From Business Islamica by Kashif Hasan Khan

Understanding the Current Debate on Tawarruq and Sukuk: A Study of the Juristic Opinions of Indian and Arab Scholars

Introduction

Tawarruq and sukuk are the two most controversial Islamic financing tools currently prevailing in the market. Since Islamic finance has its major expansion in the Arab World and its potential market is now seen in India, which is the worlds second largest Muslim Populated country, we find that religious scholars are showing greater interest in it from an Islamic perspective. But, how do the Arab and Indian Muftis (jurists) interpret it, considering its applicability in a financial market dominated by the interest based financial system?
This paper basically aims to examine these points in order to understand whether the current practices of Tawarruq and sukuk are permissible or not in the views of Indian and Arab Shari’ah scholars.

A Paradigm Shift

Islamic banking came into existence in the beginning of the 1960s but only started receiving attention and gaining high popularity in the last two decades. Now, Muslim and non-Muslim countries are giving a warm welcome to the industry, with a number of scholars over that period concentrating on the various aspects of Islamic banking and considering it to be in its infancy because of its small size compared to the gigantic conventional industry. Therefore, despite exemplary advancements and achievements, there remain a number of controversies over various underlying concepts and practices. There are also many issues that were raised in the early 1980s, such as -do Islamic banks operate according to the principle of profit and loss sharing? -Who are the benefactors and who stands to lose from such banks? Currently, there is a paradigm shift. We hardly find questions related to the principle of profit and loss sharing; rather there are some more complicated issues like risk management, transparency and Shari’ah supervision.

Here it would be relevant to answer such questions. But there are others. What is the importance of Shari’ah opinions in financial matters and what needs do these experts have to formulate consensus? And where do the opinions of both the Arab and Indian Shari’ah scholars differ in understanding the permissibility of Sukuk and Tawarruk?

Fatwa on financial Transactions

In order to understand the opinion of Shari’ah scholars it would be pertinent to start a discourse on the fatwas issued on financial transactions in India and the Arab world. The fatwa on finance is a most attractive term for both Muslims and non-Muslims, mainly because most of the Muslims are not aware of the terminology. It should be kept in mind that India is the country where fully fledged Islamic financial institutions are not yet in existence, therefore, the Fatwa issued by Indian scholars would provoke more questions such as how can Shari’ah scholars know and formulate opinions on financial matters without having first accepted the system of interest-free banking in India. Indian fatwas are mostly based on the assumptions that whatever form of Islamic finance is in practice, it will also be applicable in the Indian scenario. Arab Shari’ah scholars arent much concerned with the perceived structures of the Indian scholar in a country where most of the financial rules are governed by RBI (the Reserve Bank of India) without taking into consideration the religious sentiments of the people. That is why, when the Indian Muftis (Jurists) deliver any fatwa concerning the Islamic finance it generates debates on its viability in India. The only platform gathering Shari’ah scholars in India is the Islamic fiqh Academy (IFA).

As far as the fatwas in the Arab region, the first of these on the said issues was in 1904, and they addressed the legitimacy of interest banking. But serious attention was only given after the 1970s when Islamic banking started serious operations and some innovations sprung up. During the early seventies, Shari’ah academies also emerged into the scene.

Fatwa Shoppings

Shari’ah Supervision is essential in the Islamic banking Industry because the purpose is to ensure that the financial institutions operate in conformity with Shari’ah. It is usually made up of a number of jurists who provide clarification in regards to any questions that the financial institutions may have (Usmani, 1998). Presently, it has become an impediment to the entire Islamic banking Industry. Fatwa shopping a procedure that enables the financial institutions to seek a fatwa on financial products or contracts from the scholars who, they assume, will consider such products or contracts as Shari’ah-compliant and later grant a fatwa is a threat to the Islamic finance industry because the process works against the harmonization of fatwa.

Malaysian scholars might be considered too liberal for the Gulf Cooperation Council (GCC) investors whereas Pakistani or Indian Scholars follow different Shari’ah guidelines to those defined by GCC Shari’ah scholars. There is additionally the issue of differing interpretation of existing Shari’ah rulings. The existence of various sects in Islam and the fact that each sect has its own authority or body which provides guidance and interpretation on Shari’ah issues makes the process complicated. Differences do arise and exist between the countries and regions. For instance, Islamic financial restrictions are more liberal in Malaysia compared to the Middle East where the financial regulations have been applied more strictly.

Opinions on Sukuk and Tawarruq

Tawarruq is a transaction whereby a needy person buys something on credit and then immediately, in a separate transaction with another party, sells it for cash. It has become increasingly popular in Saudi Arabia, UAE, and other GCC (Gulf Cooperation Council) countries in recent years. However, more recently, two prominent jurists, both housed in Saudi Arabia, tackled the issues of Tawarruq and Fiqh. The Academy of OIC in Jeddah has already forbidden Tawarruq. The Fiqh Academy of the Muslim World League in Mecca issued two rulings on the transactions. The first opinion was issued during the 15th session of the Academy in 1988. It permitted the contract subject to the condition that the customer does sell the commodity to its original seller, to avoid direct interest evidence of Inah as a legal stratagem to circumvent the prohibition of Riba. The second took place in the 17th session of the academy held in December 2003; they tackled the issues of Tawarruq as practiced by Islamic banks today and forbade it. Many Muslim jurists frowned upon the practice of Tawarruq because of its similarity to bai al inah, and its propensity to incur Riba in the transactions. Whereas some of the scholars hold opinion that it is extremely suspicious from the point of Shari’ah compliance.

