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BLOG OF KNOWLEDGE (Shari'ah, Law, Islamic Finance and Muslim News)
Shari'ah, Law, Islamic Finance and Muslim News
Monthly Archives: December 2008
December 30, 2008
DR. ZULKIFLI HASAN
Conference Alert 2009
Assalamualaikum,
Dear Readers,
Conference alert in 2009:-
1. Islamic Perspectives on Management and Finance, University of Leicester, July 2009. Send an abstract to iu6@leicester.ac.uk before 10th February 2009.
2. International Conference on Islamic Financial Sector Development Credit Crunch and the Resilience of Islamic Financial Services, Manama Bahrain, March 2009. Send a full paper to
ibfd@isdb.org
before 15th January 2009. (
http://www.iqpc.com/ShowEvent.aspx?id=154678&details=163806
)
3. Leaders in Islamic Finance 2009 Shaping the future of the Islamic finance industry, April 19-21, 2009,  Doha, Qatar. (
http://www.iqpc.com/ShowEvent.aspx?id=154678
)
4. International Conference on Islamic Economics and Economies of the OIC Countries 2009, Kuala Lumpur, Malaysia, 28-29 April 2009. Send a full paper to
IIUM2009@gmail.com
before 30th November 2008. (
http://www.iiu.edu.my/enmjournal/icie_call.htm
)
5. Islamic Economics: An Institutional Economic  Perspective, June, 2009, Islamabad, Pakistan. Send a full paper to
isie@i-sie.org
before 31st December 2008. (
http://i-sie.org/
)
6. Eleventh International Conference of the Society for Global Business and Economic Development, Slovak Republic, May 27-30 2009. Send a full paper to cib@mail.montclair.edu before 13th February 2009.
7. Islamic Finance In Turkey 2009, Extending the bridge between Europe, the Middle East and Central Asia, May 2009, Istanbul Turkey. (
http://www.icg-events.com/turkey/programme.html
)
8. Islamic Economics System (iECONS 2009) Conference, Kuala Lumpur, Malaysia, Islamic Science University of Malaysia, 16-17th July 2009. Send an abstract to nuradli@usim.edu.my before 16th February 2009 and a full paper by 29th March 2009.
Best Regard

ZULKIFLI HASAN

DURHAM UNIVERSITY
With Dato’ Dr. Nik Norzrul Thani of Messrs Zaid Ibrahim & Co and Dr. Suhaimi, a Director General of the Awqaf, Zakat and Hajj Department, in Dubai, UAE.
Islamic finance news
4 Comments
December 29, 2008
DR. ZULKIFLI HASAN
A Shariah Compliant Alternative to Selling Short with Borrowed Securities by Shaiykh Yusuf Talal De Lorenzo
Available at:
http://www.shariahcap.com/the_arboon_sale_english.pdf
Introduction

Until the present stage of its development, modern Islamic Finance has been without the ability to profit rom falling markets or even to protect stock market investments from downward trends. It is widely acknowledged in Shariah finance circles that the conventional methods for hedging, and the short sale in particular, are simply unacceptable owing to their use of elements that are contrary to Shariah principles and precepts. However, for the past several years scholars and experts have indicated a growing consensus that it may be possible, at least in theory, to use classical transactional models like salam and arboon to provide investment managers with effective tools for hedging and managing risk, including the ability to profit when the price of shares declines. This White Paper outlines the development of the Arboon Sale by Shariah Capital as a practical solution for the Al Safi Trust, providing investment managers with an effective way to benefit from stock market investments regardless of market trends. Most importantly, the Arboon Sale solution is completely Shariah compliant and has been certified as such by means of a fatwa signed by senior and experienced Shariah scholars, each of whom is a member of the Shariah Board of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), the standard setting board for the modern Islamic financial industry.
Difficulties with Conventional Short Sales

Since conventional short sales require the sale of borrowed shares, such sales are clearly contrary to Shariah rules. There is complete unanimity of agreement among Shariah scholars on this point. In order to sell something, according to the Shariah, one must first have ownership of what is to be sold, or the subject of the sale. Under Shariah rules, then, if securities are to be sold into the market, the seller must first establish ownership of those securities. It is not possible, using conventional prime brokerage documentation, for a hedge fund manager to be Shariah compliant and to borrow shares of stock from a prime broker and then sell those shares into the market. It is for this reason that hedge funds are widely understood to be non-compliant with Shariah norms. It is for this reason too that it is widely believed that hedge funds will never become Shariah compliant.
It is perhaps this mistaken belief that has led some product providers to have recourse to artificial solutions which attempt to circumvent Shariah strictures by swapping returns from hedge funds, even though the hedge funds themselves are without Shariah supervision and may invest in anything from currency futures to interest-bearing instruments like T-bills and bonds; and may even include shares of companies in the business of gambling or alcohol. Such defeatist stratagems, however cleverly engineered or labeled (one such calls itself “Shariah Conversion Technology”), have been rejected by the market. Other difficulties associated with short sales as practiced by prime brokers using the conventional borrow and sell methodology include a series of interest-based charges for services and, remarkably, interest payments on borrowed securities; any and all of which render the transaction unacceptable from a Shariah perspective. None of this, however, need concern the Muslim investor any longer. The Arboon Sale is the ideal solution to all of these problems.
Shariah-based Strategies for Shorting

The conventional short sale is a forward-looking transaction that involves different times for initiation and completion. In this respect, it is immediately suggestive of two types of sales sanctioned by classical Islamic law. These are the salam and the arboon sales. The salam sale, used historically in an agricultural context, was designed to provide farmers with seeds and, at the same time, to offer merchant/financiers protection from price fluctuations on the crops which they effectively financed by providing the farmers with seeds. The arboon sale also has its roots in classical Islamic law. In an arboon, the seller takes an earnest money deposit from the buyer with the understanding that the deposit will be credited toward the price if the sale is concluded, and forfeited if it is not. From a theoretical perspective, both of these sales would appear to be suitable for replicating the conventional short sale in a manner that complies with Shariah.
Approval for the Arboon Sale

