Honoring the best

It is that time of year again, and IFN is delighted to bring you the latest results from the IFN Service Providers Poll 2016, honoring the top performers and the diverse and varied players across the globe that play such a vital role in supporting, developing, advising and encouraging the growth of the Islamic financial services sector. The leading awards ceremony in the industry, the IFN Service Providers Poll is wholly independent and voted for by industry participants, making a win one of the most valuable and coveted accolades available. Read on to find out who made the grade this year, with a few surprises in store along with plenty of familiar faces!

It is not just celebrations this week however, and we continue to bring you the best in serious industry analysis and hard-hitting journalism. Our IFN Reports this week cover a multitude of topics, from our regular sovereign Sukuk review to an exploration of opportunities in the US market, a focus on the latest moves from QInvest Portfoy, the latest developments in the Kenyan market and new calls for Shariah governance globally.

Our features come to you from Hajara Adeola of Lotus Capital exploring the economic downturn in Nigeria, Ali Mamoun Ibrahim of the Islamic Corporation for the Development of the Private Sector looking at Islamic fund opportunities in emerging and frontier markets and Muhammad Ashfaq-Ur-Rehman on the developments in auto Takaful, while our IFN Correspondents cover Russia, New Zealand, Singapore, Afghanistan and Turkey as well as real estate. We also offer a country analysis on Oman and a sector analysis on Islamic asset management.

We are delighted to bring you the latest contributions from our resident columnists, Daud Vicary and Mohammed Khnifer, as well as our monthly feature on Women in Islamic Finance and a special report on Iran’s plans for launching Shariah compliant short sale contracts by Majid Pireh of the Securities and Exchange Organization of Iran.

We wish all our readers an insightful, encouraging and interesting read and of course, we congratulate all the winners of our latest Service Providers Poll on their success. Have a wonderful week!

Topping the list: The IFN Service Providers Poll 2016

IFN is proud to bring you the results of the 13th annual IFN Service Providers Poll, honoring the best and brightest of the silent stars supporting the industry through all its ups and downs over the last 12 months. From consultancies to rating agencies, tech firms to standard setters, the Islamic finance industry is made up of more than its parts and every cog in the wheel plays a vital role in ensuring its success. 

The IFN Service Providers Poll, now in its 13th year, is recognized beyond dispute as the leading awards of the industry, and prides itself on being the only comprehensive, independent and unbiased guide to the leading players supporting the Islamic financial services sector. Once again this year we received an exceptional response, highlighting the importance of these players to the ongoing functionality of our business. 

Due to the niche nature of the industry, it is inevitable that many familiar faces return year after year — but this only emphasizes their success in reincarnating themselves and innovating their services to ensure they remain relevant in a constantly evolving industry. This year we also see some new players rise to the top, marking the growth and progress of a sector that has taken significant strides over the last 12 months amid tough competition and challenging economic circumstances. 

With faltering oil prices, volatile commodities, tightening credit conditions, tough lending criteria and political uncertainty sweeping the globe from east to west, 2016 has not been an easy year for anyone: and those who have succeeded deserve ample recognition for their solid performance amid tough times. 


2016 Winner

2015 Winner

Most Outstanding Standard-Setting Body



Best Islamic Consultancy Firm

Dar Al Sharia

Dar Al Sharia

Best Takaful Provider

Pak Qatar Family & General Takaful (Pakistan)

Prudential BSN Takaful (Malaysia)

Best Re-Takaful Provider

Dubai Islamic Insurance & Reinsurance Co (AMAN) (UAE)

MNRB Retakaful (Malaysia)

Best Interbroker for Islamic transactions

Bursa Suq Al-Sila

Bursa Suq Al-Sila

Best Islamic Rating Agency

RAM Ratings

Moody`s Investors Service

Best Islamic Research Firm

International Shari’ah Research Academy for Islamic Finance (ISRA)


Best Islamic Advisory Firm

Dar Al Sharia

Dar Al Sharia

Best Islamic Index Provider

S&P Dow Jones Indices

S&P Dow Jones Indices

Best Islamic Technology Provider

Path Solutions

Path Solutions


Read on to discover who climbed to the top of the pile this year — and how. 

Setting the standard
The Bahrain-based AAOIFI yet again took the top spot for Most Outstanding Standard-Setting Body: winning the award for the sixth year in a row and comfortably controlling the proceedings with 45% of the vote. In a category always dominated by the three leading players, Malaysia’s IFSB closed the gap somewhat from last year, taking second place with 38% in a close-run race, while the International Islamic Financial Markets (IIFM) came third with 17%. 

Established in 1991, AAOIFI is supported by over 200 institutional members from over 45 countries worldwide: including central banks and regulatory authorities, financial institutions, accounting and auditing firms and legal firms. It has issued over 95 standards in the areas of Shariah, accounting, auditing, ethics and governance for international Islamic finance.

The organization has had a busy year, forming a new Shariah board in early 2016 and holding its first meeting in March — the first major step in Shariah form since its last Shariah review six years ago. The group split its accounting and auditing board in two, creating a board solely focused on governance and ethics, in a bold move to focus on the importance of regulation and governance within the industry. The meeting led to the election of Shaikh Muhammad Taqi Usmani, a leading Shariah scholar and jurist, and chairman of the Shariah Board of the Central Bank of Pakistan, as AAOIFI chairman. The meeting also covered six new Shariah standard exposure drafts along with 11 new research studies and 13 reviews of existing standards and 19 standards currently under review, marking the thoroughness and vigor with which the organization approaches its duties. 

AAOIFI launched an ambitious reform agenda at the end of 2015 which it has pursued with vigor over the last 12 months, including reviews of its Sukuk and capital market standards as well as a new standard on the sale of debt, as well as updating its accounting curriculum and reviewing up to 10 of its accounting standards. In 2015, the central banks of Morocco, Kazakhstan and Jordan joined its ranks, while in 2016 the agency welcomed the Capital Market of Authority of Saudi Arabia in what Secretary-General Dr Hamed Hassan Merah called: “A quantum leap for AAOIFI, taking into consideration the Kingdom’s central role at various levels. In AAOIFI, we are particularly keen to achieve higher degrees of harmonization and standardization in Islamic finance products and practices worldwide, and this would add to the industry’s transparency, reliability and credibility.”

Most recently, in October AAOIFI held its 45th meeting in which it adopted Shariah Standard No. 57 on Gold and its Trading Controls, which it developed in collaboration with the World Gold Council and which should open up a whole new realm of opportunities for the industry. Several further standards are expected by year end, including a new regulation covering Islamic credit cards and another standard looking at the liability of investment managers. A draft accounting standard on Murabahah is also expected by the end of 2016, with preliminary studies on Sukuk and Ijarah standards also underway. 

Advising the industry
Standards are a key framework within which the industry must operate: but these cannot be applied or adhered to without the invaluable services provided by the stalwart leaders of the consulting and advisory field.

