Guilty by association?

Fear is a very powerful tool. Combine fear and ignorance, or a lack of understanding, and you have a weapon of mass destruction, and unfortunately, Islam today is painted with this brush of fear as a result of global terror attacks. The question relevant to us, and one we attempt to answer this week in our cover story, is: How has Islamophobia and terrorism impacted Islamic finance, if they have at all?

The IFN Editorial Team this week also takes a look at the performance of Shariah indices in the face of turbulence and shines the spotlight on Pakistan’s valiant efforts to position itself as a regional Islamic capital market investment destination as well as on an exciting new Islamic fintech player from Indonesia. Our IFN Correspondents bring you updates on standards, Malaysia and Qatar while our Columnists Ken Baldwin shares his Ramadan reflections and Mohammed Amin his thoughts on Shariah compliant cross-border transactions. We also have a timely interesting special report by a market practitioner on the implications of Brexit on Islamic finance and an asset management feature by Adam Ebrahim, CEO of Oasis.

It is a controversial topic we are highlighting this week but one that needs to be addressed; and we hope our readers will find the discussion insightful. 

The bare truth

By Dr Ken Baldwin, a lecturer in finance at Coventry University and formerly the director of financial policies and planning at the IDB in Jeddah. He can be contacted at drkenbaldwin@yahoo.co.uk.

I hope all of IFN’s readers had a wonderful Eid and that they enjoyed the spiritual benefits of the blessed month of Ramadan.

As our lives change again now that Ramadan has passed, it is timely to think about those people who are far less fortunate than us. This of course refers to the poor, the destitute and the sick. Many institutions exist to address the needs of the poor. But with so many people still below the poverty line, why does the world still face this problem? Will it ever change? And if so, how can that happen?

The last of these questions is incredibly important, because it also begs the question of what we can each do individually to make a change. Naturally, we can make personal monetary donations to various charities which are working toward helping people. But what can we do in a larger sense? 

I think one of the traps I myself fall into, and I’m sure most of us do, is to think that this will be sorted out by someone else, someone in a position of influence or power already, or someone or an organization able to reach the problem. But this is wrong. 

Most of us simply do not realize that we can make changes on a large scale. It is the will to try that matters most. Change is brought into existence by the will of Almighty God, but it is our inclinations toward making a positive change that is the catalyst.

So why do so many of us not do so? It’s not that we aren’t aware of the issues. Readers of IFN, for example, are knowledgeable in finance and appreciate the urgency of the need at hand. But we’re all caught up in our daily lives, so much so that we’re oblivious to the positive impact each of us can bring into being. Mathematically, the total is the sum of the parts, but spiritually, the total is even greater. 

So what are we waiting for? This is a word of encouragement first to myself, and then to all of my brothers and sisters in humanity out there that change starts with small steps and builds from there. 

If this message inspires only one person among you, then I am happy, and may Almighty God render your efforts most successful, Ameen.

A letter from Amin

By Mohammed Amin, an Islamic finance consultant and former tax partner at PwC in the UK.

Cross-border transactions always give rise to foreign exchange transaction risk. Imagine UK Dealerco imports excavators from the US. When the US$/GBP spot exchange rate is GBP1 = US$1.5, Dealerco agrees to import an excavator costing US$150,000 (GBP100,000) with payment being due in three months’ time. Dealerco sells the excavator to a UK contractor for, say, GBP105,000 (US$157,500).

In three months’ time, if GBP1 still equals US$1.5, Dealerco will buy US$150,000 for GBP100,000, so making an overall profit of GBP5,000 (US$7,500). However, in three months’ time the GBP/US$ exchange rate could be almost anything. If say GBP1= US$1.4, then US$150,000 will cost Dealerco GBP107,143 so overall instead of making the expected GBP5,000 (US$7,000) it actually loses GBP2,143 (US$3,000). (Conversely, if in three months’ time GBP1=US$1.6, the US$150,000 will only cost Dealerco GBP93,750, so its overall profit becomes GBP11,250 (US$18,000).)

Dealerco can eliminate this risk using a forward foreign exchange contract with a conventional bank. For example, Dealerco and the bank sign a contract today under which Dealerco commits that in three months’ time, it will buy (and the bank commits to sell) US$150,000 from the bank at a fixed price of, say, GBP100,671. The implied rate of GBP1=US$1.49 is called the forward rate. (The forward rate is not a guess by either party. It is set by taking into account three-month interest rates in pounds and dollars). Effectively, at a fixed cost of GBP671, Dealerco protects itself against unfavorable exchange rate movements, while also giving up the opportunity to profit from a favorable exchange rate movement.

Shariah scholars generally consider such conventional forward contracts impermissible. AAOIFI Shariah Standard No. 1: Trading in Currencies says: “A bilateral promise to purchase and sell currencies is forbidden if the promise is binding, even for the purpose of hedging against currency devaluation risk...”

However, the need for protection against foreign exchange transaction risk is a real need. Islamic finance will always struggle against conventional finance if it lacks Shariah compliant instruments to meet such real needs.
Accordingly, I was pleased by the International Swaps and Derivatives Association (ISDA) and the International Islamic Financial Market (IIFM) recently publishing template documentation for Islamic foreign exchange forwards. These templates are intended to be used under the umbrella of the ISDA/IIFM Tahawwut Master Agreement. Two counterparties enter into one (quite long) Master Agreement between them, and then enter into much shorter agreements for specific transactions such as the Islamic foreign exchange forwards (IFXF).