While both of these transactional models have been approved by Shariah supervisory boards around the world and are routinely used by Islamic banks and multinational banks with Islamic windows as base solutions for financing, only the arboon model has been found suitable for use in compliance with both AAOIFI and SEC (Securities and Exchange Commission, the US regulator of stock markets) standards and regulations.
Original approval for the arboon sale came from the Jeddah-based OIC Fiqh Academy which reviewed the arboon transaction and found it acceptable for use by modern Islamic banks and investment houses. This decision is documented in the Journal of the Islamic Fiqh Academy, 1993, vol. 1, number 8, p. 641. The use of the salam model in the sale of securities, however, is prohibited by AAOIFI Shariah Standards, as below: The basis for the impermissibility of salam in shares is that the subject matter of salam is a debt and not an ascertained thing, while in shares of corporations nothing works except ascertainment. This is done by mentioning the name of the corporation whose shares are desired through salam thereby rendering the shares an ascertained thing and not a liability for a debt. Shares cannot, therefore, essentially be the subject matter of the contract of salam. Further, salam in shares implies the sale of ascertained things that are not owned and this is not permitted. AAOIFI Standard 21 – Financial Paper (Shares and Bonds), at Appendix B: Basis of the Sharia Rulings, Art. 14, page 377 of the 2004-2005. Thus, even though in theory both models may be adapted for use by a prime broker as short sale alternatives, in practice only the Arboon Sale is acceptable under present Shariah standards.
The Arboon Sale in Classical Islamic Jurisprudence

The Arboon sale, also known as `urboon, arbaan and urbaan, is known to have been practiced in the time of the second Caliph, Umar ibn al Khattab which indicates that its origins were earlier and, most importantly, that it was considered a lawful transaction in the earliest days of Islam. A reliable report was related on the authority of trusted narrators that Nafi’ ibn `Abd al Harith purchased a house to be used as a prison from Safwan ibn Umayyah on the condition that if Umar approved the purchase the down payment would become a part of the purchase price, and if Umar did not approve then the down payment would be kept by the seller, Safwan. As explained in the preceding section, “Approval for the Arboon Sale”, modern scholars are agreed on the acceptability of the Arboon sale in general. In addition to support for Arboon in the writings and research of individual scholars and Shariah boards all over the globe, the decision of the OIC Fiqh Academy on the matter has never been disputed. As a result, the arboon sale is regularly used in a variety of financings offered by Islamic banks and finance houses all over the world today.
The Workings of the Arboon Short Sale

The Arboon Sale is an alternative transaction which replicates the economic results of a conventional short sale without using the “borrow and sell” method of shorting employed by conventional prime brokerages for their hedge fund clients. In essence, the Arboon Sale is a sale transaction which has the effect of generating a net economic benefit arising from a fall in the price of the shares. A complex transactional process is required to achieve the same economic benefit as a conventional short sale by means of the Arboon Sale. Several different Shariah, regulatory, legal and commercial elements are involved; and the legal documentation for the same is extensive. For example, it is not enough to work with a hedge fund manager, however willing the manager may be to comply with the investment guidelines specified by a Shariah Supervisory Board. This is because the hedge fund manager does not control the short sale process but depends instead on the services of a prime broker. Only a prime broker is in a position to provide the complicated series of services required for short sale transactions.
More importantly, only a prime broker has the contracts that satisfy the various legal, regulatory, exchange and prime broker credit and balance sheet requirements and parameters, such that all such transactions may take place in accordance with stock exchange house rules and regulatory requirements (such as the US Securities and Exchange Commission’s regulations). Then, while the creation and certification, by means of a fatwa, of Shariah-compliant short sale methodology is key to the Shariah compliant short sale alternative, there are many other factors that comprise the process. Perhaps among the most influential of these scholars are Dr. Yusuf al-Qaradawi and Shaykh Mustafa al-Zarqa, both of whom have pointed in their writings to the utility of Arboon and its harmony with the spirit of Shariah law which seeks to remove hardship and bring ease. In order to understand the workings of the Arboon Sale alternative it may be helpful to compare the Arboon Sale to the classical arboon sale model and also to a conventional, “borrow and sell” short sale.
Comparing Features of the Short and Arboon Sales

1. In a Shariah-compliant Arboon Sale, stocks are purchased using an arboon contract so that the investor actually takes ownership of the stocks. By means of the arboon contract, no stocks are borrowed. In a conventional short sale, shares are borrowed under a “Master Securities Lending Agreement” and then sold into the market. The Arboon Sale employs a “Master Securities Arboon Sale Agreement” instead to ensure the investor’s ownership of whatever stocks are later sold into the market.

2. In a classical arboon sale, the buyer agrees to purchase goods by paying earnest money against an agreed sale price. In the Arboon Sale, the prime broker agrees to sell stock to the investment manager at the quoted (and therefore agreed) market price. The investment manager makes an arboon down payment and assumes ownership of the stocks.

3. The Arboon Sale equivalent is structured with a specified “date of ultimate settlement of the purchase and sale” at which time the unpaid portion of the purchase price has to be paid (the “Closing Date”). This complies with the condition stipulated by the OIC Fiqh Academy that a time period for payment of the remaining purchase price must be specified.

4. In the classical arboon sale, if the buyer does not complete the purchase within the time period specified, he must return the goods and forfeit the down payment of earnest money. In the Arboon Sale, if the investment manager decides not to complete the sale, he returns the shares and forfeits the arboon earnest money.

5. In a classical arboon sale, once the purchaser has paid the arboon earnest money to the seller, he is free to dispose of whatever he purchased. In an Arboon Sale, once the investment manager has made a down payment equal to a margin account deposit, he may arrange through the prime broker to sell the stocks purchased by means of the Arboon Sale to a third party at the market price when the sale is concluded.