The well known Indian Scholar M.N. Siddiqui, who is perhaps the most influential writer of the first generation of modern Islamic Economists, says that the Tawarruq practice must be of limited use only for meeting unavoidable liquidity whereas Sheikh Mohammed Mukhtar Al Salami, head of the Shari’ah (Islamic) panel in the Jeddah based IDB, said the present practices of Tawarruq deal as -concealed usury which is prohibited in Islam. Prominent scholar Sheikh Nizam Yaqubi, disagrees with the Saudi Arabian ruling and this has triggered a fierce debate.

AAOIFI (Accounting and Auditing Organization of Islamic Financial Institutions) issued its Shari’ah standard 30, indicating the correct way of doing Tawarruq. In reality, of course, Shari’ah standard 30 is never implemented. In recognition of the need for expert, independent advice, and supervision on Shari’ah related matters, the AAOIFI established standards requiring every provider of Islamic financial services to have its own Shari’ah Supervisory Board (SSB) thus, in its auditing standard for IFI no. 4 AAOIFI stated in paragraph three that every Islamic Financial Institutions should have a SSB.

Sukuk

Sukuk has been derived from the term -sak in classical Arabic. The term -Sukuk (the plural of sak) as used today is synonymous with -Islamic bonds. But, in fact, it is different from it. It is a new dimension of this very industry that came into existence only two decades ago; it was an attempt by the modern scholars to confront the conventional debt market, because in the present era one can find that the debt based market has been rooted much deeper than the equity based market. Sukuk is the subject of an ongoing discussion, weighing the balance of halaal and Haram in the context of a gradual approach.

Sheikh Taqi Usmani, a leading Shari’ah scholar and chairman of the AAOIFI board of Shari’ah, said that 80% of sukuk are not Shari’ah-compliant. According to him it violates the principle of risk and profit sharing on which it should be based, and as a result, the AAOIFI brought together its board of Shari’ah scholars to clarify the issues raised by him and to form a consensus among Shari’ah scholars. They published a six point paper in 2008 outlining their position on sukuk, which included a ruling that purchase undertaking at face value for Musharaka and Mudarabah sukuk structures are no longer permissible. The Fiqh Academy of Jeddah is also in favor of the six point paper by AAOIFI.

According to Siddiqui, distancing sukuk from debt is necessary to make them free of Riba and the element of Maysir (gambling). The thing which makes the sukuk a debt instrument in the view of Siddiqui is inclusion of Murabaha receivables into the package of assets against which sukuk are issued and the commitment to redeem them at their face value at some future date, with regular periodical returns being paid in between. There is no difference, in effect, between this and some of the money lent for an interval being serviced by periodical payment covering the interval.

CONCLUSION

While going through these two important modes of finance, considering the opinions of scholars both from India and the Arab world, it emerges that Sukuk is getting approval from a number of scholars and is also found to be a viable option for a long-term project financing. However, Tawarruq is still found to be a more controversial and ambiguous financing nature, where most of the Islamic banks seek legal roots to justify lending.

About the author

Writer is a research fellow at the centre for West Asian Studies, Jamia Millia Islamia University, New Delhi, India. He can be reached at Kashif_islamicfinance@yahoo.com

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This humble effort by Dr. Imran Usmani will surely help the students, practitioners, bankers, customers and anyone interested in Islamic Banking to have a better understanding on all the major areas under the umbrella of Islamic Banking.

ISBN:
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Edition:
FIRST (2002)

2012 LSE-Harvard public lecture on Islamic Finance

Date: Wednesday 22 February 2012
Time: 6.30-8pm
Venue: Hong Kong Theatre, Clement House
Speakers: Mukhtar Hussain, Professor Volker Nienhaus
Chair: Justice Cranston

It is felt that conventional financial systems have failed and should be replaced, or supplemented, by more ethical banking and socially responsible finance. Can Islamic Finance, as a system with a strong religious background and moral framework, satisfy this hope?

Mukhtar Hussain is chief executive officer at HSBC Malaysia.

Volker Nienhaus is visiting professor, University of Reading.

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Kuala Lumpur, Malaysia January 16th, 2012 – OSK-UOB Islamic Fund Management, a joint-venture company formed between the OSK Group, one of Malaysia’s leading investment bank and Singapore’s UOB Group, one of Asia’s leading financial institutions, announced today that it has signed a strategic agreement with IdealRatings, Inc. a global Shariah compliant fund management service provider to utilize IdealRatings’ unique research based screening for their global growth strategy of equity funds.

According to Mohamed Noor, CEO, OSK-UOB Islamic Fund Management, OSK-UOB Islamic Fund Management was looking to find a partner who could provide detailed analysis of the revenue breakdown for the global stock market specifically for food companies involved in any non-halal elements. “IdealRatings, did an outstanding job screening companies with their one of a kind research methodology along with their comprehensive Shariah fund management solution. We feel confident relying on IdealRatings to provide us with top quality Shariah screening data for our Global Halal Food Fund and also for the other unique funds we will be offering as part of our portfolio in the future” said Mohamed Noor.