In the category for Best Islamic Consultancy Firm, Dar Al Sharia (a subsidiary of Dubai Islamic Bank) won yet again with 55% of the vote. In a slight shake-up, the Islamic Financial Advisory Services of Meezan Bank in Pakistan surged ahead to take second place for the first time with 24%, while Malaysia’s Amanie Advisors came third with 21%. 

“It is a great honor to continue to enjoy the trust from the industry for the seventh year in a row,” commented Sohail Zubairi, CEO of Dar Al Sharia
“They say it is easier to reach the top but difficult to maintain it. Dar Al Sharia retaining the top position in the IFN poll for the last seven years is attributed to sheer dedication by its team members to deliver high quality and authentic Islamic finance consultancy and advisory services to the clients on a consistent basis. I commend the IFN leadership and team for starting and maintaining the most transparent industry poll.” 
In a double win, Dar Al Sharia also won Best Islamic Advisory Firm this year, taking a resounding 51% of the vote and winning the prize for the second year in a row. As one of the stalwarts of the Islamic financial services industry, the group is consistent in its robust and rigorous approach to Shariah advice, the value of which is reflected in its ongoing success and recognition from a highly competitive industry. 

Always an exciting race, honorable mentions must also go to Amanie Advisors and again the Islamic Financial Advisory Services of Meezan Bank, which finished neck and neck with 25% and 24% respectively in one of the closest competitions of the year. 

Best Takaful
The Best Takaful Provider category is always one of the most closely-fought in the contest, and one which often throws up surprises — and 2016 was no exception. Last year’s winner, Prudential BSN Takaful, was nowhere to be seen; and instead Pakistan’s Pak Qatar Family & General Takaful surged ahead to take the crown. 2014 winner Etiqa Takaful took second place, while Abu Dhabi National Takaful Co came a respectable third. 

One of the pioneers of Takaful in Pakistan, Pak Qatar Family & General Takaful (Pakistan) has had a strong year and is now present in every major city in the country with a strong expansion program to grow its branch network for both individual and corporate members. The group has created bancaTakaful relationships with a number of leading banks in Pakistan which has cemented its success, and been instrumental in bringing Islamic insurance solutions to the wider public. It has also collaborated with a number of industry players to develop awareness, including a strong relationship with the IBA Center of Excellence. In 2015, the group demonstrated its strength and success with the distribution of a 28% surplus among its individual Family Takaful participants, the eighth year that it achieved a surplus distribution and reflecting its strongly competitive performance throughout the year. 

Re-Takaful surprise 
The award for Best re-Takaful Provider was another hotly contested category — but the clear winner was Dubai Islamic Insurance and Reinsurance (AMAN) (UAE), last year’s runner-up. 2015 winner MNRB ReTakaful of Malaysia took second place, while AIG Re-Takaful (Malaysia) came in third. 

The re-Takaful award is always tightly contended, with a variety of strong players that make waves in the industry and compete closely for the top spot. AMAN has had an active year, cementing itself as one of the top players in the GCC with moves such as a collaboration with Emirates Islamic for auto Takaful and the adoption of the UAE national ID card as an alternative to its health insurance card. 

It is reassuring to see that MNRB ReTakaful remains in the game, as the firm had a tough few years with losses in 2014 and a withdrawal of ratings from Fitch in 2015 followed by an internal restructuring exercise. In April 2016, MNRB Holdings was awarded a license in Malaysia to undertake General and Family re-Takaful after its restructuring, through a newly established re-Takaful division — replacing the former MNRB Retakaful unit, which will continue to manage its outstanding business portfolios. It is good to see that the group is now getting back on its feet. 

Broking the deal
Once again and following on the heels of its resounding win in 2015, the Malaysian bourse’s commodity Murabahah, Bursa Suq al Sila’, raced into first place for Best Interbroker, with a resounding majority. 

Overall, the Malaysian exchange has had an excellent year, with its best results since 2008 in the first half of 2016. Bursa Suq Al-Sila’ is a Shariah compliant commodity Murabahah trading platform which facilitates Murabahah and Tawarruq transactions. While the securities market, both regionally and globally, has seen a dampened year on the back of economic and political uncertainty, analysts note that Bursa has continued to see strong growth on the back of derivatives and fee income. For the first half of 2016, growth in derivatives (which makes up 19.3% of total revenue) grew by 20.8% (compared to a 5.1% year-on-year decline in securities trading revenue) while higher Bursa Suq al Sila’ and market data revenue helped drive growth in fee income. 

Bursa Suq Al-Sila’ (BSAS) is honored and proud to be recognized for two consecutive years as Best Interbroker for Islamic Transactions,” commented Jamaluddin Nor Mohamad, the director of Islamic capital markets at Bursa Malaysia. “The strong growth in BSAS trading was mainly driven by the adoption of [the] Islamic Financial Services Act (IFSA) in Malaysia and conversion of bank deposits from Mudarabah to Murabahah contracts, as well as the growing interest in tenor-based pricing. The stellar performance has been encouraging as we observe more interest coming from the MENA and Asia regions as the platform caters for the large-sized transactions, made possible by the availability of a large supply of physical commodities.” 

NASDAQ Dubai came second, emphasizing the growing global competitiveness of the GCC, while 2014 winner DDCAP took third place. 

Rating the industry
The contest for Best Islamic Rating Agency is always close, with the leading players fighting a tight battle while smaller regional competitors can often offer sterling competition. Excitingly in 2016, top Malaysian rating agency RAM Ratings took the top spot, beating off the bigger players with a resounding victory that won over two-thirds of the vote. Last year’s winner Moody’s Investors Service came second, while S&P Ratings took third place. 

The win highlights the valuable role played by regional rating agencies in supporting, building and encouraging their local capital markets. RAM provides crucial and independent credit opinions that allow investors and market participants to make informed decisions that contribute materially to the growth and strength of the industry. 

RAM Ratings is honored and grateful for the market’s vote of confidence in recognizing our Sukuk rating and Islamic finance thought leadership,” said CEO Foo Su Yin of RAM Ratings. “We will continue to be a catalyst for Islamic finance development.”

Researching the way
In a relatively small category with just a few key players, the winner of the Best Islamic Research Firm has swung back and forth multiple times over the years. However, in 2016 the International Shari’ah Research Academy (ISRA) once again took the top spot — cementing on last year’s success and consolidating its leading position with almost three quarters of the vote. The Islamic Research and Training Institute (IRTI) came second, while Gulf Investment House once again took third place. 
The results highlight ISRA’s increasing dominance in the research space, and the organization has been extremely active over the past year in developing its activities and making a real contribution to industry knowledge. Most recently, it collaborated with Bank Negara Malaysia to produce the valuable Educator’s Manual on Shariah Standards for the industry, which marked an important milestone in Shariah education in Malaysia. The organization is ambitious and optimistic for the future of the industry, and its enthusiasm permeates its global activities — with its latest forecast suggesting that Islamic global banking assets could reach US$3 trillion by 2018. 