6. In order to close out the transaction in the Arboon Sale, the investment manager instructs the prime broker to purchase the required number of stocks from the market at the market price. Using these securities, the investment manager terminates the Arboon and the Prime Broker retains the earnest money. The same process is used in a conventional short sale.
Legal Documentation

No transaction can be certified Shariah compliant by a Shariah Supervisory Board unless the underlying contracts conform to the principles and precepts of the Shariah. As the prime broker transacts on behalf of the investment manager, it is essential that all prime broker contracts and related documentation for conventional short sales be replaced by contracts and documentation for the Arboon Sale. Unless this is done, none of the transactions described above may be considered Shariah-compliant. The Al Safi Trust platform utilizes an alternative set of prime brokerage documentation by means of which all trades, whether long or short, may be conducted in accordance with Shariah rules, with no interest, no prohibited terms and conditions, and no prohibited sales (like the sale of what one does not rightly own, or like the purchase or sale of prohibited businesses like pork or alcohol production, banks and insurance companies, and so on). In order to ensure Shariah compliance, all managers on the Al Safi Trust platform are contractually obligated to settle short sales through one prime broker. Shariah compliant contracts allow the prime broker to process trades initiated by the platform’s hedge fund managers, while avoiding all the prohibited elements (interest, prohibited terms, prohibited businesses) that are present in prime brokerage contracts commonly used by hedge funds for conventional short sales.
To Conclude

The Arboon Sale solution for hedge funds goes beyond the usual development of a financial product because Shariah compliance requires more than structuring and monitoring a fund to ensure compliance of the hedging strategy and the securities held in the investment portfolio by means of screening, investment guidelines, and oversight by a qualified Shariah supervisory board. Most importantly, the Arboon Sale for hedge funds requires fundamental changes to the way that trades are processed. In particular, the contracts that underlie the exchange of securities must be made to comply with Shariah rules. Without these modified legal documents, no short sale solution, however sound its Shariah methodology may be, can be considered Shariah compliant.
SHAYKH YUSUF TALAL DELORENZO is a Chief Shariah Officer at Shariah Capital, a scholar of Islamic Transactional Law. Based in the Washington, DC area, he has served as a Shari’ah advisor to dozens of international financial entities, including index providers, institutional investors, home finance providers, international investment banks and a variety of asset managers. Shaykh Yusuf is the author of the three volume Compendium of Legal Opinions on the Operations of Islamic Banks, the first English/Arabic reference on the fatwas issued by Shari’ah boards, and has published several papers and chapters in books on the subject of modern Islamic Finance. He also serves as a member of the Shariah board of AAOIFI, and is a member of the ISRA Council of Scholars attached to the Central Bank of Malaysia
Best Regard

ZULKIFLI HASAN

DURHAM UNIVERSITY
Snow in Durham
Islamic finance news
3 Comments
December 23, 2008
DR. ZULKIFLI HASAN
Financial Screens for the Islamic Finance and Lesson from the Ethical Investment Industry
Quoted from the Islamic Business and Finance by Professor Rodney Wilson available at: (
http://www.cpifinancial.net
)
The criteria for selection outlined in the first part of the article are essentially qualitative, in the sense that they involve judgement rather than precise measurement. Quantitative criteria are however also used when screening equities to ensure that they are Shari’ah compliant. These involve calculation of ratios, such as the proportion of interest bearing debt to assets or the ratio of total debt to the average market capitalisation of a company over a period of 12 months. The issue of leverage is complicated. Avoidance of investments in companies which have any involvement with Riba-based banks is ideal, but this would mean the exclusion of virtually all quoted companies, including those whose stocks are traded in the equity markets of Muslim countries.
In practice, fund management groups seeking to comply with Shari’ah adopt several criteria, and there is disagreement and debate about what approach is most appropriate. Firstly, they examine the extent to which a company’s income is derived from interest, and any proportion in excess of 15 per cent is deemed unacceptable. The second criterion is to consider the extent of debt to equity finance, where a proportion in excess of one-third is considered unacceptable. Rushdi Siddiqui of Dow Jones Islamic Indices advocated tighter criteria in the 1990s, with a limit of 25 per cent for the debt to capitalisation ratio, but there was no consensus on this. The TII-FTSE Islamic index adopts only one financial screen, excluding companies whose interest bearing debt divided by assets is equal or greater than one-third, or 33.33 per cent. The Dow Jones Islamic Indexes have three financial screens to exclude companies:
1. No Islamic investment if total debt divided by the trailing twelve-month average market capitalisation is greater than or equal to 33 per cent

2. Omit companies if the sum of cash and interest bearing securities divided by the trailing twelve-month average market capitalisation is greater than or equal to 33 per cent of revenues

3. Exclude companies if the accounts receivable divided by total assets are greater than or equal to 45 per cent of revenues.
Problems and potential injustices with financial screening

Although those who advocate financial screening have good intentions, it can have unfortunate consequences both for the companies included in an Islamic equity portfolio, and the Muslim investors in the fund themselves. In bear markets such as that experienced from 2001 until early 2003 in most Western countries, market capitalisation can fall significantly while debt remains constant or rises. This results in many additional companies being excluded under the first financial screening criteria, and in the case of the post 2001 slump, high technology companies, that had been much favoured by the Islamic fund management industry, were soon excluded. Having a trailing twelve-month average for market capitalisation delays exclusion, but when bear markets persist, the inevitable occurs.
It is debatable if excluding companies because of cyclical developments affecting the entire market is justified, or indeed whether it is really legitimate to include debt laden companies simply because there has been a bull market with a very positive impact on their market capitalisation. These matters deserve further consideration from Shari’ah scholars, as companies cannot be blamed or excused because of developments in the market in general, although admittedly it can be argued that prudent companies with low or moderate debt are less likely to be affected by market downturns than those with high debt. Nevertheless, Islamic disinvestments during a slump may make matters worse for a struggling company, and bring bankruptcy and redundancy for employees, including those who are Muslims. Investors in the Islamic equity fund may also suffer, as selling shares when prices are falling may not be the best exit strategy.
The TII-FTSE Islamic Index does not screen out companies with more than one third of their revenues deriving from interest on cash and securities, but the Dow Jones Islamic Indexes, as already indicated, specifically exclude such companies. This exclusion of course applies to most conventional banks, but there is no need to use a financial screen to exclude these institutions, as they are already excluded because of the sector screen. Investment companies may be excluded if they have excessive cash holdings under this financial screen, as in practice their liquidity is likely to be invested in interest earning bank accounts or conventional bonds. For Islamic investment companies, the answer to the liquidity dilemma will be ultimately to hold sovereign and corporate Sukuk when they become more widely issued and traded. For conventional investment companies, such securities are likely to remain marginal for their liquidity management.
The concern of the Shari’ah advisors to the Dow Jones Islamic Indexes over receivables arises because there is often interest charged on deferred payments and accounts overdue. The stipulation that companies should be excluded if the ratio of accounts receivable to total assets exceeds 45 per cent is designed to ensure that companies selected for Islamic portfolios are not dependent on interest income for most of their earnings. However, this is exactly what has happened to many multinational industrial companies, that might otherwise be suitable for inclusion in Islamic fund portfolios. For instance, due to the global competition in the vehicle industry, car manufacturers such as Ford, General Motors and Daimler Chrysler have become in effect banks, with most of their profits derived from financing vehicle sales through extended payments terms. None of these manufacturers now qualify for inclusion in the Dow Jones Islamic Indexes, even though they are the world’s largest car manufacturing companies.
Rather than specifying a fixed proportion for income from cash and interest bearing securities, or a limit on receivables, the TII-FTSE Islamic Index suggests that Muslim investors can purify their income through dividend cleansing. This implies giving away any income derived from Haram sources to charitable causes, and hence making the residual income Halal. The so-called tainted dividend receipts relate to the portion, if any, of a dividend paid by a constituent company in an Islamic equity portfolio that is attributable to activities that are not in accordance with Shari’ah. Once this is calculated, Muslim investors have the opportunity to legitimise their earnings, and deserving charities benefit.
Lessons from the ethical investment industry