“The team at OSK-UOB Islamic Fund Management has great plans for much needed products in the market. We are proud to help such team with our service to develop successful products to meet the market demands in a high growth market” said Mohamed Donia, CEO of IdealRatings.

Historically speaking the institution of waqf, which is a non-governmental organization (NGO), has played a significant role throughout Islamic history, from the time of the Prophet (pbuh) to the beginning of the 19th century. Although this institution existed before the coming of Islam, yet, Islam was the first religion to develop its legal framework and regulate it. Thus, it became one of the devices created by Muslims to fulfill many services that are financed by the state or the government today, such as education, healthcare, national security, transportation facilities, basic infrastructure, food, shelter, and jobs for many. It acted like a network, penetrating many service sectors whenever it found a need to promote a particular sector. We cannot deny the role of this institution in the development of Islamic civilization before its destruction towards the end of the 19th century. With the recent revival of some of the Islamic institutions in the 21st century, the waqf found its way back with a new dimension focusing mainly on the creation of movable waqf in different countries. Waqf-share is one of the movable waqf which has been practiced in many Muslim and Muslim minority countries today. With the current financial crisis and the urgent need for capital to continue providing services needed by the different societies, the introduction of waqf-shares as a fundraising effort was totally accepted. The main objective for introducing waqf-shares is not only for capital accumulation but also to facilitate the process of creating waqf by the different sects of people in any society, regardless of whether they are rich or not, with the minimum amount of money they can afford in order to participate in developing their societies. This paper will address the current practice of waqf-shares in four different countries.

Definition of Waqf-Shares

There is a consensus among the fuqaha (Muslim jurists) regarding the definition of waqf. According to them waqf means the appropriation of the ayn (property) from private ownership and the dedication of its usufruct to charitable purposes. Hence, waqf-share is a movable waqf that is established with liquid money to promote services to mankind in the name of Allah (s.w.t). For the creation of waqf-shares the founder has to purchase the waqf-shares which were issued by the trustee of the waqf in order to generate income in perpetuity for the beneficiaries. The beneficiaries can be projects that promote the well-being of Muslim society such as building schools, hospitals, clinics, providing water supply, electricity, etc. In return the founder will receive a waqf certificate showing that he has contributed to the development of such a project.

Key Restrictions on Waqf-Shares

Muslim scholars agree that once a property, movable or immovable, is created as waqf it should be placed under three key restrictions. The first one is the irrevocability, where the founder cannot revoke the dedicated waqf once he declared it as a waqf. The second is its perpetually, i.e. once the property has been declared as waqf it must be perpetual to ensure the regular and the continual support to the beneficiaries. The last one is its inalienability; once the property has been created as awaqf it becomes like a frozen asset that cannot be gifted, inherited, sold or subject to any alienation whatsoever. All these conditions and restrictions are very important to be observed while creating the immovable and the movable waqfs including waqf-shares. The main objectives of these restrictions are to secure a continual benefit for present and future generations, besides ensuring continual rewards to the founders until the Day of Judgment as mentioned in the following hadith when the The Prophet (pbuh) said:

When a man dies his acts come to an end, except three things, recurring charity, knowledge (by which people benefit), and pious offspring, who pray for him.

Waqf-Shares Structure

The main objective of creating waqf-shares is the accumulation of capital through fundraising from the different categories of people and in different amounts in order to provide them with services needed in their society. Recently this type of waqf-shares has been practiced in Malaysia, Indonesia, Kuwait and the UK. The process started as follows;
•A founder buys waqf-shares from a specified institution for any project specified by the issuer institution for the beneficiaries such as; building mosques, schools, hospitals, providing the basic infrastructure, expenses for the different sectors, etc.
•The founder then receives a waqf-certificate as evidence that he had purchased waqf-shares with a specified amount of money for a specific project.
•These waqf-shares will then be endowed to the issuers institution that acts as a trustee to manage and invest the collected funds to that specified project.
•To ensure the perpetuity of such waqf. The accumulated funds have two different ways to be channeled to the beneficiaries;
•In case the selected project will be established on waqf land, then the accumulated funds will be channeled directly to the specified project, such as building schools on waqf land or building hospitals on waqf land; here istibdal had been practiced.
•In case the projects will be established on private land, then the accumulated funds must be invested and the revenue generated must be distributed in a proportion which varies from one project to another e.g. 70% to the specified project, 10% to the trustee for their management and 20% to be added to the capital as highlighted in the following structure.

Current Practice of Waqf-Shares in Malaysia

In Malaysia the waqf shares model has been supported by seven State Islamic Councils in order for Muslims to contribute through movable waqf for the betterment of their society. Their main objectives in supporting such schemes are: to inculcate the culture of creating waqf; to provide an alternative platform for Muslims to be involved in waqf; to encourage the Muslim society to recognize waqf as a viable tool to enhance the economic position of the ummah; and to encourage Muslims to cooperate under the concept of cooperation. Since its implementation in the early 1990s, the waqf-shares scheme has been able to play its role in gathering the needed funds to develop projects that benefit the Malaysian societies, such as developing the existing waqf lands; building mosques, religious schools, providing physical amenities for the Muslim community and maintenance of religious infrastructure; the establishment of education funds, human capital development and financing medical facilities; real estate development and the purchase of land parcels with the potential to be used for agricultural or residential projects; and financing the operations of tahfiz schools (schools for memorizing the Holy Quran).