Indexing the Islamic universe
On the indexing side, S&P Dow Jones Indices (SPDJI) came top yet again — marking a decade of unbroken success, and the longest-running unbroken win in the history of the poll. 

S&P Dow Jones Indices’s commitment to Islamic finance is long-standing and continuous and this award is a recognition of this commitment. We are very privileged to serve the community of Islamic financial professionals with our indices, which focus on integrity of data, breadth of coverage and innovative investment approaches,” said Alka Banerjee, the managing director of global equity and strategy indices at S&P Dow Jones Indices

SPDJI won 41% of the vote this year compared with 59% last year, and its dominance seems unchallenged by any serious competitor despite the suggestion last year that the merger of Russell Indexes and the FTSE Group to become FTSE Russell could change the game. However, FTSE did take second place in the contest for 2016, while 2015 runner-up MSCI came third. 

Shaping the future
And finally, the industry would be unable to function without the technology that underpins all its operations: from the most basic to the most complex. For the ninth year in a row (and 10th time in total), Path Solutions takes the crown for Best Islamic Technology Provider. This category was extremely close, with a new runner-up emerging this year. Oracle FSS came second in a very tight race, while Malaysia’s Silverlake FSS took third place. 

Path Solutions is one of the most prolific, hardworking and supportive players of the Islamic finance industry, and takes its role far beyond its day-to-day business activities to support entrepreneurial and technological advances and activities in all its forms. Most recently, for example, the group sponsored the Egyptian Collegiate Programming Contest in order to support the development of young professionals within the industry. 

“We are gratified to add to our success this prestigious award that we are winning for the tenth time, in addition to being recognized by such a prominent industry-focused publication,” commented Mohammed Kateeb, the group chairman and CEO of Path Solutions. “But what makes this award exceptional, is earning it through the votes of our esteemed clients and partners — a fantastic validation of the value and technology leadership we are bringing to the Islamic finance industry. Certainly, we are determined to continue this impressive trajectory.”

As always, IFN extends its heartiest congratulations to all the participants in the IFN Service Providers Poll, the exceptional performance of which represents the growing strength, reach and size of the Islamic finance industry across the world. Thank you also to everyone who voted in this year’s event, making it an independent and unbiased election that truly represents the leaders of the industry as voted for by their peers. We are proud and privileged to be able to facilitate and distribute such honors, and we value the support that allows us to do so.

Sovereign Sukuk: Bahrain and Jordan make headway while Ivory Coast mulls SME Sukuk

In another exciting week in the sovereign Sukuk space, Bahrain and Jordan kept the momentum going with the successful issuance of their respective Islamic debt offerings, while Ivory Coast is considering issuing a Sukuk facility to support the country’s SME sector. Regular issuers from key markets, meanwhile, kept the market busy with its usual Islamic debt issuances. DANIAL IDRAKI brings you the usual updates.

Bahrain on the 12th October concluded the issuance of an eight-year US$1 billion Sukuk facility and a 12-year US$1 billion eurobond facility. The Regulation S facilities have been admitted to listing on the Irish Stock Exchange. Bank ABC, BNP Paribas, Credit Suisse, JPMorgan and Standard Chartered Bank were the joint lead managers for both facilities while Norton Rose Fulbright acted as the advisor.

The monthly issue of the Sukuk Salam facility by the Central Bank of Bahrain (CBB) worth BHD43 million (US$110.17 million), which carries a maturity of 91 days, was fully subscribed. The expected return on the issue, which begins on the 19th October and matures on the 18th January 2017, is 2.02%.

Jordan has closed the inaugural issuance of a JOD34 million (US$47.9 million) Sukuk Ijarah facility, which was three times oversubscribed, according to a statement. The five-year tenor facility has an expected profit rate of 3.01% and was priced inside the Kingdom’s existing curve for conventional bonds. The sovereign issuance is part of the comprehensive joint Technical Assistance Package provided by Japan International Cooperation Agency and the Islamic Corporation for the Development of the Private Sector which also acted as the transaction technical support and advisor.

Ivory Coast
Ivory Coast is keen to explore the possibility of issuing Sukuk to support the country’s SME sector and intends to work with the Islamic Corporation for the Development of the Private Sector (ICD) in this respect, said Niale Kaba, the minister of planning and development of Ivory Coast, during the Africa Islamic Finance Forum 2016 in Abidjan. Ivory Coast has issued two sovereign Sukuk to fund its infrastructure needs with the help of the ICD.

The Malaysian government’s RM3 billion (US$714.96 million) GII Murabahah offering issued on the 14th October received a total of RM6.07 billion (US$1.45 billion) from a total of 256 bids. According to a filing with Bank Negara Malaysia, the facility, to mature on the 30th September 2026, was sold at a profit rate of 4.07%.

The government of Indonesia is targeting to raise IDR3 trillion (US$231.3 million) via an auction of sovereign Sukuk (SPN-S 19042017 and four project-based Sukuk series) conducted on the 18th October to finance the 2016 State Budget, according to an announcement on the Ministry of Finance’s website.

Autoriti Monetari Brunei Darussalam (AMBD) issued a BN$32 million (US$22.85 million) Sukuk Ijarah facility at a rental rate of 1.13%. The central bank noted in a statement that the 137th Sukuk Ijarah securities will mature on the 12th October 2017, based on a 364-day tenor. To date, the country has issued over BN$10.22 billion (US$7.3 billion)-worth of short-term Sukuk Ijarah securities with the total holdings of Brunei government Sukuk outstanding until the 13th August standing at BN$468.2 million (US$334.26 million).

Upcoming sovereign Sukuk



Expected date


US$2 billion



IRR60 trillion




First quarter 2017










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



Company Focus: QInvest Portfoy’s growing appetite for Islamic investments in Turkey

The growth of Shariah compliant investments in Turkey has picked up in recent times as the country continues its economic development along the trajectory of Islamic principles, and QInvest Portfoy, one of Turkey’s Islamic asset managers, is wasting no time in putting in place the nuts and bolts to capture the Islamic growth opportunities. DANIAL IDRAKI speaks to the asset management firm to find out its ambitions in the Islamic space.

QInvest Portfoy was acquired by QInvest in March this year, as the Qatari Islamic investment group looks to position itself in the Turkish market and take advantage of the growing Shariah investment flows into the country, given that more global investors are now setting their eyes on the emerging Islamic finance market that has a lot to offer. 

Islamic equity fund and real estate investment fund
With assets under management of close to US$500 million, the firm is currently working on developing an Islamic equity fund and a Shariah compliant real estate investment fund (REIF) to add to its existing Sukuk fund portfolios. “We are in the process of developing an Islamic equity fund, focusing on small and medium-sized companies with growth potential, as well as exploring the possibilities associated with establishing a Shariah compliant REIF which will appeal to both Islamic and conventional investors in and outside of Turkey,” Murat Vanli, the general manager at QInvest Portfoy, told IFN.