The IFXF transaction involves two independent unilateral promises (Waad) being made. Each promise is intended to be legally binding. If the parties use English law, each promise will be executed as deeds, making it legally enforceable.

In our example, Dealerco promises that if, in three months’ time, the spot value of GBP1 is greater than, or equal to, US$1.49, it will buy US$150,000 from the bank for a fixed price of GBP100,671. Meanwhile, the bank separately promises Dealerco that if, in three months’ time, the spot value of GBP1 is less than US$1.49, it will sell US$150,000 for a fixed price of GBP100,671. Obviously, only one of these conditions will be satisfied, but regardless of which it is, Dealerco will get the US$150,000 it wants for GBP100,671.

ISDA and IIFM also published a single promise version, which I will not discuss for lack of space.

As the economics of the IFXF are identical to that of the conventional forward contract, it is up to each individual Muslim to decide if there is a real religious difference. However, this documentation does enable corporate organizations to protect against foreign exchange transaction risk while remaining compliant with the requirements of their Shariah supervisory board.

Bahrain: Back in the game

The Islamic finance crown may have slipped from Bahrain’s fingers several years ago, but it seems that the Kingdom is one step closer to grabbing the title once again. VINEETA TAN reviews the country’s Islamic banking and finance market over the past 12 months.

Regulatory landscape
Bahrain has one of the most comprehensive and sophisticated legal infrastructures for Islamic finance and banking – it is the first nation in MENA to issue rule books addressing the Shariah compliant banking and insurance sector. In 2015, the Central Bank of Bahrain (CBB) began implementing the new capital adequacy rules for Islamic banks in accordance with the requirements of the IFSB as well as also issuing the finalized revised Prudential Information Returns for Shariah banks.

The apex bank in April released Resolution No (20) of the year 2015 in respect of the establishment of a centralized Shariah Supervisory Board. The resolution, intended to develop and harmonize the Islamic finance industry, includes but is not limited to the roles of the board, membership requirements and the binding force of the board’s Fatwa

A number of international Islamic finance regulatory bodies are based in Bahrain including: AAOIFI, International Islamic Financial Market (IIFM), Liquidity Management Center, General Council for Islamic Banks and Financial Institutions, Waqf Fund and Islamic International Rating Agency.

Banking and finance
There are 14 Islamic wholesale banks, six Shariah retail banks, one Islamic financing company, three branches of Islamic foreign banks and one Shariah compliant microfinance institution in Bahrain as compared with 23 conventional retail banks, 69 wholesale banks, two specialized banks as well as 36 representative offices of overseas banks, according to the CBB. Data from EY’s World Islamic Banking Competitive Report 2016 shows that Shariah compliant banking assets accounted for 29.3% of the Bahraini banking market in 2014.

Internationalization is an emerging theme in 2015 and 2016: In March 2015, the CBB granted a license to Turkiye Finans, allowing the Turkish participation bank to operate as a wholesale bank in Bahrain and in December extended an Islamic banking license to Sudan’s Bank of Khartoum. Local bank Al Salam Bank-Bahrain and Seychelles Pension Fund in 2016 successfully acquired BMI Offshore Bank Seychelles, rebranding it as Al Salam Bank-Seychelles and will use it as a launch pad to other regional markets; meanwhile, GFH Financial Group and Abu Dhabi Financial Group (ADFG) have received preliminary approval to jointly launch an Islamic bank in Abu Dhabi Global Market

Sukuk and capital markets
Deepening the Bahraini capital markets has been a strong focus for authorities: the Bahrain Bourse (BHB) in September 2015 launched the Bahrain Islamic Index and created a real estate investment trust (REIT) market in preparation of welcoming its first REIT, which is expected to be Shariah compliant, by Eskan Bank. The CBB also approved the BHB’s request for the provision of Murabahah facilities through equities service, which is expected to be announced and implemented in due course. 

This year the BHB, which has a market capitalization of US$22 billion with over 45 listed companies (out of which 17 are Shariah compliant), is expected to receive a US$100 million injection from the recently launched Bahrain Liquidity Fund which will act as a market maker and invest in Shariah compliant and conventional equity instruments listed on the exchange. As of March 2016, there are 91 Islamic funds (out of over 2,740 mutual funds) with total assets amounting to US$1.3 billion as of March 2016, a slight drop from US$1.4 billion a year earlier; total assets under management for the fund industry is approximately US$7 billion.

In terms of Sukuk: the Bahraini government (through the CBB) is a frequent and consistent issuer of short-term Sukuk. As part of its strategy to bolster the Islamic capital markets, the Ministry of Finance in 2015 increased the size of its monthly issuances: from BHD36 million (US$95.44 million) to BHD43 million (US$114 million) for its three-month Sukuk Salam and from BHD20 million (US$53.02 million) to BHD26 million (US$68.93 million) for its six-month Ijarah facility. 

The government is expected to have printed 188 Salam papers and 136 Ijarah facilities by the end of 2016. The government in 2015 issued long-term Sukuk Ijarah for the first time – offering a total of three facilities collectively worth BHD550 million (US$1.46 billion), with the papers ranging from two to 10 years.

The CBB launched in April 2015 a Wakalah liquidity management instrument based on a standard contract of the IIFM.

The CBB also unveiled the Investment Monitor, a global investment portal linking capital seekers (for projects) and capital providers, creating leads for potential new deals in the Islamic finance space.