As already indicated, there are parallels between the concerns of investors involved with the ethical investment industry in the West, and those who entrust their money to Islamic equity funds. As with Islamic equity fund management, the ethical industry uses both positive and negative screens for stock selection. The major difference is that the screens are socially determined rather than through religious teaching. Often the ethical industry is described as socially responsible investing, the main concerns being matters of social conscience and environmental issues. Although the ethical investment industry is primarily driven by secular concerns, and does not promote an overtly religious message, some of the leading participants such as Friends Provident and Clerical Medical in the United Kingdom have Christian origins, the former being associated with the Society of Friends.
The Friends Provident Stewardship fund is the leading UK ethical fund with more than $2.5 billion under management, compared to $3.6 billion managed by the entire Islamic equity fund management industry. Friends Provident Stewardship fund aims to avoid companies that cause environmental damage and pollution, or are involved in the manufacture and sale of weapons, trade with or have operations in oppressive regimes, exploitation of developing countries, unnecessary exploitation of animals, nuclear power, tobacco or alcohol production, gambling, pornography or offensive or misleading advertising. As most Muslim economies are developing, and some have oppressive regimes, the negative list of the Friends Provident Stewardship fund may be of particular interest to Islamic equity fund managers and their Shari’ah advisors.
Islamic equity funds should arguably put stress on the positive criteria for selecting companies rather than simply listing prohibitions. The Friends Provident Stewardship fund looks to support companies that supply the basic necessities of life and provide high quality products and services that are of long-term benefit to the community. As Muslims share these objectives that are stressed in Islamic teaching, it may be appropriate for Islamic equity funds to include such positive statements in their prospectuses. At present the Islamic equity funds industry is largely reactive, disinvesting when companies breach its financial screens or change the nature of their business, hence being excluded by the sector screens. The ethical investment industry is more proactive than reactive, seeking to engage with companies in order to change their policies, so that they can conform to their social and environmental agendas.
In practice, most of the engagement with companies by the Friends Provident Stewardship fund has involved encouraging international pharmaceutical companies to supply patented medicines to the developing world at lower prices and improve working conditions and employment practices. Unlike many fund management groups, the Friends Provident Stewardship fund is actively engaged in corporate governance by voting in around 1,500 companies each year. Where they vote against a company proposal, reasons are given in writing, and the fund attempts to start a discussion with the company over its concerns. The complete voting record is made available on the website and updated every month.
Ethical investment encompasses stock broking and portfolio management as well as equity fund management, Charcol Holden Meehan, being the largest specialist firm in the sector in the United Kingdom. Individuals with more than $178,000 to invest can have a personal ethical screening service, and Charcol Holden Meehen also offer ethical pensions and investment opportunities for venture capital. The standard of information disclosure to clients is extremely high, and in many ways could be regarded as a benchmark for the Islamic fund management industry.
Charcol Holden Meehen offers clients three different levels of ethical compliance, designated light green, medium weighting and dark green. Even for the light green designation, companies involved in tobacco production or distribution, the armaments trade, animal testing or environmental exploitation are excluded. However, much of the emphasis is on positive screening. Portfolios are designed to have market sector weightings, so that performance can be compared with major indices, but companies for inclusion are selected according to a best of sector approach, this being defined in ethical rather than financial terms. Companies are selected that exemplify the best environmental and social policy in each sector. For Charcol Holden Meehan, the medium ethical category implies some exposure in oil, pharmaceuticals and banks, but below market weight for each of these sectors. Companies that are included in the dark green portfolio are expected to contribute significantly to the ethical objectives adopted, for example waste management companies making a major contribution to recycling.
Although many may view Shari’ah compliance in binary terms of Haram and Halal, there are often ethical trade-offs when adopting screening, and choices are by no means clear cut. It is not simply a matter of sacrificing material gain in order to be certain that Islamic principles are being upheld, but of recognising that a step-by-step approach may be the best means of attaining religious objectives. Hence, those who are at the light green stage may be regarded as being at the start of the journey, and those at the dark green stage further down the road. There are philosophical as well as practical lessons for the Islamic screening process to be learnt from the ethical screening experience. Yusuf Talal DeLorenzo, a leading Shari’ah advisor to numerous equity fund managers, has stressed the benefits of building bridges between the ethical and Islamic investment industries.
Widening the remit for Shari’ah screening

Developing sound and acceptable screens is crucial for both Islamic and ethical finance. It reduces the workload of the Shari’ah board, as once the criteria are agreed, fund managers can simply apply the rules and exclude Haram stock. Many institutions offer a wide range of Islamic equity funds as clients have different time horizons and risk preferences, and it would be impossible for Shari’ah board members to advise on every single stock purchase by fund managers. The availability of standardised screens can therefore facilitate the development of the industry. For instance, the National Commercial Bank of Saudi Arabia could introduce new products such as the Islamic Equity Builder Certificates without increasing the workload on their Shari’ah advisors, as fund managers simply apply the screening software supplied by the Dow Jones Islamic Indexes.
Satisfying the Shari’ah advisors regarding screening is a necessary but not a sufficient condition for the success of Islamic equity funds. Having a Shari’ah committee composed of eminent and respected scholars is a source of comfort for most clients, and is a major factor in ensuring a sound reputation for the fund. However, knowledgeable clients in the future may want direct assurance of Shari’ah compliance rather than indirect assurance through the Shari’ah committee as intermediaries. As with ethical funds, clients may wish to make their own judgements in the light of full information on the screens, and an explanation of why they are relevant to Shari’ah compliance. This will not necessarily reduce the role of the Shari’ah advisors, but rather they may become more communicators and educators as well-informed clients ask ever more questions about the rationale for investing according to conscience, and not simply on the basis of financial returns.
Best Regard

