Finance and Ethics: A Disconnect
An interview was published recently with one of a rare breed, a former wealth manager for a major international investment bank in London who went on to become a nun and then an academic. Professor of Ethics Catherine Cowley at Heythrop College, London University, is also a specialist on ethics in finance, especially relating to risks and derivatives. She had predicted in a book, "The Value of Money: Ethics and the World of Finance," in the early 2000s the coming global financial crisis. Among the points she made: While many reasons have been cited for the cause of the credit crunch and the global financial crisis, a major criticism of global banking is that of a disconnect between finance and ethics. more…
TID non-Shariah compliant?
In some jurisdictions, if a company enters into a transaction beyond the powers set out in its incorporation documents, that transaction may be void with the consequences that obligations connected to the transaction may be unenforceable. The recent dispute on a Wakalah agreement between Blom Development Bank and The Investment Dar (TID) is an example of such a situation and the potential impact this may have on Islamic finance. Blom is a reputed financial institution incorporated in Lebanon. It placed US$10 million as an investment with TID under a Wakalah agreement on the 11th October 2007. Governed by English law the agreement’s basic terms provided for a return of the capital invested and the pre-agreed profit to... more…
Nights to Remember
Islamic Finance news (IFN) organized the 2010 Islamic Finance news Awards Ceremony and Dinner in Kuala Lumpur last week and in Dubai this week. The Kuala Lumpur event brought together more than 250 delegates from Indonesia, Singapore, Thailand, the UK and elsewhere, who are well known in their respective activities within the Islamic finance industry. The guest list included Bank Negara assistant governor Muhammad Ibrahim, CIMB Islamic Bank CEO Badlisyah Abdul Ghani, Bank Muamalat Indonesia president director Arviyan Arifin, Islamic Bank of Thailand senior executive vice-president Che Lasin Che Deraman and PricewaterhouseCoopers global Islamic finance leader Mohammad Faiz Azmi. more…
Islamic Banking in Qatar
Qatar is one of the key players and most exciting countries in the GCC with its expanding economy as an oil- and natural gas-rich nation. It has initiated multi-billion-dollar projects in line with the four development pillars — human development, society, economic development and the environment — aimed at achieving developed nation status by 2030 without compromising on its Islamic principles and Arab identity. The Islamic banking industry remains steady with healthy growth and a positive outlook even after the recession while challenging the conventional sector in terms of a dynamic, fast-paced and competitive environment. more…
Sustaining Sukuk Issuance in Domestic Markets
The issuance of benchmark Sukuk (US$500 million and above) from 2004 to 2007 provided Islamic capital markets with tremendous momentum as annual issuance grew from just over US$7 billion in 2004 to US$47.5 billion in 2007. Until 2008, the largest issuers of Sukuk were real estate companies (most of them based in Dubai) that issued both straight and convertible Sukuk but have since become sub investment grade credits. The placement of these Sukuk has been to a predominantly bank-driven investor base in the GCC that is currently afflicted with deteriorating asset portfolios, excess exposure to real estate and focused on deleveraging. more…
Quantification of Market Gharar Metric
The literal meaning of gharar in Islamic finance and economics is that of excessive risk taking leading to exacerbation in uncertainty of outcome. In financial risk management (FRM) the term excessive risk taking reminds us of derivative and structured product positions and the recent global subprime credit crisis. Also, in contemporary quantitative risk management terms, it implies that any financial transaction which is categorized as highly risky due to uncertainty regarding its outcome should have higher positive and negative returns; exhibiting kurtosis value in excess of three above the shape of the normal distribution curve. more…
= Islamic jurisprudence
Alternative spelling = Sharia, Shari'a, Shari'ah, Syariah, Syaria, Syari'ah, Syari'a
Islamic cannon law derived from three sources: the Quran, the Hadith and the Sunnah
A “Shariah compliant” product meets the requirements of Islamic law.
A “Shariah board” is the committee of Islamic scholars available to an Islamic financial institution for guidance and supervision in the development of Shariah compliant products.
A “Shariah advisor is an independent Islamic trained scholar that advises Islamic institutions on the compliance of the products and services with the Islamic law.
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= Islamic bond (Plural. Also see Saak.)
An asset-backed bond which is structured in accordance with Shariah and may be traded in the market.
A Sukuk represents proportionate beneficial ownership in the underlying asset, which will be leased to the client to yield the return on the Sukuk.
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= leasing
Alternative spelling = Ijara
A lease agreement whereby a bank or financier buys an item for a customer and then leases it to him over a specific period, thus earning profits for the bank by charging rental. The duration of the lease and the fee are set in advance. During the period of the lease, the asset remains in the ownership of the lessor (the bank), but the lessee has the right to use it. After the expiry of the lease agreement, this right reverts back to the lessor. This is a classic Islamic financial product.