Murat believes that Turkey has a great deal of potential in the REIF segment, and expects the market to be flooded with a number of options in the future, with a focus on different kinds of real estate and land investments with both capital gain and rental income objectives. “Investors will be able to invest in single projects, as well as diversified portfolios of promising projects via REIF structures provided by the asset management industry,” he noted. 

It is not difficult to see why QInvest Portfoy is upbeat about establishing an Islamic REIF in Turkey, as the country’s real estate sector, which makes up around 5% of total GDP, has been on an upward trend with Turkish home prices doubling over the last five years and jumped 18% in 2015, according to figures from property consultancy Knight Frank.

Islamic pension funds
Besides the real estate sector, QInvest Portfoy is also targeting pension funds for its Islamic investments, which it believes still have quite some room to grow. “We see multi-asset pension funds, especially Islamic pension funds, growing further toward a more meaningful size relative to the industry’s total, and relative to the country’s GDP. QInvest Portfoy in past years has focused mainly in Islamic pension funds management and has built experience and expertise in this area, and we recently established our own mutual funds and have started to utilize this expertise for our retail and high-net-worth clients,” Murat explained.

Current Sukuk funds
Furthermore, the firm currently has two Sukuk funds: a Turkish lira Sukuk fund and a US dollar-denominated global Sukuk fund. “Our Turkish lira Sukuk fund has a short-term investment strategy, mainly investing in local papers. This fund targets short-term Turkish lira investors, who seek higher returns and more flexible liquidity management compared to Islamic Turkish lira bank deposits,” Murat commented. Its global Sukuk fund, on the other hand, invests in US dollar-denominated global Sukuk and targets hard-currency investors who seek considerably higher returns than Islamic US dollar bank deposits, but have a more medium to long-term investment horizon. 

“Credit risk and duration risk are actively managed here, and the fund can shift between strategies in order to seek yield in longer duration[s] or riskier credit, as market conditions evolve. However, there are limits to both, such as the fund maintains a minimum weighted average credit rating of ‘IG (BBB-)’ and does not exceed a term of six years in average duration,” Murat added.

The Turkish lira Sukuk fund currently has a year-to-date return of around 8% which corresponds to an annual return of around 10%. “This is pretty much a money market instrument, so it’s probably safe to say that the annual returns would hover around 10% net in the medium term as well. The US dollar Sukuk fund has a year-to-date return of 6.3% which would correspond to around an 8% annual, but of course, it’s been a bull year mostly for the US dollar Sukuk. In the medium to long term, our clients should expect to receive between 4% and 6% net returns on this investment fund,” said Murat.

Turkey’s domestic market
On the wider front of the domestic Islamic finance market, Murat expressed that he would like to see more corporate issues from the real sector, especially with a medium to long-term duration. “We would like to see the Islamic profit curve evolve to match the conventional yield curve, so that the local Islamic funds are also able to apply more active duration strategies, rather than only provide liquidity and yield pick-up in the short end of the curve,” Murat opined, adding that he hopes the Turkish market will also have more flexible fund legislation, along with derivatives and structured products in the Shariah compliant universe.

Global and African multilateral financial players strengthen Islamic finance commitment to unlock wealth of opportunities in the region

“Not so long ago, ‘Africa as a home of Islamic finance’ was considered by many as a mapping exercise or a theoretical concept. Today, thanks first to the African citizens, playmakers, regulators and investors, our dream has become a reality,” remarked Khaled Al Aboodi, CEO of the Islamic Corporation for the Development of the Private Sector (ICD), addressing the 450-strong global audience of government leaders, policymakers, decision-makers and Islamic finance industry elites, at the Africa Islamic Finance Forum 2016. VINEETA TAN brings you an exclusive look at the seminal Africa Islamic Finance Forum from Abidjan.

Held in Abidjan on the 17th October, the two-day high-level event is a reflection of the commitment by African nations to Islamic finance evident by the quality of its speakers: Niale Kaba, the minister of planning and development of Ivory Coast, officiated the ICD-led event with a welcome speech; Prime Minister Danial Kablan Duncan; Dr Sidi Ould Tah, the director-general of the Arab Bank for the Development of Africa (BADEA); Tiemoko Meyliet Kone, the governor of the Central Bank of West African States (BCEAO); Ousmane Diagana, the vice-president of ethics and the chief ethics officer of the World Bank; and Khaled each delivered a keynote address.

From Nigeria, Somalia, Ivory Coast, Sudan, Kenya and beyond, Islamic finance experts and senior decision-makers from various African states agreed that Islamic finance is a vital instrument for financial inclusion and capital diversification with the capacity to unlock liquidity in the region and attract wealth from the Gulf. Africa’s will to reform and undertake serious reforms to increase the productive base of the continent to develop the middle class, the region’s great infrastructure needs to boost it to emerging country level and a strong population growth rate creating significant demand, are drivers for Islamic finance in the continent. 

Among sectors identified as areas for high Islamic finance growth in Africa are SMEs, microfinancing and the Sukuk market, especially in light of the massive infrastructure needs of the region (of up to US$97 billion). Yet, market participants are cognizant that the current regulatory framework is not yet conducive enough to ensure cost efficiency and the timely execution of Shariah compliant financial transactions: double taxation, Shariah disharmony and tedious documentation which lacks standardization remain issues. 

“When we heard of Islamic finance, we were excited because at that time, our bond issuance was very well received and we were excited to tap the Sukuk market,” shared Felister Kivisi, the director of the debt management office of the National Treasury of Kenya. “However, we soon realized that it isn’t that easy,” Kivisi noted, adding that the lack of a comprehensive legal infrastructure and tax neutrality were holding the country back from issuing a sovereign Sukuk facility, one that has been postponed multiple times over the last few years.

Nonetheless, regulators and multilateral financial institutions are taking concrete steps to overcome these barriers. Kone revealed that the Central Bank is working on an Islamic finance framework that is expected to be effective January 2017; BADEA has confirmed it will support the BCEAO in laying out such a framework while the ICD’s Khaled affirmed that the ICD is working with several African governments to resolve the issue of double taxation. 

Multilateral institutions are also strengthening their resolve to facilitate the mobilizing of resources and assist in developing and issuing Islamic financial products. At the Forum, Bassary Toure, the vice-president of the West African Development Bank (BOAD), confirmed that the BOAD is launching an Islamic finance window it hopes to become operational in 2017. “The BOAD wants to become an agency to execute international Islamic financial transactions, establish special funds [and] cooperate with Islamic financial institutions to create a leverage effect. This window will aim at making [the] BOAD a reference institution in Africa with the role of executing transactions and initiatives,” said Toure. The ICD continues its strong support for African players: the IDB’s private sector arm at the event signed an MoU with Afriland First Bank under which both entities will cooperate to establish an Islamic window in Ivory Coast. 