ZULKIFLI HASAN

DURHAM UNIVERSITY
USTINOV COLLEGE DINNER, DURHAM UNIVERSITY

With Mr. Zhe Li from Shanghai, Dr. Irfan Kaygalak from Turkey and Mr. Mohamad El-Saiti from Libya
Islamic finance news
3 Comments
December 19, 2008
DR. ZULKIFLI HASAN
Shari’ah Scholars and Harmony in Short Supply
Quoted from the Financial Times
Barely five years ago, few western investment bankers would have believed that they would be following the fatwas or religious rulings of Muslim scholars, some of whom do not use email of fax. But the spectacular rise of Islamic finance in the past few years has left many western institutions rushing to acquire the knowledge and expertise necessary to compete – with a resulting scramble for skills. Bankers’ scepticism about the sector is expressed only privately but some Islamic scholars have gone public in their attacks on banks and the judgments of other clerics.
Many analysts say such debate is simply part and parcel of a religion with no clerical hierarchy, and to be expected in a sector as young as Islamic finance. More of a threat to immediate growth is the shortage of skills – from the religious scholars needed to approve sharia compliance to lawyers, bankers and technical staff needed to implement deals. Salaries are rising in accordance with the demand, say recruitment consultants. There are only about 60 Islamic scholars with expert knowledge of finance, while an even smaller group of around 12 are highly sought-after by western institutions. “The number of internationally accepted scholars is stagnant and there is an acute shortage,” says Qudeer Latif, head of Islamic finance at corporate law firm Clifford Chance in Dubai. For one deal, he had to travel to four countries to meet just one Islamic scholar.
It takes about 15 years to train in Islamic jurisprudence and become expert in finance. But there is a pipeline of people who have started training, says Jamal Dar, an executive at PwC in London. Mr Dar says the lack of Islamic standardisation offers opportunities for institutions to offer a wide variety of products and instruments to suit all levels of religious sensibility. “There is agreement on 90 per cent of the sector,” he says. It gets complicated in the other 10 per cent with instruments such as derivatives, which affect the cross-border market, not the domestic market.”
Malaysia is a long-established Islamic financial centre but has been challenged in recent years by strong growth in the Gulf. The Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) is working hard to develop common, regulatory standards including sharia and training. “There are more than 16 jurisdictions that follow or consult our standards,” says Khairul Nizam, assistant secretary-general at AAOIFI. “The standards take into consideration all the different Islamic schools of thought – and there is a lot more similarity than difference among the schools.” But AAOIFI standards are not enforceable, and different scholars even within the same jurisdiction are likely to continue on their own paths. “I’ve looked at AAOIFI and I think the problem is that, with anything done by a committee, clarity and crispness is sacrificed in getting a consensus,” says Henry Thompson, legal counsel at the Bahrain-based Arcapita investment firm. “It will be hard to have standardisation because each board of scholars at all the different firms will be loth to have their rulings overturned.”
Another area where AAOIFI is likely to be ignored is remuneration. The organisation said scholars should not accept contingency fees and where pay might depend on a deal going ahead as it creates a conflict of interest. Most scholars, however, receive a set fee and observers say a top scholar can earn up to $250,000 on a typical capital markets deal. Another organisation striving for standardisation is the Central Bank of Bahrain, which examines regulation such as bank adequacy rules to ensure stability. “We were the first to develop such regulations and we have been promoting them worldwide,” says Khalid Hamad, an executive director at the Central Bank of Bahrain. The International Islamic Finance Market (IIFM), also in Bahrain, is working on regulation of Islamic capital and money markets in co-operation with the International Capital Market Association. “There is a generational issue when it comes to standardisation, with some older people not feeling comfortable giving judgment on complicated instruments,” says Ijlal Alavi, IIFM chief executive.
Many analysts hope there will be greater consensus on standards as the sector matures. “The scholars have made great strides in recent years in establishing rules which have seen the development of mainstream products, such as profit-bearing deposits, mortgage loans and other investment vehicles,” says Salim Nathoo, head of Islamic finance for legal firm Allen & Overy. “Selection of reputable scholars who command the respect of the market is critical in developing some of these newer products.”
Best Regard

ZULKIFLI HASAN

DURHAM UNIVERSITY
Special Note: The AAOIFI has initiated 4 months training program for Shari’ah scholars known as Certified Shari’ah Adviser and Auditor (CSAA) which is specifically designed to equip Shari’ah scholars with the requisite technical understanding and professional skills on Shari’ah compliance and review processes. The IBFIM also offers Shari’ah Scholars Introduction Program that has been endorsed by the Central Bank of Malaysia which is specifically designed for Shari’ah officers and advisers. Another program available is the Scholar Development Program initiated by the Islamic finance council and the Securities and Investment Institute which provides Shari’ah scholars with the knowledge of the conventional system.
Edinburgh Castle, Scotland
Islamic finance news
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December 16, 2008
DR. ZULKIFLI HASAN
Islamic Finance in the UK and France
Assalamualaikum,
Dear All,
A brief update on Islamic finance in the UK and France.
The UK Islamic finance sector has seen the development of regional hubs in London, Birmingham and Edinburgh. According to a report produced by International Financial Services London, at the beginning of 2008 the UK hosted five stand-alone Islamic retail and wholesale banks, over twenty conventional banks with Islamic windows, and one stand-alone Shariah compliant insurance provider; nine fund managers providing opportunities for investment in Shariah compliant funds and one Shariah compliant hedge fund manager; and a number of advisory firms (law, accountancy, consultancy, etc) with considerable experience and expertise in dealing with Islamic finance.With over USD18 billion in Shariah compliant assets, the UK comes eighth in The Banker’s league table of Islamic assets worldwide, the highest of all Western countries.
After London, France could be the next platform for Islamic finance in Europe. It is expected that the financial authority in France will grant licence to several Islamic banks by June 2009. As of to-date three Islamic banks have submitted application for approval namely the Qatar Islamic Bank, which already has a subsidiary in London, Kuwait Finance House and Al-Baraka Islamic Bank from Bahrain.
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ZULKIFLI HASAN