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= cost-plus financing
Alternative spelling = Morabaha, Morabahah, Murabaha
A form of credit that enables customers to make a purchase without having to take out an interest-bearing loan. The bank buys an item and sells it to the customer on a deferred basis. The price includes a profit margin agreed by both parties. Repayment, usually in installments, is specified in the contract. The legality of this financing technique has been questioned because of its similarity to riba. However, the modern Murabahah has become the most popular financing technique among Islamic banks, used widely for consumer finance, real estate, the purchase of machinery and for financing short-term trade.
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= joint venture, profit and loss sharing
Alternative spelling = Musharaka
An investment partnership in which all partners are entitled to a share in the profits of a project in a mutually agreed ratio. Losses are shared in proportion to the amount invested. All partners to a Musharakah contribute funds and have the right to exercise executive powers in that project, similar to a conventional partnership structure and the holding of voting stock in a limited company.
This equity financing arrangement is widely regarded as the purest form of Islamic financing.
The two main forms of Musharakah are:
Permanent Musharakah: an Islamic bank participates in the equity of a project and receives a share of the profit on a pro rata basis. The length of contract is unspecified, making it suitable for financing projects where funds are committed over a long period.
Diminishing Musharakah: this allows equity participation and sharing of profits on a pro rata basis, and provides a method through which the bank keeps on reducing its equity in the project, ultimately transferring ownership of the asset to the participants. The contract provides for payment over and above the bank's share in the profit for the equity held by the bank. Simultaneously the entrepreneur purchases some of the bank's equity, progressively reducing it until the bank has no equity and thus ceases to be a partner.
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= Gulf Cooperation Council
A political alliance and trade bloc consisting of six states of the Arabian Gulf: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE.
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= Islamic insurance
Based on the principle of mutual assistance, Takaful provides mutual protection of assets and property and offers joint risk-sharing in the event of a loss by one of the participants. Takaful is similar to mutual insurance in that members are the insurers as well as the insured.
Conventional insurance is prohibited in Islam because its dealings contain several haram elements, such as gharar and riba.
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= reverse Murabahah
In personal financing, a client with a genuine need buys an item on credit from the bank on a deferred payment basis and then immediately resells it for cash to a third party. In this way, the client can obtain cash without taking out an interest-based loan. It has two forms: Tawarruq Munazzam (organized Tawarruq), in which the client simply seeks credit and has no interest in the original asset for sale; and Tawarruq al Asli, where the client buys goods on credit and then sells them to get cash.
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= general sale
The price of the commodity in question is reached through bargaining.
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= interest
An increase, addition, unjust return, or advantage obtained by the lender as a condition of a loan. Any risk-free or “guaranteed” rate of return on a loan or investment is riba. Riba in all its forms is prohibited in Islam.
In conventional terms, riba and “interest” are used interchangeably, although the legal notion extends beyond mere interest.
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= unlawful, forbidden
Activities, professions, contracts and transactions that are explicitly prohibited by the Quran or the Sunnah. See halal above.
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= Islamic jurisprudence
The science of the Shariah. An important source of Islamic economics.
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= sale and buy-back
The sale and buy-back of an asset for a higher price than that for which the seller originally sold it. A seller immediately buys back the asset he has sold on a deferred payment basis at a price higher than the original price. This can be seen as a loan in the form of a sale.
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= religious tax
Alternative spelling = Zakah
An obligatory contribution which every wealthy Muslim is required to pay to the Islamic state, or to distribute amongst the poor.
According to Islam, zakat – the third pillar of Islam – purifies wealth and souls. Zakat is levied on cash, cattle, agricultural produce, minerals, capital invested in industry and business.
There are two types of zakat:
Zakat al Fitr, which is payable by every Muslim able to pay at the end of Ramadan. This is also called Zakat al Nafs (poll tax).
Zakat al Maal is an annual levy on the wealth of a Muslim above a certain level. The rate paid differs according to the type of property owned.
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= exemption limit
Exemption limit for the payment of zakat, which differs for different types of wealth.
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= the Prophet's sayings and commentary on the Quran
Alternative spelling = Ahadith
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= Islamic Financial Services Board
A Kuala Lumpur-based international standard-setting organization that was set up in 2003 to promote the stability of the Islamic financial services industry by issuing global prudential standards and guidelines. The IFSB helps regulators govern Islamic financial institutions in compliance with Basel II and evolving global standards.
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= Accounting and Auditing Organization for Islamic Financial Institutions
Bahrain-based Islamic international standard setting body established in 1991 for Islamic corporations and the industry. Members include central banks, Islamic financial institutions and other industry participants.
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= uncertainty
One of three fundamental prohibitions in Islamic finance (the other two being riba and maysir). Gharar is a sophisticated concept that covers certain types of haram uncertainty in a contract. It is an exchange in which one or more parties stand to be deceived through ignorance of an essential element of the exchange. Gambling is a form of gharar because the gambler is ignorant of the result of the gamble. The prohibition on gharar is often used as the grounds for criticism of conventional financial practices such as short selling, speculation and derivatives.
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= charitable trust
Alternative spelling = Awkaf, Awqaf
An endowment or a charitable trust set up for Islamic purposes (usually for education, mosques, or for the poor). It involves tying up a property in perpetuity so that it cannot be sold, inherited, or donated to anyone.
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