There are six Takaful operators and two re-Takaful insurers in Bahrain, along with 14 conventional insurers and two re-insurers. The pioneering Takaful operator in the country is Bahrain Islamic Insurance Company, now known as Takaful International Company, incorporated in 1989. Arab Insurance Group, which holds a majority stake in Takaful Re, confirmed in February 2016 that it will cease the underwriting activities of its loss-making re-Takaful arm.

In 2015, the CBB implemented a new Takaful model designed to enhance the measuring and assessing of the solvency status of Takaful and re-Takaful firms and is expected to bolster the ability of these firms to distribute surpluses and dividends in an extremely competitive market. 

Islamic balanced funds: Addressing the long-term needs of investors in a relatively low risk manner

Islamic funds globally have experienced robust growth over the past decade with assets under management currently at around US$60 billion. Contributing to this growth has been the development of new products and solutions to address clients’ financial needs and objectives. The development of Islamic income as an asset class, for example, has benefited a wide range of market and economic participants across the world, these being the issuers, the investors, the supporting industries and indeed the world economy more generally. ADAM EBRAHIM explores.

We have seen, as a result of this extraordinary advancement, the emergence of several new domestic, regional and global Sukuk markets, spanning no fewer than 23 currencies. In a world increasingly focused on external vulnerabilities, the establishment of the Islamic income market globally can help to ensure the availability, stability and sustainability of funding through not only good times, but tough times as well. 

Another important characteristic of the growth in Islamic finance has been the deepening and broadening of the market as a whole. While there is still some way to go, this has given investors the flexibility to manage the characteristics of their Shariah compliant portfolio with greater ease, so that evolving market views can be turned into actionable portfolio adjustments, and client needs can be appropriately catered to. 

Perhaps more fundamentally, the rise of Sukuk and other short-term Islamic income instruments has given investors the opportunity to benefit from a more fully diversified portfolio of assets, including equity, property and Islamic income instruments. This gives global wealth managers like Oasis the platform to provide a complete wealth management solution to clients, allowing for more suitably diversified products that cater to all life stages and risk appetites. 

Islamic balanced funds offer investors the best investment vehicle to protect and grow their real wealth. They are well regulated, liquid and are made up of a mix of assets which can be tailored to meet an individual’s financial objective and risk tolerance. Importantly, Islamic balanced funds can provide investors with an appropriate level of diversification which ensures a lower level of risk while generating real returns over the medium to long term. This diversification is achieved across various levels including: 

  • Geographic diversification
  • Currency diversification 
  • Asset class diversification 
  • Sector diversification, and 
  • Instrument diversification. 

Geographic diversification allows investors to invest in world-class developed economies such as the US which benefit from lower energy costs, quality skills and higher productivity. Currency diversification allows for exposure to reserve currencies such as the US dollar, euro and the UK pound sterling, which typically provides benefits to investors during times of economic uncertainty and volatility. Asset diversification allows for investments across the various asset classes such as equity, property and income, which deliver lower volatility and can act as a hedge against inflation when allocated appropriately. Sector diversification ensures exposure to major sectors such as healthcare, telecommunications, technology and the consumer sector which allow investors to benefit from key secular trends affecting the world. Instrument diversification provides the ability to invest in high-quality corporate or sovereign issuances that deliver sustainable returns to investors over the long term.

The benefit of this diversification is clearly reflected during volatile environments as the Islamic balanced funds provide clients with substantial downside protection as noted in Charts 1-2 and Tables 1-2 using the Oasis Crescent Global Low Equity Balanced Fund (OCGLEBF) and the Oasis Crescent Global Medium Equity Balanced Fund (OCGMEBF) as examples.


Table 1: Returns of OCGLEBF versus OECD inflation rate


Since inception




Oasis Crescent Global Low Equity Balance Fund



OECD Inflation Rate



Table 2: Returns of OCGMEBF versus OECD inflation rate


Since inception




Oasis Crescent Global Medium Equity Balance Fund



OECD Inflation Rate



The merits of investing in Islamic balanced funds are clearly highlighted in the aforementioned tables and charts with real wealth creation coming through. Importantly, these funds provide investors with the peace of mind that their funds will provide significant downside protection during down markets. With this type of solution in place globally, investors and financial advisors can be confident that there are comprehensive products and solutions of the highest quality available to address the needs and objectives of not only Muslims, but all investors. 

Islamic balanced funds can compete effectively against conventional balanced funds highlighting its ability to provide superior risk-adjusted performance over a period of time. The OCGLEBF received the Lipper award (in the UK and Switzerland) for best mixed-asset class fund over three years against all funds in that class globally. 

To conclude, we face an environment of increased volatility and uncertainty. Islamic balanced funds provide investors with the ideal investment vehicle to protect and grow their real wealth in this context. The choice of an investment manager with the appropriate skills is important as the asset allocation decision will play an even more significant role as the ability to adapt to changing economic and market conditions and be forward-looking will be a differentiating factor in whether real returns are delivered to investors or not. This is eloquently captured by one of the great investors of our time, Warren Buffett, who said: “The investor of today does not profit from yesterday’s growth.”

Adam Ebrahim is CEO of Oasis. He can be contacted at adam@oasiscrescent.com.

Implications of Brexit on Islamic finance

As the dust settles after last month’s Brexit vote, the smoke is only getting thicker with no clear visibility on the tough road ahead. However, is it really all doom and gloom? Or, seen through a wider context, is it a bitter short-term pill for a better long-term future? In this article, SIRAJ IBRAHIM discusses the implications of Brexit, how this may result in the fulfilment of real Islamic finance, and how Islamic finance will not be significantly affected in the UK.