Current Practice of Waqf-Shares in Indonesia

The establishment of cash waqf in Indonesia was lead by a non-profit organization, Dompet Dhuafa Republika. This organization, which was established in 1993 by a group of journalists, is driven by a mission to help the needy through zakat, infaq, sadaqah and waqf. Dompet Dhuafa Republika established a dedicated body to participate in waqf programs and to ensure the efficiency and the effectiveness in the implementation of its waqf known as the Indonesia Waqf Board. Recognizing that cash waqf has the potential to provide the necessary funds for charitable projects, including poverty alleviation, the Indonesia Waqf Board launched a cash waqf scheme known as Tabung Wakaf Indonesia or the Indonesian Waqf-shares. The main objective of these waqf-shares is to accumulate capital that can be used for purposes benefiting the Muslim community in Indonesia, such as financing; poverty alleviation programs; the provision of free medical services; the implementation of educational programs; and entrepreneur development programs. In this scheme, the founder can make contributions once or regularly, depending on his financial abilities. To ensure regular contributions, the Indonesia Waqf Board encourages the founders to give standing instruction to their banks for regular transfers from their accounts to the designated bank account of the Indonesia Waqf Board waqf-share scheme.

Current Practice of Waqf-Shares in Kuwait

In Kuwait the non-governmental organizations (NGOs) play an important role in promoting the growth and development of cash waqf schemes. The International Islamic Charitable Organization IICO, which is one of them, was established in 1986 in Kuwait under the law No. 64. The main objective of this charitable organization is to provide global and humanitarian aid, aiming at assisting the poor communities and helping them in developing their resources in the most efficient way. Prior to the schemes adopted by the State Islamic Councils in Malaysia, IICO implemented a model based on waqf-shares. Through this model, it has established nine waqf-share schemes; and each has been given a motto to motivate people to contribute to any of their preferable schemes. These schemes are; waqf-share scheme for the poor and the needy, waqf-share scheme for mosques, waqf-share scheme for printing al-Quran, orphans waqf-share scheme, empowerment waqf-share scheme, sacrifices waqf-share scheme, supplying water waqf-share scheme, breaking the fast waqf-share scheme and waqf-share for the needy families. The waqf-share scheme in Kuwait covered many needy areas and not only for the poor but also for the majority of people in Muslim societies living in different countries.

Current Practice of Waqf-Shares in the United Kingdom
In a country where Muslims are a minority, waqf plays an even more important role for the advancement of Muslims in various social and economic sectors. In the United Kingdom, charitable organizations and solidarity groups are an important element within the Muslim community. One such institution is the Islamic Relief which is a non-governmental organization founded in 1984, as an international relief and development charity organization, with the aim of alleviating the suffering of the worlds poorest people, responding to disasters and emergencies, and promoting sustainable economic and social development by working with local communities. Similar to Kuwait, seven waqf-share schemes have been developed to provide global and humanitarian aids in the different Muslim and Muslim minority countries such as; Chechnya, Afghanistan, Palestine, Bangladesh, Bosnia, Ethiopia, Salvador, Albania, Mali, Kosovo and Sudan. These waqf-share schemes are; education waqf-share scheme, water & sanitation waqf-share scheme, orphans waqf-share scheme, qurbani waqf-share scheme, healthcare waqf-share scheme, emergency & relief waqf-share scheme and income generation waqf-share scheme.

Conclusion: The current practice of waqf-shares in the different Muslim and Muslim minority countries is good evidence of the continuation of the remarkable role of the institution of waqf from the time of the Prophet (pbuh) until today. We hope that by adapting such schemes more non-profit institutions in Muslim and Muslim minority countries will emerge not only to provide the services needed in their societies but also to assist in solving the current financial crisis.

About the Author

Dr. Magda Ismail is a Lecturer at the Economic and Governance Department at INCEIF, the Global University of Islamic Finance in Kuala Lumpur, Malaysia.

Worst Performing MENA Stocks

Published by Zawya.com

Gulf markets alone lost USD52-billion, despite significant revenues generated by high crude prices during 2011, which kept the economies in great shape.

The Gulf states also benefited from economic packages unveiled by virtually all the six GCC states, but investors were more concerned about Arab Spring, geopolitical tensions, slow growth in the U.S. and a sovereign debt crisis in Europe to pay to much attention to domestic stimulus.

Egypt Stock Exchange lost a whopping USD34-billion, or 42.5%, as the country suffered from political tensions between the army and pro-democracy forces after the departure of president Hosni Mubarak, who was ousted in a wave of popular uprising.

Lebanon also lost 20.3% in the year, or USD1.5 billion in the year, emerging as the second worst MENA market during the year.

Bahrain, the most troubled Gulf state, was not far behind.

“The Bahrain bourse posted the steepest decline amongst its GCC peers, down by 20.1% for the year,” said Kuwait-based Markaz in a report. “The kingdom’s economy is estimated to have lost up to USD2bn due to political unrest that hit Bahrain in 1Q2011. All sectoral indices ended the year 2011 on a negative note, with only a handful of stocks ending the year with gains.”