The Africa Islamic Finance Forum 2016 continued on the 18th October, hosting the launch of a Sukuk index, a collaboration between the ICD and the West African Stock Exchange. The index will list the sovereign Sukuk of Senegal, Ivory Coast and Togo amounting to CFA766 billion (US$1.28 billion).

“This will be one of the sizeable Sukuk listings worldwide and a relevant answer to those who did not believe in the pioneering role that Africa has to play in the finance area,” said Khaled, who further revealed that the ICD is exploring dual listing options at the Kuala Lumpur Stock Exchange (Bursa Malaysia) in order to boost quantum trade and also to offer investors of the Middle and Far East with exposure to the WAEMU.

Data analytics to transform motor Takaful into a profitable and sustainable business

Motor Takaful or motor insurance is a risky and loss-making line of business for most who are associated with the Takaful industry. Why? Because prudent risk management is not practical without the involvement of digital tools that help in providing insight and intelligence in accepting or rejecting the risk. MUHAMMAD ASHFAQ-UR-REHMAN strongly believes that data analytics can improve the profitability of the motor Takaful portfolio for Takaful operators. 

First of all, it is pertinent to explain what motor Takaful loss-making is. In layman’s terms, a Takaful company receives premium against insuring the risk of a specific vehicle and in return, issues a Takaful policy to the customer to safeguard him/her from potential loss in the event of any road accidents. Takaful companies budget or project certain losses in anticipation of vehicle-related accidents. For instance, a loss ratio is projected at 80% and there are 10 customers booked with an aggregate premium of US$10,000. Assuming the loss ratio remains within the set threshold as 80%, based on that fact the Takaful operator will be paying US$8,000 to compensate customers against their losses as a result of vehicle accidents. If the projected loss ratio or claims swing in a negative direction, ie jumps more than 80%, that will impact the Takaful operator’s profitability for the motor business and will also upset the overall profitability across the company. 


Empirical evidence shows that there are Takaful companies that have motor loss ratios around 100-120% or even more but there are also examples of lower loss ratios. The point here is not to focus on what the loss ratios are but to highlight the significance and the negative impact triggered due to the upward swing in loss ratios as a result of the unavailability of data analytics.

According to AM Best’s special report published recently, the motor insurance market share (net written premium) was 35.5% and 50.8% was medical whereas 13.6% was for other lines of insurance products in 2014. Such high values for the motor and medical businesses demonstrate the significance of both lines of business. 

Leaving the natural or environmental catastrophes aside, the issue of the usual losses is pretty much solvable. In the absence of data analytics, it is difficult to predict the loss ratio correctly or price motor Takaful with a justified formula. This issue can be overcome through the effective use of data analytics in addition to a robust actuarial/underwriting model.

Saudi Arabia and the UAE, the leading Takaful markets within the GCC, are working hard to put in place the right regulations to govern the industry and safeguard the interest of stakeholders. 

Why should good drivers be penalized with the bad ones?
Why shouldn’t a good driver be paying lesser premium for motor Takaful compared with another who has a history of accidents? Is it not the bad driver who is supposed to pay more? A good driver should have some incentive over a bad driver if the good driver is an experienced driver and had no accidents in the past. 

Since some Takaful companies do not have the ability to analyze customers individually and in depth, thus they cannot treat each customer as per what they are due. So they offer flat rates without any differentiation and even sometimes a higher rate than the previous year. These all depend on how the company is doing on its budgeted loss ratios for a certain line of business. In such a situation, as an alternative, confident drivers who believe that they would not have any accidents due to their own negligence or mistakes during the policy year, may then choose a slightly higher deductible in order to get a special rate on the motor Takaful. But, that is something one needs to understand really well and decide upon carefully.

Random decision-making leads to unjustified pricing and high losses
There is a fundamental issue of not making informed decisions for many Takaful underwriters/companies. One can only make informed decision if he or she has the relevant data to analyze. If the necessary data on customers and vehicles is available and the data is clean and easily accessible, the company will have better decision-making and customers will benefit and stay loyal to the company for a long time. 

Some might arguably proclaim that they have the requisite data. The problem with poor decision-making has been either due to a lack of data or the poor quality of the data, ie issues of accuracy and authenticity. Poor quality data starts with punching in the details of any customer and vehicle incorrectly or not in line with the expected outcome into the system. The worst-case scenario is that there is no quality check performed on keying in the details of customers and vehicles, therefore the right inference from the data is questionable. 

Substandard work put in at this point affects both the Takaful operator and some customers in the form of unjustified pricing and unanticipated losses. As a result, the Takaful loss ratio deviates from the projected figures where good drivers do not get preferential rates and are charged for those who happen to have accidents which is obviously not fair. This may differ from company to company as it depends on how analytics-savvy the company is. 

Some Takaful operators only come to know of their loss ratios through their periodical financials produced by the relevant departments. Why? Because there is no audited management information system or data analytics available on a real-time basis in a digital format. Tools like business intelligence or Qlickview are handy but they can only help if they are deployed in their true spirit, and only when the data coming from core applications is also accurate and authentic. In some companies, the motor portfolio holds the bigger slice of the pie, hence in the worst-case scenario that would gobble up the capital of the company quickly.

Data analytics can help to make motor Takaful a profitable line of business
Digital disruption is sweeping through industries and Takaful being already a laggard can take full advantage of the digital force which is nearly neutralizing competition across businesses. The exploitation of data analytics could be a game changer for a profitable motor Takaful business. Unleashing the power of data analytics to its full extent can enable Takaful operators to get the desired results. 

Data analytics can provide intelligence on customers for better engagement, enable data mining, perform predictive analysis to forecast losses more vigorously, perform re-Takaful arrangements, predict the cession rate and help with the choice on the access of the loss or quota share. Data analytics can help Takaful operators to stay up-to-date to gauge the pulse of the business for immediate and informed decision-making when taking corrective measures. As a stepping stone, Takaful operators with the help of data analytics should analyze the reality on the ground by searching answers to the following questions:

  • Is the data of customers and vehicles entered into the system correctly?
  • Is the criterion of customer/vehicle identification robust?
  • Is there a clean database, free of errors and incompleteness?
  • Has the date ever been audited for accuracy and authenticity?
  • Do we have master level data management as a centralized database solution?
  • Can data of existing/new customers/vehicles be fetched from the company’s own or third-party systems seamlessly?
  • Is the pricing philosophy ad-hoc and does it take customer relationship (profitable or loss-making) into consideration?
  • Is an eye kept on the industry landscape at real-time and close intervals?
  • Is there a historical record of a specific customer and/or vehicle?
  • What is the overall value of any customer’s relationship to the company? Are other products taken into consideration when pricing motor Takaful?
  • Is there a rationale for contribution cession, for the choice on the access of the loss or/and quota share in re-Takaful arrangements?

Already under pressure, Takaful operators need to ‘disrupt’ themselves sooner rather than later. They are going to be challenged further as they will soon be receiving enquires to insure driverless cars. In Singapore, a trial on driverless taxis has already kicked off. In the Middle East, Dubai is also not far behind with driverless vehicles, with a test ride already performed. 