The country may appear more akin to some sort of an unruly third world quagmire, rather than one of the leaders in the global corridors of power and the fifth-largest national economy in the world when considering the following facts:

  • the pound plunging to a 31-year low, twice the amount seen during the UK’s 2008 recession
  • the FTSE-250 down 7% (an index of mid-sized companies regarded as more closely tied to the UK economy as it contains more UK-centric businesses)
  • the suspension of half of all UK retail property funds – and possibly more to follow
  • two main political parties in a state of desperate disarray, and 
  • a huge surge in race-hate crime.

The UK’s slick and developed media machine (which actually on closer inspection, is mired in darkness – a staggering 69% of national newspaper readership is controlled by right-wing press owned by a handful of billionaires, one of which is Rupert Murdoch, whom the Chilcot report did not include in the role of such influencing media despite having beaten the drum for war in Iraq in 2003, thus allowing the press free to push the public into future disasters) failed the UK electorate once again. Both camps – Leave and Remain, scaremongered the nation with inaccuracies and distortion of facts; the newspapers facilitated such messages with their usual spin-doctored drivel. It was hard to come by an impartial piece discussing objectively, both sides of Leave and Remain.

Such covert manipulation came from top-down. The HM Treasury published economic projections of how dire a Brexit would be, under assumptions such as the Bank of England (BoE) or Treasury not stepping in. Thankfully, such assumptions were hot air. Last week, for the first time, the BoE released banks from a requirement to hold GBP5.7 billion (US$7.38 billion) of capital as a protection against downturns, resulting in an increase in banks’ capacity for lending to households and businesses by up to GBP150 billion (US$194.2 billion). This, coupled with other measures, such as an expected cut in BoE interest rate this week, from the current 0.5% which has been the same for nearly 90 months, to – according to Bank of America Merrill Lynch – as low as 0.1%, will get the cogs moving in the right direction for damage limitation. 

And the support is not only coming from within. In recent days, four Tier 1 Wall Street banks and Standard Chartered put their names to a joint statement with Chancellor George Osborne, promising to work with the UK to “help London retain its position as the leading international financial center”, asserting that London boasts: 

  • one of the most stable legal systems in the world
  • a brilliant workforce 
  • deep, liquid capital markets unmatched anywhere else in Europe, and
  • world-class regulators. 

The statement continued: “In recent years, it has established itself as a global hub for renminbi (yuan), rupee, Islamic finance and green finance, as well as leading in new markets such as FinTech.”

What does Brexit involve?
So why have the markets been shaken and nerves wrecked? Well put very simply, it’s a divorce of sorts. After a 41-year union, during which period and after a number of iterations, the evolution of the EU allowed all the member countries to operate as if it were a single country, with respect to the free movement of goods, services, money and people. Brexit now means the UK will exit from this ‘special club’, and start afresh with respect to its relationship with the EU and the countries therein.

This means a Pandora’s box of issues that need to be dealt with. Negotiating and balancing the situation of single-market access (if it was on the table in the first place, that is) against freedom of movement, fresh trade agreements with the EU and countless non-EU countries, managing the situation within the UK – Scotland and Ireland, UK citizens abroad in the EU, EU citizens in the UK, re-issuing of passports, and a whole other plethora of details need to be ironed out. This is going to be a long and interesting journey to say the least.

How did it come to this? Well the UK’s prime minister, David Cameron, took what he thought was a calculated risk, by caving in to right-wing pressure to call for a referendum. By some stretch of imagination, Cameron, who resigned immediately after the vote for Brexit (washing his hands off from when the party and the country yearned for a real leader), can be compared to a young Tunisian gentleman who set himself on fire in December 2010, which became the catalyst for the Arab Spring. How the action of a very few can have such a profound effect on the wider region is remarkable. 

Whether such a significant decision for the UK to exit the EU should have been given to the public in the first place, while demonstrating democracy albeit gung ho democracy, is another question in itself, especially considering the fog of misinformation from both Leave and Remain camps. Irrespectively, it is an eye-opener outcome that only 51.9% for Leave, against 48.1% for Remain, resulting in 1.27 million votes for Leave above that of Remain, has such weighty implication for many years to come. Or will it? There may even be an ‘Exit Brexit!’, the possibility of which is detailed in the following paragraphs.

Brexit and real Islamic finance
The UK is the largest center for Islamic finance in Europe, and the western hub for the sacrosanct form of financing. A handful of Islamic finance banks, a host of international banks offering Islamic finance products, a multitude number of law firms and accountants involved in Islamic finance, a number of associations/bodies in this space, and a relatively large number of educational academic and professional courses and qualifications in Shariah finance, can be found in the UK. 

Just recently – April 2016 – the Economic Secretary to the Treasury, Harriett Baldwin, asserted that the government was determined to cement the UK’s status as the leading western hub for Islamic finance. This was one of the more recent such announcements from UK government officials, trailing back more than a decade ago, when the double stamp duty requirement was removed to make Islamic financing more accessible in the UK. Cameron himself, a few years ago, stated that he wanted London to “stand alongside Dubai as one of the great capitals of Islamic finance anywhere in the world”. 

