); it should be real, i.e. the Buyer 1 (a genuine third party Since the above three features typically metal being traded should genuinely move other than Seller 1) characterise virtually all organised tawarruq from seller to buyer; there should be no transactions done by IIFSs, the ICFA holds ‘trick’ or collusion involved and hence, no iv) Metal actually moves from the that ‘organised’ tawarruq should be fixed embedded return. These conditions warehouse of Seller 1 to Buyer 1 disallowed. actually describe a type of tawarruq that by and Buyer 1 completes possession definition cannot be the organised tawarruq Tawarruq – AAOIFI’s Standard 30 that is typically used in today’s Islamic In fact, point (iv) in Sale-2 is what must finance industry. happen, as a necessity, as implied by What does AAOIFI Shari’ah Standard 30 AAOIFI Shari’ah Standard 30, clause 4/5: say? The key clause in Shari’ah Standard 30 All these conditions are based on concerns is Article 4/5: that are identical or very similar to those Moreover, the commodity should not return held by the ICFA. Therefore, it is correct to back to the seller by virtue of prior ‘The commodity (object of monetisation) agreement or collusion between the two say that AAOIFI’s organised tawarruq is must be sold to a party other than the one parties or according to tradition. consistent with the ICFA’s implicit definition from whom it was purchased on a deferred of unorganised tawarruq. The key lies in the payment basis (third party), so as to avoid So a key question relating to point (iv) is: separation of ‘how it is’ (therefore e’na which is strictly prohibited. Moreover, Does the commodity bought by the prohibited by ICFA) and ‘how it should be’ the commodity should not return back to customer in Sale 1 (on deferred payment) (if permitted by AAOIFI). Although the seller by virtue of prior agreement or eventually definitely leave the warehouse of everyone may not perceive it thus, in effect collusion between the two parties or Seller 1, as Standard 30 clause 4/5 above the ICFA has passed the recent resolution according to tradition.’ clearly requires? The answer is, by and against organised tawarruq in light of the fact that the conditions for the permissibility large, no. There are a number of reasons for In practice, Article 4/5 is not followed in of tawarruq (as laid out by AAOIFI) are this. Firstly, the fact remains that the overall organised tawarruq. In addition to Article virtually never followed. Rather than there purpose of the seller in the transaction (who 4/5, Articles 4/7, 4/8, 4/9 and 4/10 (all in being a conflict, in reality the ICFA agrees effectively provides the liquidity by selling Standard 30) also highlight the divergence with and reinforces AAOIFI Shari’ah on deferred payment) is: between AAOIFI’s permitted tawarruq and the tawarruq that is typically practiced. In Standard 30. summary, Articles 4/7 to 4/10 say the ❑ To advance liquidity following: Why Organised Tawarruq Must Go ❑ To make a return on the money advanced, ❑ The bank or its agent should not sell the built into the price of Sale-1 commodity on the customer’s behalf, if the The joint stance of AAOIFI and the OIC customer initially bought that commodity Fiqh Academy is, ‘Do it properly, or don’t Not to trade, and therefore, certainly not to from the bank – neither should the bank do it at all.’ take on the kind of risk that is associated arrange a proxy third party to sell this with normal and genuine commodity commodity In the light of AAOIFI Standard 30, trading activities theoretically, the only way for tawarruq to ❑ Rather, the client should sell the operate properly would be via three real and Therefore, from the seller’s point of view: commodity either himself or through his distinct parties, namely: own agent. At the most, the bank should ❑ There is no purpose or intention to provide the client with the information ❑ Customer A physically transport any of the commodities needed to sell the commodity. ❑ Seller-1 that he holds in his warehouse In reality, quite clearly, AAOIFI Shari’ah Standard 30 is therefore also implicitly ❑ Buyer-1 ❑ In fact, this activity would in the seller’s saying that: view incur unfeasibly high costs and And two distinct and unconnected sales: moreover, this is precisely not the ‘If your organised tawarruq cannot fulfil purpose of their involvement with such these stringent conditions, then you cannot Sale-1 i) Customer A buys metal on liquidity provision mechanisms as do organised tawarruq.’ deferred payment from Seller 1 tawarruq. www.newhorizon-islamicbanking.com IIBI 17

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