DURHAM UNIVERSITY
Westminster, London
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BLOG OF KNOWLEDGE (Shari'ah, Law, Islamic Finance and Muslim News)
Shari'ah, Law, Islamic Finance and Muslim News
Monthly Archives: January 2010
January 22, 2010
DR. ZULKIFLI HASAN
Does Islamic Finance neglect the women?
Islamic Finance and Women
By Lahem al Nasser Available at:
http://aawsat.com/english/news.asp?section=6&id=19516
Riyadh, Asharq Al-Awsat- Islam honors women, enhancing their standing [in society] and granting them their full unabridged rights, and in the process solidifying this view in the hearts of Muslim believers. This can be seen in the fact that one of the surras [chapters] of the Holy Quran is named “al Nissa” [the woman]. Al-Nissa is the fourth surra in the Quran, and one of the seven longest surras in the Quran. There are also a number of Sunnah which relates situations that honor women and their rights.
In one Hadith narrated by Abu Huraira, he said “A person came to the messenger of God and asked ‘Who among the people is most deserving of my fine treatment?’ He said ‘Your mother.’ He then said ‘who next?’ The Prophet replied ‘Your mother’ again. He asked ‘who next?’ The Prophet said ‘Your mother.’ He asked again ‘Then who?’ Thereupon the Prophet said ‘Then your father.’
The prophet’s life was a model of how to honor and do justice to women. In the Sahih al-Bukhari collection of Hadith, the Prophet’s wife Aisha said that the Prophet consulted women and sought their opinion on the most serious issues. The Sahih al-Bukhari quoted al-Miswar Bin Makhrama as saying that “When the writing of the [Hudaybiyyah] treaty was concluded, the messenger of God said to his companions ‘Get up and slaughter your sacrifice and get your heads shaved.’ By Allah, none of them got up, and the Prophet repeated his order thrice. When none of them got up, he left them and went to Umm Salamah and told her of the people’s attitude towards him. Umm Salamah said ‘Oh Messenger of God, do you want your order to be carried out? Go out and don’t say a word to anybody until you have slaughtered your [own] sacrifice and called your barber to shave your head.’ So the Prophet went out and did not talk to any one of them until he did that i.e. slaughter the sacrifice and called the barber to shave his head. Seeing this, the companions of the Prophet got up, slaughtered their own sacrifices, and started shaving each other’s heads, and there was such a rush [to do this] that there was a danger of killing each other.”
Commenting on this Hadith, Imam al-Hassan al-Basri said that the Prophet did not need to consult with Umm Salamah but rather he did this as he wanted to set an example to the people that they should not feel embarrassed about consulting with women.
Despite women’s considerable standing in Islam in general, the Islamic financial industry, which is based upon the principles of Islamic Shariaa law, has failed to give women priority. Therefore women do not occupy their natural position in this industry, even though they contribute financially to this industry’s assets. Experts at the International Islamic Finance Forum held in Dubai 2007 estimated the value that Gulf women contribute to the Islamic financial industry is in the region of $35 billion. Observers may notice this negligence in two major sectors, the employment and business sectors.
As for employment, this negligence is apparent in a variety of aspects, such as qualification and training, as Islamic financial institutions offer few training courses to female employees. Of the few courses that female employees have access to, these are primarily basic courses, not advanced ones. This prevents female employees from being able to qualify for senior positions, and therefore they are restricted to lower-level management and marketing positions. This has created a shortage of qualified female employees in the Islamic financial sector, which in turn has caused a lack of qualified trainers for female employees of Islamic financial institutes, thereby creating something of a vicious circle. There is also a lack of a suitable work environment in line with the provisions of Islamic Shariaa law, and this is something that would increase productivity. This lack of a suitable work environment places pressure on the female employees in the financial sector, causing professional employees to abandon their work as a result of this. This also prevents the Islamic financial sector from easing unemployment rates among women, especially in conservative societies.
The business sector in Islamic finance is lacking in financing and investment services aimed at women. It is also lacking in initiatives that enhance women’s contribution to the Islamic financial industry, such as the establishment of banks, and capital and investment companies that cater specifically for women. At this point I would like to pay tribute to the Kuwaiti Tejarati company, which was the first company to be established by women, targeting women as clients. We wish this company all the success, and hope that this encourages other types of initiatives.
In fact, the Islamic financial industry is not the only financial sector that neglects women, as this is something that is widely spreading to include the financial industry as a whole. This is why the International Finance Corporation in collaboration with a number of banks has sought to establish the Global Banking Alliance for Women. Their aim to take the necessary measures to ensure the speedy growth of the wealth of women by exchanging the best possible practices between financial institutions around the world.
“If a woman has to choose between catching a fly ball and saving an infant’s life, she will choose to save the infant’s life without even considering if there are men on base.” Dave Barry
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ZULKIFLI HASAN