While that particular statement was slightly ambitious, from a transaction perspective, the UK government has made some headway. In 2014, the UK government issued a GBP200 million (US$258.94 million) ‘Islamic Sovvie’ (a Shariah compliant UK government bond). This debut capital market issuance, while small in amount, signaled that the UK meant business, especially considering it was the first such sovereign bond issued by a country outside the Islamic world.

A year later in 2015, the UK Export Finance had underwritten its first Sukuk. This guarantee was for the 10-year US$913 million Sukuk issued by Emirates Airlines to finance the acquisition of aircraft. 

Is such commercial traction of Islamic finance in the UK going to be compromised as a result of Brexit? In one word – no. In fact, there is a line of thought to suggest, as broached earlier, that Brexit may result in the fulfilment of real Islamic finance. However, before we consider the more ‘higher’ reasons for such an argument, let us first discuss the following more basic reasons why Islamic finance may very well not directly be affected as a result of Leave. 

1. Needs-based financing
We live in a needs-based world. Let’s be honest, the international banks, ranging from Citibank, HSBC, JPMorgan, Deutsche Bank, Standard Chartered, Credit Agricole and Natixis to many others, are not in it to fulfil philanthropic objectives. One of the key objectives for such players is to attract Middle East liquidity. 

Along the same bandwidth of thought, the UK having lost its coveted ‘AAA’ credit rating from S&P, and Fitch lowering its rating from ‘AA+’ to ‘AA’, means the government would theoretically find it fractionally harder to sell their bonds. While I am not advocating the idea that this will result in the UK government approaching the Middle East with hat in hand, what I am saying is that Islamic finance could find itself that little more useful in supporting liquidity if and when the needs arise. Indeed, Theresa May, now the only candidate to take the poison chaliced leadership to succeed Cameron as prime minister, said last week that the government should borrow more in an attempt to avoid raising taxes.

One could argue that with the right-wing being emboldened in the UK by the Brexit vote and finding more airtime in the political landscape, they may have a less of an appetite for ‘Islamic’ finance. But let us not forget, politics is, basically, politics. Nigel Farage, one of the cartoon-type architects that twisted Cameron’s arm for an EU referendum, made ridiculous claims, like how the UK exiting will save GBP350 million (US$453.14 million) a week, only to detract from such claims fairly soon after Brexit. Politicians of his ilk – and there many of those in the Tories – will be open to Islamic financing, depending on the function of need. This is especially in the case where precedent and the legal structure for government issuance has already been laid.

Also, with the London Stock Exchange developed to support Islamic finance, with more than US$34 billion in Sukuk raised through 49 issues at the exchange, it is sufficient to say the international capital markets are comfortable with the London ‘setup’ and there will be no change in direction in this regard.

2. Scotland and Northern Ireland
Brexit has created fault lines across the land and breadth of the UK. While it seems unlikely that Scotland and Ireland will become independent from the UK (so did a Brexit not so long ago), there does not appear to be much choice if they want to remain as part of the EU. Taking Scotland as an example, 62% voted to Remain against 38% to Leave, putting it at odds with the UK as a whole. The charismatic Nicola Sturgeon, Scotland’s first minister, insisted that a Scottish independence referendum, a second one in as many years, was now highly likely. Northern Ireland too stated that they want to remain in the EU and a border poll may be on the cards. 

The other alternative is for Scotland and/or Northern Ireland to retain EU membership (some even tout that London in itself as a city could be part of that ‘in’ club!) while still being part of the UK. Such possibility can be understood in the context that the EU has a history of flexible and variegated participation. For instance, West Berlin was a member of the EEC for 33 years, although not part of West Germany. 

In any case, if Scotland and /or Northern Ireland were to break away from the UK, the take-up of Islamic finance could potentially increase. In Scotland, the Islamic Finance Council UK has advised the Scottish government on a number of issues, as Scotland may emerge as a new hub for Islamic finance. In Ireland, according to PwC, there is approximately EUR2.5 billion (US$2.76 billion)-worth of Shariah compliant funds in Ireland, making up to 20% of Islamic funds based outside of the Middle East. Independence for both countries could very well mean more dependence on outside sources..

3. Opportunities 
With all the uncertainty, it is obvious that London, which has been seen usually been seen as a safe haven for international investors to park their excess cash, including billions from the Middle East, has dropped a peg or two. Thus in this regard, some may feel there may be less ‘Islamic funds’ finding itself from the GCC to London. 

However, the word on the ground is this – there isn’t much choice when it comes to investing in large-ticket real estate transactions which have a tried and tested robust and transparent legal structure. If anything, the devaluation of the pound sterling coupled with the uncertainty may very well result in great bargains for Middle Eastern investors, buying up more of the city’s skyline. In actual fact, it has been reported that investors as far afield as Hong Kong have been looking to purchase sought-after London property in light of the devalued pound. Thus, Islamic finance from a real-estate investment perspective may be part-shielded. 

As a side point, some within the Islamic finance space opine that Islamic finance will take a hit as a result of the UK financial institutions potentially losing ‘passporting’ privileges. In basic terms, what this means is that such financial institutions use the UK as a gateway to Europe’s vast markets, taking advantage of an EU financial ‘passport’ that allows them to sell products in all 28 countries. This can very much affect financial institutions which actually do European-wide business. 

However, domestic Islamic banks usually do business within the UK, thus even if the UK was to lose such passporting rights, it will not greatly affect the small Islamic finance space. In any case, London will very much push the government to ensure Brexit negotiations preserve the passporting rights of financial institutions. 