Similar to any other industry, data analytics can literally help Takaful operators to improve their bottom line performance, not only in the motor Takaful business but also in other businesses such as medical, property and travel. Data analytics built intelligently will help in enhancing customer experience, creating cross/up-sale opportunities in addition to providing insight into the business at large. So, the following steps should be taken:

  • Punch in the data correctly with the ‘four eyes’ principle so that you do not merely depend upon intuition while pricing and projecting losses.
  • Make full use of data analytics (in-house and third-party solutions) to provide a snapshot of historical claims regarding the driverd and vehicles.
  • Keep an eye on the dashboard’s color schemes (green, amber and red should your company be using full proof data analytics and business intelligence tools).
  • Use telematics which can help in getting more intelligence about behavioral aspects such as speed pattern, distance traveled, brakes application, area of travel, causes of accidents and such. It is also good to team up with auto manufacturers to fit ‘black boxes’ in vehicles under loyalty program arrangements.

Muhammad Ashfaq-Ur-Rehman is an independent management consultant and advisor for financial and non-financial institutions on strategy, distribution, performance improvement, insuretech, digital transformation, data analytics, sales, marketing and customer experience. He can be contacted at m.ashfaq.rehman@me.com.

Islamic funds: Growth of assets in emerging and frontier markets

Within the last decade, Islamic financial assets have exhibited double-digit growth but they still only represent a mere 1% of global assets. Analysts believe that the industry has a long way to grow driven by rising demands for ethical-based finance especially in Muslim-dominated economies. Perhaps one notable aspect is the wide underrepresentation of funds that exist across a diverse spectrum of asset classes. ALI MAMOUN IBRAHIM reviews the global untapped markets within private equity, SMEs and income and capital market domains in Islamic asset management funds within emerging and frontier markets.

Private equity based on ‘partnership’ the core foundation of Islamic finance

  • ‘Private equity’ despite the ‘alternative’ categorization, has its core concepts built on the foundations of partnerships (profit and loss) and asset-based finance which are at the epicenter of Islamic finance. In fact, the involvement of investors in turnaround restructuring, growth synergy and improved governance can lead to more equitable profits specifically, when compared to the incoherent and behavioral volatility of capital markets. Hence, it comes as no surprise that Islamic private equity funds have exhibited considerable growth in the past decade, including accumulated wealth markets, pension funds, endowment funds, sovereign wealth funds and institutional investors across growing emerging and frontier markets.

  • For example, the MENA region’s private equity industry started from a low base but has undergone significant growth over the past decade. Cumulative capital raised for MENA funds increased from US$1 billion in 2002 to over US$20 billion in 2011 as a result of:

  1. Increasing liquidity and investible funds
  2. Inward-looking strategies followed by the region’s sovereign wealth funds and major private sector investors 
  3. Global investors seeking greater exposure to high-growth emerging markets, and 
  4. More realizable exit opportunities and growing capital markets.
  • However, the industry still remains under-penetrated with the private equity investment to GDP ratio in 2011 of 1% in MENA as compared to 98% in the US and 75% in the UK, according to the Emerging Market Private Equity Association (EMPEA) report for the first quarter of 2012. 

    Currently, the majority of regional sovereign wealth funds and global private equity investors are seeking new avenues to channel their excess liquidity into high-growth emerging and frontier economies to generate attractive returns. Recent figures from EMPEA note that the percentage of capital available for investment that is focused on emerging markets has grown from about 7% of aggregate committed capital eight years ago to approximately 14% at present. Regions including Latin America, Eastern Europe, India, Asia and Africa have all exhibited traction from limited partners and general partners in recent years, fueling a significant scale-up in commitments to established local managers and spurring increased involvement from globally diversified players, according to E&Y’s ‘Private Equity Roundup: Africa’. 

  • Despite the growth in assets under management (AUM), the number of established, experienced and credible private equity fund managers in developing markets is limited. A number of OIC countries in South Asia, Southeast Asia and CIS regions are experiencing similar general trends and have experienced strong interest from limited partners. Africa, specifically, has been known for its lack of long-term finance and underdeveloped capital markets which make private equity an ideal solution for companies requiring growth capital. 

    Private equity investment in Africa (including North Africa) has risen from US$1.5 billion in 2012 to US$1.8 billion in 2013 according to the report, ‘Pension Funds and Private Equity: Unlocking Africa’s Potential’ by Making Finance Work for Africa, The CommonWealth and EMPEA (2014). In fact, Africa is known to have US$29 billion from pension funds which can enable exuberant growth for the continent in the coming years, according to the report ‘Africa Private Equity Insider: In Pursuit of Pensions’ by Anna B Wroblewska (published by AFKInsider in 2016). 

Structured trade finance funds – a key solution for SMEs

  • In emerging and frontier markets, entrepreneurs and business owners looking to start or grow SME businesses face significant challenges particularly in terms of access to appropriate financing, experienced business support and the market linkages and networks needed to succeed. SMEs are also considered too large for microfinance, too small for traditional private equity and too risky for traditional security-based financiers as they are often informally structured (compared to large corporates) or have a lack of security or track record. Thus, many entrepreneurs and business owners find themselves in the ‘missing middle’. 

  • A report by the Asian Development Bank (ADB) noted that SMEs face higher rejection rates than other types of firms globally for submitted trade finance proposals. SMEs, especially in Africa (32%) and Asia (19%), depend on working capital for pre-export financing as their main source of trade finance. 

  • Unmet funding gaps (the global trade funding gap is US$1.4 trillion, US$693 billion in developing Asia, according to the ADB’s report, ‘2015 Trade Finance Gaps, Growth, and Jobs Survey’) in frontier and least-developed economies are troubling. Geographically, these gaps are proportionately widest in sub-Saharan Africa, South America and within developing Asia, and are hindering growth.

  • This is of particular concern as SMEs are a leading driver of trade, employment and economic development. SMEs are strategic in multiple ways as follows: 

  1. SMEs are crucial to the development of strong OIC economies 
  2. SMEs act as the principal means of job creation for individuals at the bottom of the pyramid and the driving force for a thriving, formal economy, and 
  3. SMEs build a healthy national infrastructure, encouraging political and social stability.
  • According to the International Labor Organization, SMEs provide two-thirds of all formal jobs in developing countries and up to 80% in low-income countries. 

  • SME funds centered on structured trade finance (STF) can play a vital role across the value chain and across geographies. The mode of finance enables the financier (fund manager) to hold the commodity or goods exchanged as collateral which fits SMEs well in addressing their lack of available securities. In fact, STF funds in general are uncorrelated with the market and even in the SME trade finance space can yield lower volatilities and higher Sharpe ratios. 

    However, the core foundation of SME success falls not only on origination but also mainly on value-added post-acquisition management. Despite their attractive features, such fund management does not come easy and its execution requires thorough due diligence across involved counterparties and active monitoring (requiring full management of the goods across the supply chain: collateral management, goods inspection, and logistics support and processing management). 