DURHAM, UK
Kyoto, Japan
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January 20, 2010
DR. ZULKIFLI HASAN
Islamic Finance Educational Hub in the UK
Islamic finance hub opened at Aston Business School
By Anna Blackaby: Available at:
http://www.birminghampost.net/birmingham-business/birmingham-business-news/financial-business-news/2010/01/19/islamic-finance-hub-opened-at-aston-business-school-65233-25628043/
Birmingham’s hopes to position itself as a centre for Islamic finance have moved up a notch after Aston Business School launched a ground-breaking Islamic Finance and Business Centre – the first of its kind in Europe. The centre has been developed as a result of a £1.5 million grant from Dubai-based business Surgi-Tech, the largest gift on record for the university.
It will be used to develop qualifications and advance research in the Islamic finance field. To be named after the director of Surgi-Tech, the El Shaarani Centre for Islamic Finance and Business will develop a suite of qualifications on Islamic finance for 2010, including undergraduate, postgraduate, PhD and executive programmes.
It will also continue with research into Islamic Finance and Shariah-compliant business, developing Islamic finance solutions for companies and providing an advisory service to the government and the commercial sector. The university said the sponsorship came as a result of Aston Business School’s excellent global reputation and the prestige of associating a Middle Eastern company with a UK university.
Dr El Shaarani, chief executive of Surgi-Tech Group, Dubai, said: “We are honoured to sponsor a UK business school as prestigious as Aston and help to fund research that will explore the role of Islamic finance in the future global financial system. “We believe that the creation of this centre will result in the development of new financial tools that will attract greater foreign investment to the West Midlands region. We look forward to continuing a prosperous relationship with Aston University.”
Dr Omneya Abdelsalam, Director of the Islamic Finance and Business Centre, Aston University, added: “We’d like to take this opportunity to thank the Surgi-Tech Group for their generous support. With their assistance, Aston has established this centre to meet the growing interest in Shariah-complaint finance across the world.
“Through the centre we will educate the next generation of Islamic economists and business leaders – both nationally and internationally. “Our research will allow us to investigate how mainstream financial institutions can learn from Islamic finance practices in their recovery from and avoidance of the next global economic crisis.”
The El Shaarani Centre for Islamic Finance and Business plans to exploit Birmingham’s large concentration of professional financial and legal services and culturally diverse business community to reposition the city as a centre for Islamic finance. A suite of executive education programmes in Islamic finance will be launched by Aston Business School in summer 2010, followed by a Masters qualification in the subject in October.
“The difference between school and life? In school, you’re taught a lesson and then given a test. In life, you’re given a test that teaches you a lesson.” Tom Bodett
Best Regards

ZULKIFLI HASAN

DURHAM, UK
With Sheikh Amen Fatih in Dubai.
Islamic finance news
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January 18, 2010
DR. ZULKIFLI HASAN
French Study on Islamic Finance
French study on Islamic finance ready next month

Available at:
http://www.gulfbase.com/site/interface/NewsArchiveDetails.aspx?n=123193
The French Institute for Islamic Finance (FIIF) announced here Monday that the team responsible for Islamic Finance affairs in France will submit a study on Islamic contracts next February. Head of FIIF Mohammad Nouri told KUNA that the team, formed by the advisor of Minister of Economic Affairs, Industry, and Employment Christine Lagarde, will submit their study on Murabaha (a kind of sale which is compliant with Islamic Sharia), Sokuk (Islamic bounds), and Ijara (Lease-to-Own).
The study also covers Istisna’ (an agreement to sell to or buy a non-existent asset to be made or built based on specifications outlined by ultimate buyers at an agreed predetermined selling price and to be delivered on a specific future date).
The team, which consists of Banque de France (bank of France), counseling offices, legal offices, and FIIF, meets every two weeks to study laws and legislation on Islamic financing, he pointed out. He stressed that Islamic finance attracts people around the world, especially following the world economic crisis, the decrease of liquidity, and the increase of international deficit, adding that France suffers a deficit of about 100 billion euros.
French officials realized that the cause of the crisis was the big connection with virtual economy rather than “real” products, he said. In addition, economic banking proved it was special and efficient, technically and profit-wise, and was based on simple principles understood by the public, he noted.
Nouri said the French government became aware of that last factor, especially after it noticed the big steps by the United Kingdom to attract substantial capital from the Islamic world. France is paving way for Paris to become a major western and European center that attracts Islamic banks, he emphasized.
The start of this effort was with an expression of a political desire with the announcement of the president, finance minister, and central bank governor, he said. This was followed by media, political, legal, and legislative action, including research, seminars, lectures, and other academic input, he said.
Saying he was opposed to changing the unique characteristics of Islamic finance, he noted the issue was one of credibility. He stressed that Islamic finance was an international system that many countries benefited from by now, including Japan, the United States, China, and Russia, noting that France will issue Sokouk this year.
In 2009, real estate Murabaha operations of three billion euros were made, he said, adding that France aims to reach 100 billion euros in this category. Nouri pointed out FIIF was established in 2008 to sponsor Islamic finance in France. It includes a group of Muslim scholars, economists, bankers, and legal figures who have knowledge about French laws. The institute also interacts and cooperates with scholars from different Islamic countries who have expertise in Islamic finance.
“If my theory of relativity is proven successful, Germany will claim me as a German and France will declare that I am a citizen of the world. Should my theory prove untrue, France will say that I am a German and Germany will declare that I am a Jew.” Albert Einstein
Best Regards

ZULKIFLI HASAN
Dubai International Financial Centre
Islamic finance news
3 Comments
January 12, 2010
DR. ZULKIFLI HASAN
Tomorrow’s business leaders should focus more on business ethics and stakeholders instead of concentrating on profit and shareholders
MBAs should focus more on business ethics

Available at:
http://www.dur.ac.uk/news/newsitem/?itemno=9146
Tomorrow’s business leaders should focus more on business ethics and stakeholders instead of concentrating on profit and shareholders, according to new research involving Durham University. During the economic downturn business schools were criticised for producing graduates obsessed with shareholder value and high risk growth strategies.
However according to the findings of the Research & Consultancy Centre at the Association of MBAs, in partnership with Durham University’s Business School, it appears that the era of focusing solely on shareholder value above all else could well be over. When asked whether the MBA should adopt a stakeholder rather than a shareholder focus, almost eight out of 10 (79 per cent) of business schools agreed that to a large or very large extent that this should be the case.
The majority of alumni also agree that the MBA should adopt a stakeholder rather than just a shareholder focus on the bottom-line (59 per cent). In the late 1980s and 1990s, when many of today’s corporate leaders were studying for their MBA, concerns about business ethics and sustainability played little part in the curriculum.
Mirroring the shift for greater transparency and accountability in business today, eight out of 10 (83 per cent) of alumni surveyed agreed that ethics have become important or very important, whilst three-quarters (75 per cent) said that corporate governance is now important or very important. In turn, 80 per cent of business schools agreed to a large or very large extent that corporate social responsibility should underpin the actions of organisations.
When asked how the MBA could better prepare students post-downturn, almost half (46 per cent) of the respondents raised issues relating to sustainability or ethics. However, it appears that schools have taken this point on board as when asked to rate the importance of various topics in today’s economic climate business ethics came top (4.59, where 5 is rated as “very important.”). The research included a total of 100 business schools as well as 544 alumni from 57 countries across the world. In terms of their roles and responsibilities, half of the alumni were senior managers or above, with almost a tenth at CEO/president level.
Commenting on the findings, Professor Rob Dixon, Dean of Durham University’s Business School said: “The economic crisis has shown that we can’t simply expect things to go on as they were. “It’s not just all about profit. Business schools are helping to build a new way of doing business, one that doesn’t put the interests of shareholders above all other stakeholders. “Business needs well rounded executives with strong leadership skills and the ability to integrate ethical, sustainable and stakeholder thinking into their management decisions.”
Other key findings of the research include:
Risk management: Business schools acknowledge that both risk management and strategic risk are two of the top three topics where there is the widest disconnect between what they offer in the current curriculum and what they ought to be offering in the post-downturn world.
A qualification for challenging times: Seven out of 10 (70 per cent) of MBAs agree or strongly agree that their business education helps them to manage change, while six out of 10 (59 per cent) said it prepared them to deal with uncertainty.
Maintaining edge: Business schools appear committed to maintaining the relevance of their MBA programmes. More than nine out of 10 (94 per cent) had undergone a full re-design of their curriculum within the previous five years.
Adds Accreditation Project Manager, Mark Stoddard of the Association of MBAs: “The report provides a clear consensus on the direction the MBA needs to take and will encourage important debate amongst the business school community.
“Schools have been working hard to adapt the MBA to the changing demands of modern business, particularly in terms of developing a greater stakeholder focus for their programmes. “But the economic crisis highlights the need for further change, including a broader, skills-focused and integrated curriculum with more extensive coverage of ethics, risk management and sustainable business practices.“
“Ethics is not definable, is not implementable, because it is not conscious; it involves not only our thinking, but also our feeling.” Valdemar W. Setzer
Best Regards