4. Trade
One of the key tenets of Islamic finance is the fair distribution of wealth. For all the fanciful Shariah compliant structures within the capital markets used by international banks to woo Islamic banks and large corporates, to earn fees and revenues (and fair enough if the international banks obtain the requisite green light from the respective Shariah boards), this one fundamental and significant key tenet is not fulfilled. 

This crucial principle is emphasized in the Quran, with respect to the idea that wealth produced in a society must be distributed in a just and fair manner, so that it may not be concentrated in the hands of a few people. The Quran says: “So that it may not circulate only between the rich among you (chapter 59, verse 7).”

Keeping this in consideration, let us see how Brexit may affect the distribution of wealth.

(a) TTIP
The Transatlantic Trade and Investment Partnership (TTIP) is a proposed US-EU bilateral trade agreement with the alleged claim of promoting trade and multilateral economic growth. It would do this by reducing the regulatory barriers to trade for big business, and would affect things like workers’ rights, public services, food safety law, environmental legislation, banking regulations and the sovereign powers of individual nations. Masses of people within the EU do not want this, and the petition against it may very well be the world’s largest petition ever – signed by approximately 3.5 million people. Some of the critics of TTIP argue that multinational corporations would be able to sue over government policies that harm their profits or contravene trade rules, for example taking reasonable policy decisions such as putting cigarettes in plain packages. It has been seen by many as a way of ‘corporate power grabbing’.

The UK was one of the strongest supporters of the TTIP in the EU. As a result of Brexit, the eventual departure one of the US’s closest allies has, at the least, delayed the TTIP drive. 

As we have seen before, super large corporates do not necessarily distribute money in society – in many cases, they are driven by pure and unadulterated capitalism; in fact many mega-sized corporates find innovative ways just to avoid paying tax! The TTIP would promote monopolies, economic and political globalization, and may very well compromise the fair distribution of wealth. In this regards, a Brexit, if indeed it does stop the TTIP in its tracks, can be seen as a means of fulfilling the higher objectives of Islamic finance.

(b) Africa
Strictly from a trade perspective, the EU’s joint free trade agreement with multiple African countries through the Economic Partnership Agreement (EPA), compromises fairness. The EPA encourages African countries to open up the lion’s share of their markets to European imports. In exchange, African states receive customs-free access to the European market. But in actual fact, it is the African countries that get the bad end of the bargain, not just because many African countries risk losing their competitive trade advantage opposite European companies, but importantly because the negotiating power of the EU as a trade-bloc is very strong and can work exploitatively.

As a result of Brexit, the UK exiting would mean that as well as the UK requiring to negotiate its own free trade agreement with EU (and this is no easy job, considering the EU is the largest trading partner of the UK, accounting for 44% of the UK’s goods and services exports in 2015, and delivering 53% of the UK’s imports), it will also have to negotiate free trade agreements with other countries – like the African countries. Consequently, the result of the weaker negotiating power of the UK could potentially mean a slightly fairer deal for African nations. While it is accepted that renegotiation of the trade deals may very well result in a dip in trade volume between the UK and African nations, adversely affecting the latter, the long-term effect may very well outweigh such impact. However, Brexit means that Africa would lose one of its biggest supporter – the UK – to influence aid and support from within the EU. 

‘Exit Brexit’
Just literally a few days ago, more than 1,000 lawyers signed a letter addressed to Cameron saying the EU referendum result is merely ‘advisory’ and not legally binding. Brexit, under UK law, is not binding on parliament – a large majority of whose members are opposed to leaving the EU. As Geffrey Robertson QC points out: “It’s the representatives of the people, not the people themselves who vote for them.” Who is to know whether a U-turn, or a second referendum may be carried out? 

As unlikely as the case may be, there has been precedents for similar U-turns. In 2008, the Irish voted against the Lisbon Treaty but supported it the second time around. In Denmark, voters originally rejected the Maastricht Treaty, and then reversed their decision. Such is the level of uncertainty that along with all the uncertainty that comes with Brexit, whether or not a Brexit itself will happen is not absolutely yet set in stone.

So what now?
Now that we are on the cusp of May taking the baton from Cameron, the much talked-about serving of Article 50 will be at the forefront. Article 50, written into the Lisbon Treaty (the constitutional basis of the EU) provides a formal mechanism for a country to withdraw from the EU. Amidst all the uncertainty, what exacerbates it further is that Article 50 has never been triggered before and there is no legal precedent for a country to leave the EU and renegotiate a trade agreement with the bloc.

To invoke Article 50, the UK government must inform the EU in writing or in an official statement at a meeting of the European Council

The article states that the negotiations would take up to two years, but they can be extended if all the EU countries agree unanimously that they need more time.

The UK would very likely be without a trade deal after the end of the two-year negotiation period, as under EU law, the bloc cannot negotiate a separate trade deal with one of its own members, as rules have to apply to all member states equally. Similarly, individual member states cannot make trade deals with third countries on their own. Consequently, as the UK will remain a full member of the EU throughout the negotiating period set out in Article 50, it could only formally sign trade deals with other countries once it has left. 

In other words, trade talks cannot be concluded until the UK officially exited the EU, implying that the UK may face a period in which it is outside the EU but does not have a new trade deal with the single market, nor with other non-EU countries. In this case, it would have to rely on World Trade Organization rules until the final deal is concluded. 