    Well-managed SME STF-based funds coupled with active resource mobilization can raise the development multipliers, yield lucrative returns to investors and play a vital role in bridging the gap for SME finance in OIC economies. 

Income funds and capital markets a necessity for OIC liquidity demands

  • One of the most critical impediments in realizing the potentially high growth of Islamic finance is the restricted supply of Shariah compliant investment products that offer both recurring income and liquidity to investors. 

  • Following the financial crises, financial institutions have become more conservative and selective in their credit reviews resulting in a slowing credit environment. Although markets have now picked up, the use of bank financing remains limited, as well as more costly, as compared with the pre-financial crises era. On the other hand, the weak performance of capital markets (being adversely affected by the developed world’s economic slowdown) is also making it difficult for companies to raise new capital to capture growth. 

  • Several governments are now trying to reduce their role and encourage private sector participation in order to increase efficiency, promote transfer of skills, broaden business opportunities for the private sector and develop an alternative source of funding. 

  • Capital markets are generally underdeveloped in the OIC with a low mutual fund asset base (with respect to GDP) when compared to developed economies, in addition to the dire need for liquidity management solutions, according to the EY’s ‘GCC wealth and asset management report 2015’ and the dataset from WorldBank.org.

  • This is particularly true, especially as fund managers adopt socially responsible investments (SRI) through an environmental, social and governance (ESG) framework while combining with Shariah finance, which both cross-over in terms of the ethical nature and socially responsible investing. Adopting such strategies for capital market funds will reap rewards for investors, according to Deutsche Bank; incorporating ESG data into investment analysis correlates with superior risk-adjusted returns at a securities level. For example, Saturna’s Capital Growth Fund Investor Shares (AMAGX) and Income Fund Investor Shares (AMANX) have consistently outperformed S&P 500 and Russell 1000 benchmarks for the past 10 years with such strategies. 

  • For example, to address this, the Islamic Corporation for the Development of the Private Sector (ICD) over the past three years have launched a series of funds across the income and capital markets such as the ICD Money Market Fund, the ICD Trade Premium Fund (STF strategy), the ICD Corporate Premium Fund and the ICD Global Sustainable Investment Fund (SRI/ ESG-based) and has succeeded in growing the AUM to over US$550 million generating an almost 3-times mobilization multiplier (on committed capital) in three years.

High-growth frontier and emerging economies are unveiling as attractive destinations for asset management funds (income and capital market platforms, private equity and SMEs) driven by strong economic fundamentals, favorable demographics and a strong demand for growth capital that has significantly outpaced supply, thus creating significant opportunities for both established and new institutional players with superior capabilities and unique strategies to generate risk-adjusted returns and boost development. 

It’s critical to note that navigating the turbulent terrain and dynamics of emerging markets merits scrutiny and thus demands a globally experienced management team to capitalize on opportunities and achieve a development impact in the OIC.

Ali Mamoun Ibrahim is the portfolio manager of income and capital markets at the Islamic Corporation for the Development of the Private Sector. He can be contacted at aibrahim@isdb.org.

Nigeria: Economic dip breeds opportunity

Nigeria, blessed with oil wealth, arable land and a vast population, is considered a forerunner on the African continent. The country’s large Muslim population reflects the huge potential for Islamic finance and speculators have waited with bated breath for the giant to awaken. Unfortunately, the uptake of Islamic finance, particularly Sukuk, is surprisingly sluggish and as such the country has been overtaken by others on the continent. HAJARA ADEOLA writes.

When oil prices began to nosedive in 2014, it was clear that the Nigerian economy was headed for a rough patch, the severity of which was anyone’s guess. Two years on, inflation has hit 17% and the once-emerging economy is now in a recession. The deepening crisis and the accompanying sense of urgency have spurred the government into action, albeit delayed.

Proposed Sukuk issuance to fund the country’s key infrastructure needs
The Nigerian government has adopted an expansionary fiscal stance to stimulate economic activities and part of its plan includes a long-awaited sovereign Sukuk issuance in the first quarter of 2017. According to the government’s Medium Term Expenditure Framework and Fiscal Strategy Paper, infrastructure spending is at the heart of the economic agenda with a critical focus on power and transportation. Given the relevance of Sukuk as an infrastructure financing tool, there are higher possibilities that it will be considered for some of these projects. In addition, there are expectations for the issuance to be sizeable in view of the country’s large infrastructure funding requirement of US$33.2 billion as estimated by the National Planning Commission. 

It is noted that in apparent recognition of the funding requirements and the renewed commitment of the government, the IDB opened a gateway office in Nigeria in August 2016. This development is considered to be timely as it places the IDB in a good position to actively support the nation’s infrastructure development as well as drive growth in other priority areas such as healthcare, agriculture and SMEs. 

More subnational issuers to tap Sukuk market following sovereign Sukuk
Prior to the planned sovereign Sukuk, the Islamic debt capital market appeared somewhat unattractive due to the lack of a pricing benchmark. This caused the size of the market to be restricted to NGN11.4 billion (US$36.19 million) and comprised wholly of the Osun State Sukuk issued in 2013. The industry was also affected by the poor credit quality of potential municipal issuers who were forced to contend with reduced central allocations, high overheads and large debts. However, in 2016, some municipals have increased their internal revenue generation and restructured existing debts. This improvement in financial management is believed to have gradually increased the attractiveness of municipal issuers. Once the sovereign Sukuk create the required pricing benchmark, it is expected that more subnational issuers will tap the market. 

Expansion and product innovation likely to be on the rise
Despite the general economic malaise, the Islamic finance industry has still managed moderate growth. The capital market segment consists of five operators: Lotus Capital, ARM, Stanbic IBTC Asset Management, Al Buraq Capital and Kord Kapital. Jaiz Bank remains the only fully-fledged Islamic bank, operating alongside two conventional banks, Sterling Bank and Stanbic IBTC, offering Islamic banking services. Jaiz Bank, which is well established in the country’s northern region, acquired its national banking license in May 2016 and has gradually commenced expansion to the southwest. The company raised an additional NGN2.9 billion (US$9.21 million) in equity in the year to fund its expansion. 

Jaiz Bank’s expansion reflects the resilience of Islamic finance and a growing acceptance of Islamic finance products. This is further evidenced by new product development in the industry. Of particular note is the recent launch of a NGN1 billion (US$3.17 million) Islamic fixed income fund by Lotus Capital in August 2016. The fund, which is designed to invest in Sukuk, non-interest fixed term deposits and asset-backed transactions like Ijarah, Murabahah and such, attracted subscription from retail and institutional investors, including Takaful operators. An increasing pool of investible funds is expected to drive further product innovation in the market in 2017. Nevertheless, this growth will be largely contingent on patronage from the large investment bloc of pension funds. Also, according to industry reports, several new Takaful operators are expected to come on stream in the next few months.