But it was Kuwait stock exchange index which saw more than US20-billion, or 16.4% during the year. While the country escaped the worst of the Arab Spring, it suffered from political deadlock, which resulted in the storming of parliament and dissolving of the Cabinet. Kuwaiti authorities spent much of the year bickering and failed to proceed with an ambitious programme to diversify away from oil revenues.

Investors responded by exiting the index, as real estate and financial services continued to weigh in on the economy. Problems with key companies such as MTC also did not help investor sentiment.

Saudi Tadawul, the region’s largest market lost USD14-billion in the year, or 3% during 2011. High oil revenues and a generous stimulus package was offset by regional troubles, and the market came out fair-to-middling given the global investment climate.

“Despite its negative performance, which was mainly due to external factors such as worries over international markets and the economic situation around the world, the Saudi market managed to end the year with marginal loss, compared large declines of other GCC stock exchanges,” notes Global Investment House in a report.

Abu Dhabi and Dubai lost 11.7% and 17% respectively through 2011. Combined with Nasdaq Dubai, the UAE markets lost around USD13-billion in the year. Abu Dhabi now has the lowest price-to-earnings ration among MENA markets at 8.14, even lower than Egypt’s 8.19. Dubai, at 9.56, is not far behind making UAE markets one of the cheapest in the region. Combined with excellent infrastructure and stable oil revenues, UAE markets appear ripe for a boost in the near future.

Qatar, which has a 12.84 price-to-earning ratio is the most expensive in the region. Doha Stock Market was the investor darling last year as the country appeared to ignore global and regional slide and chart its own path to prosperity on the strength of gas revenues.

Despite the global financial crisis, Qatar has prospered in the last several years. IMF figures showed that Qatar’s real GDP, which has recorded one of the world’s highest growth rates over the past decade, leaped by nearly 175 in 2010 and is forecast to pick up by about 19% in 2011, says Markaz.

The Qatari exchange rose 1.1% during the year and was easily the best performing market in the region and the only one that rose during the 12 tumultuous months.

Saudi Arabia’s Qassim Agriculture was the best performing stock, according to EFG-Hermes, based on its coverage universe.

Six Saudi stocks made it into the top ten, as Saudi companies benefited from the domestic stimulus.

At the other end of the spectrum, not surprisingly, Egyptian companies dominated the top worst performing stocks in 2011. Seven Egyptian companies found themselves as the region’s worst performers, with SODIC leading the way with 30.5%, according to EFG-Hermes estimates.

Bahrain’s InvestCorp., once the darling of investors fell 30.5% as global investor sentiment deteriorated.

Sabic was by far the most traded stock in the region, clocking in 143.6 million on average per day in 2011.

© alifarabia.com 2012

INCEIF awarded “Best Islamic Finance Education Service Provider

INCEIF was recognised as the “Best Islamic Finance education service provider in 2011″ at the Global Islamic Finance Awards (GIFA), initiated by Oman Islamic Economic Forum (OEIF) on 17 Dec. Associate Prof Dr Asyraf Wajdi Dusuki– Head of Research-for ISRA (International Shari’ah Research Academy) was awarded the “Most promising talent in Islamic finance”.

The former Malaysian Prime Minister, Tun Abdullah Ahmad Badawi, was the guest-of-honour at the two-day event held in Muscat on 17 and 18 Dec 2011. INCEIF President and Chief Executive Officer Mr. Daud Vicary Abdullah received the award on behalf of INCEIF while Dr Asyraf Wajdi was on hand to receive his award.

The awards were part of OIEF’s initiatives to give recognition and celebrate the success and contributions of individuals and institutions in the Islamic financial services industry. While new, OIEF aims to be one of the prominent Islamic finance forums in the Gulf region.

Mr Daud Vicary Abdullah receiving the award from H.E. Tun Abdullah Ahmad Badawi.

Since its set-up in 2005, INCEIF has chalked up a number of accomplishments including a total of 289 graduates from more than 50 countries, providing Islamic finance talents around the world including in the Gulf, Australasia, North America and Europe. From one flagship programme-the Chartered Islamic Finance Professional– INCEIF has added two programmes, namely Masters in Islamic Finance- and PhD in Islamic Finance. At the third convocation in October 2011, INCEIF welcomed its first batch of PhD graduates.

In line with INCEIF’s strategic focus to bridge the gap between academia and industry practitioners, the PhD theses of the graduates touched on current key industry issues such as ‘Performance/commodity-linked Sukuk for private and public sector funding’, and ‘Cost, profit and technical efficiency: A Data Employment Analysis-based comparative analysis of Malaysian Takaful and insurance providers.’

Its faculty members have also been strengthened with luminaries in the Islamic finance industry including former Islamic Finance Services Board secretary-general Prof Datuk Rifaat Ahmed who is INCEIF’s Adjunct Research Professor and former International Monetary Fund Executive Director Prof Abbas Mirakhor who is the First Holder– INCEIF Islamic Finance Chair. In total, 14 of INCEIF’s 29 faculty members are fulltime professors in Islamic Finance, enabling INCEIF to have one of the highest concentrations of Islamic finance educators in the world.

On the first day of the OIEF, Mr. Daud Vicary was one of the panelists at the session on ‘Islamic banking as practiced by full-fledged Islamic banks: Differences and similarities’. Having been in the finance and consulting industry across Asia, Europe, Latin America and the Middle East for more than 38 years of which the past 9 years have, specifically, been in the Islamic finance industry, Mr. Daud Vicary shared his experiences to date including as the first managing director of one of the Islamic banks in Malaysia. Other panellists at the session were Professor Rodney Wilson of Durham University, and Islamic finance expert Mohammed Amin.