ZULKIFLI HASAN

DURHAM, UK
The Louvre Museum, Paris
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January 11, 2010
DR. ZULKIFLI HASAN
GCC remains dominant in Islamic finance
GCC remains dominant in Islamic finance

Abdul Jalil Mustafa | Arab News Available at:
http://www.arabnews.com/?page=6&section=0&article=131017&d=11&m=1&y=2010&pix=business.jpg&category=Business
AMMAN: The Islamic financial system gained additional popularity in 2009, thanks to the relative immunity it enjoyed from the fallout of the financial crisis. The widely perceived viewpoint that Shariah-compliant financial institutions had passed the global credit crisis nearly unscathed is presenting the Islamic financial industry to many non-Muslim investors in the world as a safe haven from speculative excesses.
“We have reports that countries such as France, Australia and Japan are now mulling the introduction of Islamic banking into their financial systems,” Musa Shehadeh, general manager of the Jordan Islamic Bank said. Investors traumatized by the credit crisis apparently found comfort from the stricter rules imposed on lending by Islamic law, which considers the payment of interest as usury, thus banning the structures and financing methods that quickly unraveled during the US mortgage crisis at the end of 2008, Shehadeh said.
According to a study published in November by the Banker Magazine in association with HSBC Amanah, Islamic finance continued double digit growth despite global crisis in 2009. The survey, that covered top 500 Islamic financial institutions, showed that assets held by fully Shariah-compliant banks or Islamic banking windows of conventional banks rose by 28.6 percent to $822 billion from $639 billion in 2008.
This result contrasted sharply with a Banker study released in July which showed that the world’s top 1,000 conventional banks achieved an annual asset growth of just 6.8 percent. “The Islamic finance industry continues to build a solid track record: The compound annual growth rate for 2006-2009 is 27.86 percent, with assets forecast to hit $1.033 trillion in 2010,” the study said.
The six Gulf Cooperation Council (GCC) member states remained the dominant segment of Islamic finance, with $353.2 billion or 42.9 percent of he total global aggregate, according to the study. Iran remains the largest single market for Shariah-compliant assets, accounting for 35.6 percent of the global aggregate.
Outside the Middle East, Malaysia is by far the largest player, accounting for 10.5 percent of the global aggregate, but other markets are expanding rapidly. The United Kingdom now accounts for just under 2.5 percent of the world’s Shariah-compliant assets. “Apparently, Islamic finance sectors are attracting larger amounts of investment funds against the backdrop of being the least affected as a result of the global financial crisis,” Salah Shalhoub, professor of Islamic financing at the Dhahran-based King Fahd University for Petroleum and Minerals, told the Dubai-based Arabic version of the CNBC television.
“Demand has also substantially increased for Islamic tools and bonds, known as sukuk, due to the shortage of liquidity that can be obtained from conventional banks,” he added. However, the image of the booming Islamic finance seemed to have been marred at the end of November with the declaration by the state-run Dubai World conglomerate that it was asking creditors of two of its flagship real estate firms-Nakheel World and Limitless World – for a standstill on debt worth of tens of billions of dollars.
The two subsidiaries are run according to Islamic law through the issuance of billions of dollars worth of sukuk. Some analysts expected Islamic finance to be at risk as a result of the Dubai World debt crisis, but Hanaa Hunaiti, professor of Islamic Economics at the Amman Arab University for Higher Studies, believes the problem has nothing to do with Islamic finance. “Nobody said that the problem was because of sukuk, which as a matter of fact can lead either to profit or loss according to Islamic law,” Hunaiti said.
“I believe it is a short-lived ordeal that certainly will be dealt with in a satisfactory manner, given the assurances made by UAE officials that the emirate will be able to repay all its debts,” she added. However, other analysts suggested the focus of Islamic finance could be shifted from Dubai to Saudi Arabia, Qatar and Bahrain in 2010 pending the settlement of the Dubai World debt crisis. This vision was supported by a report issued recently by the Saudi chambers of commerce which expected investment funds to change their direction from Dubai to Saudi Arabia. “An opportunity now exists for Saudi Arabia to lead the forthcoming wave of the Islamic finance industry in the Gulf as the kingdom possesses all qualifications of this leadership, including the necessary infrastructure and guidelines,” the report said.
“You will become as small as your controlling desire; as great as your dominant aspiration”, James Allen
Best Regards

ZULKIFLI HASAN

DURHAM, UK
Milan, Italy
Islamic finance news
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Al-Baqarah, 2:275
Calendar
January 2010

M

T

W

T

F

S

S

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31
« Dec
Feb »
Academic
Centre for Islamic Area Studies at Kyoto University

Durham Islamic Finance Programme

Harvard University Islamic Finance Project

IIUM Institute of Islamic Banking and Finance

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International Institute of Islamic Economics

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