Pension regulator to release new guidelines 
With over NGN6 trillion (US$19.05 billion) in assets, Nigeria’s pension funds are by far the largest pool of investible assets in the country. However, pension investment in the Islamic finance industry is meager as it is constrained by regulatory bottlenecks. The Nigerian Securities and Exchange Commission, through its Capital Market Master Plan Implementation Committee, has made laudable efforts to prompt the review of regulations to accommodate investment in Islamic finance products as well as other outlets such as infrastructure. Although the National Pension Commission has prepared draft guidelines to address these challenges, the release has been stalled for almost a year. Nevertheless, the guidelines will be given renewed attention due to the government’s current financial constraints. 

Overall, the economic downturn has brought an appreciation for the potential of Islamic finance. Although development has been slow, the industry is finally due for an upturn. The sovereign Sukuk issuance will be an impetus for this development as it will set the pace for other issuers and create a suitable investment outlet for existing Islamic finance institutions. Now that the Islamic finance model has been successfully tested for viability and market acceptance and varied Islamic finance institutions established (banks, asset managers, Takaful), the timing is auspicious for the Islamic finance industry to come of age. Regulatory oversight has caught up, thus regulatory developments are expected to be more accommodating to Islamic finance. This can only bode well for the development of the Islamic finance industry which is long overdue.

Hajara Adeola is CEO and the managing director of Lotus Capital. She can be contacted at info@lotuscapitallimited.com.

Iran’s plans for launching Shariah compliant short sale contract

As it is known in many financial terms, a short sale is a transaction in which an investor sells borrowed securities in anticipation of a price decline and is required to return an equal number of shares at some point in the future.

A short seller makes money if the stock goes down in price, while a long position makes money when the stock goes up. While there are different models for managing a short sale contract, typically you can find the short sale structure more or less as follows: 

  1. Short seller borrows shares from the lender via a broker
  2. Short seller immediately sells the shares in the market
  3. Short seller receives the price of the sale and deposits the proceeds of the sale plus an additional amount as margin into his/her margin account
  4. Short seller deposits the collateral in favor of the lender
  5. Short seller repurchases the shares from the market and returns the borrowed shares to the lender any time they are due, and
  6. Margin will be released.

However, since the Shariah Board of the Securities and Exchange Organization (SEO) resolved that conventional short sale contracts do not meet Shariah criteria for trades, there is an alternative model assigned to the board for its consideration. 

The structure of the new alternative model is as follows: Two parties of the transaction are the first owner and the second owner (as an alternative to a short seller) of the shares, where the first owner transfers the ownership of the shares to the second owner. The contract between these two would be a sale contract in which all rights of the shares will be transferred to the second owner (as an alternative to a short seller). 

In order to set other standard conditions for short selling, two other options will be stipulated in the sale contract. First, the second owner gives a call option to be able to repurchase the sold shares at the transaction price on or before a particular date. Then, the first owner gives a put option to the second owner to sell the purchased shares to the first owner at the transaction price on or before a particular date. Diagram 1 shows how the structure looks like. 

Characteristics of conventional short sale alternative 

  1. Options stipulated in the sale contract are tacit conditions and could not be traded independently.
  2. Options stipulated in the sale contract could be executed on or before the maturity date. For more flexibility, different types of options could be used within the sale contract.
  3. Through the execution of an option, the other one could automatically be canceled.
  4. Proceeds from the sale of the shares will be deposited with the clearing house as the first owner’s margin and the additional amount paid by the second owner will be deposited as the second owner’s margin. The second owner’s margin could be adjusted according to the daily movements of the share price.
  5. In the case of equity corporate actions, adjustments would be performed according to the actions on the option contract.

After some deliberation, the Shariah Board of the SEO finally resolved that: 

  1. This particular transaction is to be composed of several contracts in which the main contract is the sale contract of the shares at a certain price.
  2. Two parties of the main transaction stipulate both types of options as the terms of the contract. The first owner stipulates the second owner’s call option, and the second owner stipulates the first owner’s put option.
  3. There would be no Bai Al Inah (a sale with immediate repurchase) doubt in this structure because what is stipulated is not the execution of the transaction but the option to execute the transaction. However, the Mabi (the subject of the sale) is not the same subject. The second owner sells the purchased shares in the market, then repurchases additional shares after a while and sells to the first owner.
  4. Margins deposited to cover the risks of option contracts by the two parties of the Bai contract would be accepted as collateral.
  5. Adjustments to the option contract in case of equity corporate actions in the form of quantity and the price of basic shares would be correct and considered as the implied terms of the contract.
  6. Canceling of an option in the case of execution of another option would be permissible and considered as the implied term of the contract.

The SEO is now studying the operational aspects of the new model for a Shariah compliant short sale. However, we should wait for further news from the SEO about its implementation.

Majid Pireh is the Islamic finance senior expert at the Securities and Exchange Organization (SEO) of Iran. He can be contacted at m.pireh@seo.ir.

Women and Words: Who gains and who loses with intermediation of new currencies?

By Laura Elder, a cultural anthropologist who teaches in the Department of Global Studies at Saint Mary’s College in Notre Dame. Her primary research interests are global political economy, Islam and gender. She can be contacted at lauraeveelder@gmail.com.

A decade ago, reflecting on the purpose of Islamic finance within Shariah, Mahmoud El-Gamal argued that the replication of all conventional financial products within Islamic finance should be abandoned and instead, Islamic finance should focus on community banking, microfinance and socially responsible investment. 

In other words, in his view, Islamic finance should relate to the social and economic ends of financial transactions, rather than the contractual mechanics by which financial aims are achieved. But this call for a return to the near past of Islamic finance has been largely dismissed among bankers. One possible reason is the way that Islamic finance has become enmeshed in financialization which is largely unseen and depoliticized.

Financialization – a hot term on the conference circuit – is the term for the largely invisible social reordering process in which financial institutions and markets move closer and closer to the center of social relationships of power. And financialization is made possible by nonfinancial sectors becoming aligned with financial goals and practices. Take for example, a commodity Murabahah or Bai Al Tawarruq contract. This contract has been used to create a secondary market for cell phone airtime. As the bank obtains a client’s ‘promise to purchase’ and then buys commodities from a broker, this contract properly avoids Riba. The bank then sells the commodities, in this case cellular airtime, at a markup known as cost plus profit. And then finally, the client authorizes the bank as the agent to sell the commodities back to the commodity broker for cash. In this financing structure, the client gets a loan, the bank gets a profit and the commodity broker gets a fee.

This secondary market reveals how financialization invisibly creeps into the cracks of communication between family and friends. But further, as banks move toward ending physical banking and toward online-only intermediation, and phones increasingly becoming the point of access to cash, loans, and sales, banking and finance institutions will also intermediate access to markets and money without consumers’ knowledge, invisibly. Both Islamic and conventional bankers want to retain profit as intermediaries in these relationships. But as “all that is solid melts into air”, whom does intermediation serve?


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