On the second day, Mr Daud Vicary was one of the panellists at the session on “Islamic banking as a tool for economic reforms”. He was joined by Prof Rodney Wilson and Recipco of UK Chairman, Mr James Fierro.

The forum, organised by Amjad Group, was attended by Omani ministers, members of the State Council and Shura Council, heads of banks operating in Oman neighbouring countries. The forum aimed to highlight significant issues in relation to organisational challenges faced by Islamic finance and the effective model of Islamic banking for Oman. Apart from the current issues in Islamic law covering finance, economic development, role of Zakat and the corporate social responsibility were also discussed. Six working sessions were conducted on topics which included ‘Competing Islamic banking regulatory models: Which one is the best for Oman’; and ‘Shariah issues in Islamic banking and finance.’

By Dana El Baltaji - Dec 21, 2011 on bloomberg.com

Goldman Sachs Sukuk Row May Dent Industry Lure: Islamic Finance

Goldman Sachs Group Inc. (GS), the fifth biggest U.S. bank by assets, has become entangled in a debate about how Shariah compliant its $2 billion Islamic bond program is, which may diminish the allure of Islamic debt.

Goldman Sachs’ sukuk program, blessed by eight of the world’s top scholars, is criticized by some Islamic advisers for not ensuring the debt will be traded at par value as mandated by Islamic law. Advisers including Riyadh-based Mohammed Khnifer of Edcomm Group Banker’s Academy in New Yorkand Dubai-based Harris Irfan at Cordoba Capital have also said it’s unclear on how Goldman will use the funds it raises.

The debate highlights the struggle of Islamic finance’s standard-setting bodies to formulate rules that apply globally. Companies and governments aren’t bound by the regulations set by organizations including Manama-based Accounting & Auditing Organization for Islamic Financial Institutions and Kuala Lumpur-based Islamic Financial Services Board.

“The industry needs to welcome key global financial institutions if it wants to strengthen and further entrench Islamic finance globally in order for it to become a viable and competitive alternative,” Rizwan Kanji, a Dubai-based debt capital markets partner at King & Spalding LLPsaid in a telephone interview Dec. 15. “That said, new entities looking to Islamic finance as a source of financing should work hard to answer queries by the Islamic finance community.”

Islamic Bond Demand

Islamic bond sales, which jumped 68 percent to $26 billion in 2011, are still below 2007’s record $31 billion and are dwarfed by the $764 billion in bonds sold globally this year. Shariah restricts investors to transactions based on the exchange of assets rather than money alone because interest payments are banned.

Goldman Sachs set up a sukuk program based on a so-called commodity murabaha structure, or a cost plus mark-up transaction, that was approved for listing on the Irish Stock Exchange by the Central Bank of Ireland in October. Murabaha certificates can only be bought and sold at par value because they represent a future claim on the underlying assets.

“The commodity murabaha structure is already under fire from much of the Islamic community who consider it a shallow attempt to mimic conventional debt structures, and using such proceeds to fund conventional banking activities is ludicrous,” Irfan, managing partner of Cordoba Capital, an Islamic finance advisory company, said in an e-mailed response to questions Dec. 7.

Tawarruq Contracts

Edcomm’s Khnifer, a sukuk structurer and strategist, drew parallels between Goldman Sachs’ Islamic bond structure and the reverse Tawarruq contract, which was banned in 2009 by the Jeddah-based unit of the 57-member Organization of Islamic Cooperation. International Islamic Fiqh Academic hasn’t deterred issuers in Malaysia from using Tawarruq.

He also says Goldman’s program doesn’t ensure the commodity murabaha certificates are only traded at par, as per shariah law, especially since the program is listed on the Irish bourse.

Goldman Sachs says it has done its due diligence. The bank is “entirely confident” in the certification of its program as Shariah compliant, New York-based spokesman Michael DuVallysaid in an e-mail Dec. 7.

The bank, which hired Dubai-based Islamic finance advisory Dar Al Istithmar Ltd. to help set up the program, said it plans to use the funds it raises ”for its general corporate purposes and to meet its financing needs,” according to details offered in the program. It didn’t specify whether the money would be used in compliance with Shariah law, which would prevent it from paying interest and investing in businesses associated with gambling or alcohol.

Scholars Approve

Scholars involved in overseeing the sukuk program deemed it to comply with Shariah guidelines, Chairman of Dar Al Istithmar’s Shariah board, Hussain Hamed Hassan, said in a Dec. 19 e-mailed statement. Hassan sits on more than 15 boards, including Dubai Islamic Bank PJSC. (DIB) Additional scholars mentioned in Goldman Sachs’ program include Mohammed Elgari and Sheikh Abdullah Bin Sulaiman Al Manea.

The sukuk structure is “a Murabaha, pure and simple,” Asim Khan, London-based managing director and head of structuring at Dar Al Istithmar, said in an e-mailed response to questions. A listing on the Irish Stock exchange would offer tax benefits, added Khan, whose said his comments reflect his own views rather than those of his company.