The road ahead is littered with several directions, five to be precise according to an analysis conducted by the UK government in March 2016. As it stands at present, it appears the least smoggy is the Norway style, ie membership in the European Economic Area, but not in the EU. However, whatever happens, Islamic finance will not be significantly adversely impacted, and if it does, it would be more of a function of the overall finance system being affected, rather than Islamic finance on its own.

Siraj Ibrahim is the senior relationship manager at Qatar Development Bank. He can be contacted at siraj.ibrahim1@gmail.com.

Sovereign Sukuk: A quiet week

As Muslims around the world celebrate the end of Ramadan and usher in the month of Shawal with the celebration of Eid Mubarak, it appears that the sovereign Sukuk space over the past week was also on a break after what was a hectic period a week earlier. DANIAL IDRAKI writes.

As we move into the second half of the year, we take a quick look at how the Sukuk market has performed in the first half of 2016, and what the markets can expect for the remaining six months of the year. In its latest report, S&P found that total Sukuk issuance dropped compared with last year, with issuance declining by 12.5% year-on-year in the first half of 2016.

S&P expects issuance in the second half of 2016 to continue depending on monetary policy developments and volatility in developed markets as well as the policy actions of sovereigns in core markets, namely GCC countries and Malaysia, in response to lower oil prices. Furthermore, the rating agency reckons that issuance will remain muted over the next six to 18 months, with total issuance reaching around US$50-55 billion for the full year 2016, compared with US$63.5 billion achieved in 2015.

Upcoming sovereign Sukuk



Expected date


US$2 billion



XOF150 billion

July 2016


IRR60 trillion






JOD175 million



PKR79.1 billion











South Africa






Hong Kong

US$500 million to US$1 billion


Ningxia Hui Autonomous Region

US$1.5 billion



XOF150 billion






US$500 million





Shandong Province

CNY30 billion


Sindh Province

US$200 million



KWD5 billion





Sri Lanka

US$1 billion



US$1 billion


London firm to leverage Islamic fund to capitalize on Saudi and MENA opportunities

Crown Prince Mohammed Salman’s plan to boost Saudi Arabia’s economic prowess by overhauling its oil-dependent economy is showing positive signs as foreign investors are banking on the Kingdom’s economic transformation for capital appreciation, and are choosing the Shariah compliant route to capture investment opportunities. VINEETA TAN reports.

London-based Milltrust International is looking to capitalize on opportunities in one of the world’s largest Islamic financial markets and the MENA region through its newly-launched Milltrust SEDCO MENA Fund, in partnership with Saudi’s Shariah compliant asset manager SEDCO Capital. The fund, which offers daily liquidity, will invest primarily in companies in the region thorough a portfolio of equity securities under the UCITS IV framework, making SEDCO Capital the first Saudi-based firm to be awarded a mandate to manage MENA and Saudi equities under a UCITS platform.

“Saudi Arabia together with all other MENA markets provide a perfect optimizer for an emerging market allocation as they all provide favorable demographics [and] growth potential in a protected currency environment. Not many other emerging economies can claim such positioning,” said Yazan M Abdeen, the lead fund manager and head of MENA capital markets at SEDCO Capital

Oil-rich Saudi Arabia is aggressively pushing to reduce reliance on its most prized asset – fossil fuel – as energy prices nosedived to new lows in recent years, leaving the Kingdom reeling from strained finances, bleeding foreign reserves and escalating debts. The Crown Prince’s ambitious Vision 2030 seeks to turn things around by placing itself in the heart of the Arab and Islamic world, and also by being a global investment powerhouse, beyond its black gold wealth. In order to capture international capital, the Capital Market Authority relaxed rules for foreign investment and opened up the nation’s market, in the hopes of boosting foreign direct investment to 5.7% from 3.8%. The Kingdom is also poised to be included into the MSCI Emerging Market Index.

“The launch of the fund comes at an exciting time as the Kingdom is opening its doors to welcome investors from all around the world to diversify the Saudi economy and broaden investor base,” said Hasan Al Jabri, CEO of SEDCO Capital, echoing the sentiments of Simon Hopkins, CEO of Milltrust International Group, who believe that the fund will “create compelling investment opportunities across an extremely diversified and dynamic stock market universe”.

Company Focus: Investree plans to launch Shariah products by end of the year

The fast-growing financial technology sector (fintech) in Indonesia is taking a Shariah compliant turn when Investree, a peer-to-peer (P2P) lending marketplace, recently announced that it is planning to launch an alternative offering in the form of Shariah compliant products. DANIAL IDRAKI speaks to Adrian Gunadi, the co-founder and chairman of Investree, to find out more.

Peer-to-peer lending (P2P) is a method of debt financing that enables individuals to borrow and lend money without the use of an official financial institution as an intermediary. It connects lenders directly with borrowers and the transaction takes place online. In Indonesia, the financial sector is progressively moving toward fintech and regulators are increasingly making attempts to regulate the industry. 

The company is in the process of developing its first Shariah compliant product and is targeting to roll it out by the end of the year. Adrian commented that the relatively early stage of investments and growth of Shariah compliant financial products in the country poses the issue of higher operating expenses compared to the conventional peer, hence making the cost of funding and borrowing a lot steeper. Investree plans to cut through these additional costs with its P2P Shariah compliant products. 

“One of the value propositions of fintech is leveraging digital technology to create a more efficient means for financial services. As opposed to the conventional brick and mortar model of branches, fintech is more efficient in terms of its platform and process. With P2P lending, the pricing is in line with what conventional banks offer, [but] in a much simpler, faster, accessible and transparent manner,” Adrian told IFN recently.