With Islamic bond sales increasing globally, investors may yet overlook the controversy and buy the bonds. South Africa invited banks Dec. 6 to submit proposals for the sale of its first Islamic bond, and Senegal plans to start investor meetings before year-end for the possible sale of sukuk.

Appetite for Goldman

“There will be an appetite from the market as Goldman Sachs is still one of the largest financial institutions in the world,” said Hakim Azaiez, head of capital markets in the Middle East and North Africa at London-based Dinosaur Securities. Still, “if its main aim is to achieve lower funding costs through this deal, then this won’t offer much value for investors as there will be comparison with its conventional bonds,” he said in an e-mailed response Dec. 19.

The yield on Goldman Sachs’ 5.375 percent dollar bonds maturing March 2020 jumped 88 basis points in 2011 to 5.79 percent today, according to Bloomberg prices. The average yield on Islamic bonds in emerging markets has fallen 65 basis points so far this year to 4.09 percent yesterday on the HSBC/NASDAQ Dubai US Dollar Sukuk Index. The debt returned 6.7 percent in 2011, compared with a loss of 0.1 on Goldman Sachs’ debt.

The yield on Dubai government’s unrated 6.396 percent sukuk maturing November 2014 dropped 59 basis points so far this year to 5.98 percent today, lowering the extra yield investors demand to hold Dubai’s sukuk over Malaysia’s 3.928 percent debt maturing in June 2015 26 basis points in the period to 312, according to data compiled by Bloomberg.

‘Fine Mess’

“We got ourselves into this fine mess, and have no one else to blame,” Safdar Alam, chief executive officer of Manchester, U.K.-based Solum Asset Management, said in an e- mailed response to questions Dec. 15.

On the one hand the Islamic finance industry encourages issuers to use structures as debt instruments “in clear contradiction of one of the most prominent facets of our industry — the prohibition of Riba” or interest, he said in an e-mailed response to questions Dec. 15. “Then on the other hand we disagree with how some entities use this product, because it is not ‘right’ or ‘good’, according to a definition of those words I am not familiar with.”

To contact the reporter on this story: Dana El Baltaji in Dubai at delbaltaji@bloomberg.net

To contact the editor responsible for this story: Claudia Maedler at cmaedler@bloomberg.net

By Shazia Khan and Shelina Janmohamed

Ogilvy Noor

There is a consumer segment that is growing faster than any other  globally. In regions where both population and economy are stagnant,  there is one group of consumers set to grow in both size and spending  power: the Muslim consumer segment.

The global ‘Halal’ market is estimated at US$2.1 trillion, growing at  a phenomenal US$500 billion annually. Muslims account for 23% of the  world’s population and are expected to grow by 35% to be 2.2 billion in  2030. Muslims make up approximately 60% of the population of Malaysia.

The movers and shakers, the ones leading Muslim consumer trend, also  dubbed ‘The Futurists’ tend to be under 30. This 42% of the Muslim  population command disproportionate influence. Marketers who wish to  build a relationship with these consumers need to recognize that glib  generalizations are not enough. Industry consideration on how to best  speak to Muslim consumers has grown rapidly in the last few years.

“Islamic Marketing” or “Islamic Branding” as it’s colloquially known  is fast becoming one of the most hotly debated topics in today’s  marketing circles. ‘Halal’ is moving beyond the conventional good,  wholesome and pure. It is extending to beauty, pharmaceutical and even  tourism. At the heart of this ‘Halal’ revolution is the unsung consumer,  the new age Muslim consumer, the Futurist, responsible for shaping  branding and marketing for the generations to come.

So who are these Futurists? In our segmentation of the Global Muslim  consumer population, the Futurists show marked difference in values and  behavior compared to the Traditionalists. Those brought up inthe  aftermath of 9/11, have a strong sense of identity as Muslims, some  suggest. They are twice as likely as theTraditionalists to say that  ‘religion gives me a sense of identity’. It is this sense of purpose  that differentiates them from global Gen Y populations. They are proudly  individualistic unlike the Traditionalists who seek belonging and  social harmony. The Futurists are driven by success and progression.

They believe in an Islam that is flexible, that allows them to find  their own path, balancing their sense of self within the realms of the  Ummah or society.

The Futurists are inarguably the first generation of educated, world  travelled and tech-savvy Muslims. They use the knowledge of the world  and their experiences to improve their lives and those around them. They  are tomorrow’s catalysts, confident in using their knowledge and skills  to bring about a positive change in their worlds.

For Marketers, the Futurists are an ideal target audience, simply  because they enjoy the deepest relationships with brands. They seek  brands that embrace the values that are important to them: humility,  transparency, purity and togetherness; brands that shape the communities  they serve and demonstrate a higher purpose that goes beyond product  delivery. Brands that ignore or stereotype them will do so at their own  peril.

If the revolution in the Middle East is anything to go by, the Futurists have a way of getting heard.

Shazia Khan is the Associate Planning Director Kuala Lumpur, and Shelina Janmohamed is the Senior Strategist for Ogilvy Noor.

http://www.islamica-me.com/article.asp?cntnt=706

Although the Grand Duchy of Luxembourg is a very small country in terms of area and population (2,586 km2 and 502,000 inhabitants), it is one of the most important financial centers all over Europe. Nowadays, Luxembourg is considered to be the first European financial centre and globally the second after the United States of America in terms of fund industry. Furthermore, Luxembourg is recognized as one of the leading Islamic financial centers through its history in the field of Islamic finance and its continuous efforts to develop this sector.

The eminence record of Luxembourg in that respect is full of achievements. Luxembourg was the first of the European countries to host an operating Shari’ah-compliant financial institution in the 1970s. Further, the first Takaful Company in Europe was established in Luxembourg in the1980s. In 2002, Luxembourg listed the first Sukuk in the European stock markets and in 2009 the Luxembourg central bank became the first European central bank to become a member in the Islamic Financial Services Board (IFSB), leading to Luxembourg being the first non-Muslim country to host the annual IFSB meeting in May 2011.

Despite having more than 40 regulated Shari’ah-compliant investment fund, and further having complications in determining the number of unregulated Shari’ah-compliant funds, it is clear that Luxembourg could play a much more important role in this sector, especially for the Middle Eastern investors.

This eminence record is the result of the continuous efforts done by the Luxembourg Government to modify the tax laws and regulations to accommodate different types of Shari’ah-compliant vehicles and products. The Luxembourg tax authorities have issued 2 tax circulars to clarify the tax treatment of various Islamic financing arrangements and issues.

Direct tax circular

The first circular essentially deals with the direct tax treatment of murabaha and Sukuk, however also describes various other Shari’ahcompliant instruments, such as musharaka, mudaraba, ijara, ijarawa- lqtina and istisna.

Murabaha

Murabaha refers to a sale transaction in which assets are sold under deferred terms at cost plus a profit mark-up. The cost price and mark-up are known by both the buyer and the seller. Both Islamic and conventional financial institutions can act as buyers/sellers in murabaha financing arrangements. The predetermined markup represents the remuneration for the financial institution.

Sukuk

The circular, however, adopts a substance over form approach and provides that the taxation of the income can be deferred over the term of the transaction (as would be the case in a conventional financing arrangement).

Sukuk are the second type of Islamic financial transaction analyzed in the circular. Luxembourg-based Soparfi and securitization vehicles, among others, are flexible vehicles that can be used to issue Sukuk, as illustrated in the example below.

According to the circular, for Luxembourg tax purposes, Sukuk would be treated like conventional bonds and the yield on sukuk would be treated as interest payments on conventional debt instruments. This tax treatment would apply even though the yield on the instruments is directly contingent on the income earned on the underlying asset. Hence, the yield will be taxdeductible at the level of the Sukuk issuer in the same way as interest on a conventional debt obligation.

No withholding tax applies on such a yield under Luxembourg domestic law (implications of the EU Savings Directive should be fairly limited given the nature of the instruments and the residency of the investors).

Indirect tax circular

The second circular, which was issued in June 2010, deals mainly with indirect tax. The circular covers various VAT and transfer tax issues related to murabaha and ijara agreements.

The circular clarifies the tax treatment applicable to the predetermined mark-up concluded in a Shari’ah agreement. Such profit margin will be assimilated as interest and consequently not subject to tax. The transfer tax levied on the resale transaction will be consequently levied on the acquisition price of the real estate by the SPV. However, such treatment will be only granted if the below conditions are met:

• The client must immediately take possession of the property after the resale
• The delay between the acquisition of the property by the financial operator and the resale to the client must not exceed ten days
• The initial acquisition contract of the asset must contain a clause specifying that that asset was bought under the terms of murabaha agreement
• A copy of the murabaha agreement must be attached to the authentic deed

Further, the circular confirms that SPVs created under murabaha or ijara contracts are subject to VAT. Any real estate transaction under such Shari’ah-compliant financial instruments may however benefit from certain VAT exemptions. This circular will provide clarity and more security in the real estate transactions involving Shari’ahcompliant financial instruments.

Regulatory circular

On 26 January 2011, the Luxembourg regulatory authority (CSSF) clarified the rules applicable to Sukuk issuance as to the prospectus which facilitates the listing process of Sukuk in the Luxembourg Stock Exchange market. Sukuk may be treated as asset backed securities or as guaranteed debt securities.

The minimum information disclosure required for guaranteed securities concerns:

1 Nature of the guarantee. It includes a description of any arrangements, including commitments to ensure obligations to repay debt securities and/or the payment of the yield. Such description shall set out how the arrangement is intended to ensure that the guaranteed payments will be duly serviced

2 Terms and conditions of the guarantee. It must also include all details about conditionality on the application of the guarantee, guarantors power of veto to changes security holders rights

3 Information to be disclosed about the guarantor. It must disclose information about itself as if it were the issuer of that same type of security that is the subject of the guarantee

4 Indication of the places where the public may have access to the material contracts and other documents relating to the insurance has also to be included

All these efforts confirm the willingness of the Luxembourg Government to facilitate the development of Shari’ah-compliant products and structures, and to position the Grand Duchy as a significant hub for Islamic finance.

About Deloitte

-Deloitte is the brand under which tens of thousands of dedicated professionals in independent firms throughout the world collaborate to provide audit, consulting, financial advisory, risk management, and tax services to selected clients. These firms are members of Deloitte Touche Tohmatsu Limited (DTTL), a UK private company limited by guarantee. In Luxembourg, Deloitte consists of 65 partners and about 1,100 employees and is amongst the leading professional service providers on the market.