Access to financing and connectivity in Indonesia, it seems, continues to be an issue that hinders growth in a country that is still developing its Islamic finance industry. “By introducing Shariah compliant P2P lending, we will be able to provide wider accessibility [and a] more transparent process and digital user experience in a society that is increasingly relying on the internet and mobile [connectivity],” he said. 

Adrian explained that one of the reasons why the Shariah banking industry still hovers in the 5% range of the total industry is because branch access is still limited compared with conventional banks, other than the more expensive pricing. Indonesia has the largest Muslim population in the world, and Investree is certainly banking on this fact for the growth of its Shariah compliant products.

Investree does not intend to just settle on domestic growth as it plans to go beyond its borders and expand regionally in 18 months’ time. “Countries that share the same demographics as Indonesia and where banking penetration is low would be interesting markets,” Adrian said, without explicitly naming the countries.

As of June 2016, Investree has disbursed 45 financing facilities totaling IDR10.8 billion (US$821,880), with zero defaults so far, based on real-time data from its website. Adrian said that the average financing size is US$15,000 that is geared for small businesses, while its current products consist of invoice financing and employee financing, with an average return of 17% per annum and an average tenor of 45 days. Most of the borrowers are medium-sized enterprises with invoices from reputable companies. “These SMEs may not be bankable yet given the limited collaterals and number of years in operation, but they have good invoices from reputable companies, while investors are retail with an average investment size of US$500,” Adrian affirmed.

Investree had in May 2016 secured a Series A funding commitment from Kejora, an Indonesian venture capital firm. With Investree’s Shariah compliant products already in the pipeline, Adrian will be leveraging on his previous stint as a managing director of retail banking at Bank Muamalat Indonesia to offer investors alternative investment instruments that are short-term, transparent, easy to access and, more importantly, carry attractive yields..

Shariah indices indicate positivity in the face of turbulence

The global markets have been volatile and the Islamic finance industry has not escaped the turmoil. However, the situation is improving as we move out of the summer lull: with both regional and global Shariah indices reflecting this positive progress. LAUREN MCAUGHTRY speaks to S&P Dow Jones on their outlook for the rest of the year – including some exciting new prospects for index development. 

“Islamic finance in the GCC region has not been affected as much as the conventional side,” confirmed Charbel Azzi, the head of Middle East, Africa & CIS at S&P Dow Jones Indices. “We are still seeing a lot of positive movement on our Sukuk indices and our regional Shariah equity indices.”

The S&P MENA Sukuk Index, which includes US dollar-denominated investment grade Sukuk issued in the Middle East and African markets, is up by 4.05% year to date (as of the 8th July 2016), while the S&P MENA Bond and Sukuk Index is up 5.13% over the same period. Although the conventional benchmark, the S&P MENA Bond Index, is up 5.61% so far this year and has outperformed both of its siblings, this is in part due to the preponderance of conventional sovereign issuance in the region as governments affected by the lower oil prices seek quick fixes to plug their growing deficits. Corporate Sukuk issuance is still active, particularly in the financial institutions arena, with the successful recent issuances from DP World, Emirates Islamic and Dubai Islamic Bank (along with the UAE’s first-ever private placement Sukuk from Al Hilal Bank) spurring a strong pipeline. 

On the equity side, performance is also positive. The S&P 500 Shariah Index is up 3.84% so far this year (as of the 8th July), compared with 4.21% for the overall S&P 500. Over the last 12 months the figures are even better, with the S&P 500 Shariah outperforming the benchmark over a one-year period with returns of 4.7% compared to 4.07%. The S&P Emerging BMI Shariah, which offers investors a comprehensive emerging markets benchmark, is also up 3.94% year to date. 

Regionally, Asia is surging ahead with returns of 3.25% for the S&P Pan Asia Shariah Index – compared with annual 12-month returns of just 0.83%, marking a particularly strong performance for 2016. The GCC is keeping up with 1.55% so far this year for the S&P GCC Investable Shariah Index – an impressive recovery from the -13.99% one-year annual return. Africa is another outstanding performer, with year to date returns for the S&P Pan Africa Shariah Index reaching 10.3% as of the 8th July – another strong pullback from the (negative) -18.32% of the annual one-year performance. Unsurprisingly, Europe is the only real low point: with the S&P Europe 350 Shariah Index down -3.73% year to date in the wake of the EU referendum and Brexit fears. 

As optimism increases and performance improves, regional indices are responding to consumer demand for increased customization. “We have developed a few IPO Shariah indices in Saudi Arabia, as well as some customized Sukuk indices for clients in the region,” explained Charbel. 

And there are some new developments afoot, to accommodate the growing interest in alternative ways of investing. These include multi-asset class tactics, as well as smart beta, low volatility routes. “We are looking to launch a multi-asset class Shariah index which takes into account both Sukuk and equities combined together,” Charbel told IFN. “There are multi-asset class funds but we would be the first to launch multi-asset Shariah indices in the region.” 

Another possibility is a MENA-wide Shariah index weighted by an index of volatility, which S&P Dow Jones Indices is also considering. Strong regional performance is driving interest in the equity markets, with hotspots including Kuwait, Saudi Arabia and the UAE hitting the spotlight. 

“I think the market has reached bottom and now we are looking at opportunities to stabilize and hopefully start growing again,” concluded Charbel. “I think there will be demand for Shariah-driven products by the end of Q3, so we should be seeing momentum kick in by Q4.”.


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