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BLOG OF KNOWLEDGE (Shari'ah, Law, Islamic Finance and Muslim News)
Shari'ah, Law, Islamic Finance and Muslim News
Daily Archives: March 7, 2012
March 7, 2012
DR. ZULKIFLI HASAN
Between the Goldman Sukuk and the Goldman’s Secret Greece Loan
Goldman’s Secret Greece Loan Reveals Sinners
(Note: This article should be read together with another article
Click Here
)
By Nicholas Dunbar and Elisa Martinuzzi -Available at:
http://www.bloomberg.com/news/2012-03-06/goldman-secret-greece-loan-shows-two-sinners-as-client-unravels.html
Greece’s secret loan from Goldman Sachs Group Inc. (GS) was a costly mistake from the start.

On the day the 2001 deal was struck, the government owed the bank about 600 million euros ($793 million) more than the 2.8 billion euros it borrowed, said Spyros Papanicolaou, who took over the country’s debt-management agency in 2005. By then, the price of the transaction, a derivative that disguised the loan and that Goldman Sachs persuaded Greece not to test with competitors, had almost doubled to 5.1 billion euros, he said.
Papanicolaou and his predecessor, Christoforos Sardelis, revealing details for the first time of a contract that helped Greece mask its growing sovereign debt to meet European Union requirements, said the country didn’t understand what it was buying and was ill-equipped to judge the risks or costs.

“The Goldman Sachs deal is a very sexy story between two sinners,” Sardelis, who oversaw the swap as head of Greece’s Public Debt Management Agency from 1999 through 2004, said in an interview.

Goldman Sachs’s instant gain on the transaction illustrates the dangers to clients who engage in complex, tailored trades that lack comparable market prices and whose fees aren’t disclosed. Harvard University, Alabama’s Jefferson County and the German city of Pforzheim all have found themselves on the losing end of the one-of-a-kind private deals typically pitched to them by securities firms as means to improve their finances.
Goldman Sachs DNA
“Like the municipalities, Greece is just another example of a poorly governed client that got taken apart,” Satyajit Das, a risk consultant and author of “Extreme Money: Masters of the Universe and the Cult of Risk,” said in a phone interview. “These trades are structured not to be unwound, and Goldman is ruthless about ensuring that its interests aren’t compromised — it’s part of the DNA of that organization.”
A gain of 600 million euros represents about 12 percent of the $6.35 billion in revenue Goldman Sachs reported for trading and principal investments in 2001, a business segment that includes the bank’s fixed-income, currencies and commodities division, which arranged the trade and posted record sales that year. The unit, then run by Lloyd C. Blankfein, 57, now the New York-based bank’s chairman and chief executive officer, also went on to post record quarterly revenue the following year.
‘Extremely Profitable’
The Goldman Sachs transaction swapped debt issued by Greece in dollars and yen for euros using an historical exchange rate, a mechanism that implied a reduction in debt, Sardelis said. It also used an off-market interest-rate swap to repay the loan. Those swaps allow counterparties to exchange two forms of interest payment, such as fixed or floating rates, referenced to a notional amount of debt.
The trading costs on the swap rose because the deal had a notional value of more than 15 billion euros, more than the amount of the loan itself, said a former Greek official with knowledge of the transaction who asked not to be identified because the pricing was private. The size and complexity of the deal meant that Goldman Sachs charged proportionately higher trading fees than for deals of a more standard size and structure, he said.
“It looks like an extremely profitable transaction for Goldman,” said Saul Haydon Rowe, a partner in Devon Capital LLP, a London-based firm that advises global investors on derivatives disputes.
Disappearing Debt
Goldman Sachs declined to comment about how much it made on the swaps. Fiona Laffan, a spokeswoman for the firm in London, said the agreements were executed in accordance with guidelines provided by Eurostat, the EU’s statistical agency.
“Greece actually executed the swap transactions to reduce its debt-to-gross-domestic-product ratio because all member states were required by the Maastricht Treaty to show an improvement in their public finances,” Laffan said in an e- mail. “The swaps were one of several techniques that many European governments used to meet the terms of the treaty.”
Cross-currency swaps are contracts borrowers use to convert foreign currency debt into a domestic-currency obligation using the market exchange rate. As first reported in 2003, Goldman Sachs used a fictitious, historical exchange rate in the swaps to make about 2 percent of Greece’s debt disappear from its national accounts. To repay the 2.8 billion euros it borrowed from the bank, Greece entered into a separate swap contract tied to interest-rate swings.
Falling bond yields caused that bet to sour, and tweaks to the deal failed to prevent the debt from almost doubling in size by the time the swap was restructured in August 2005.
Greece, which last month secured a second, 130 billion-euro bailout, is sitting on debt equal to about 160 percent of its GDP as of last year.
Eurostat Rules
Under Eurostat accounting rules, nations were permitted until 2008 to use so-called off-market rates in swaps to manage their debt. Greek officials, including Sardelis, say they learned that other EU countries such as Italy had employed similar methods to shrink their debts, taking advantage of the secrecy of over-the-counter derivatives compared with swaps traded on exchanges.
Eurostat said Greece didn’t report the Goldman Sachs transactions in 2008 when the agency told countries to restate their accounts.
“The Greek authorities had never informed Eurostat about this complex issue and no opinion on the accounting treatment had been requested,” the Luxembourg-based agency said in a statement last month.

Eurostat said it had only “general” discussions with financial institutions on its debt and deficit guidelines when the swap was executed in 2001. “It is possible that Goldman Sachs asked us for general clarifications,” Eurostat said, declining to elaborate.
Loudiadis Role
Bloomberg News filed a lawsuit at the EU’s General Court seeking disclosure of European Central Bank documents on Greece’s use of derivatives to hide loans. Releasing such information could damage the commercial interests of the ECB’s counterparties, hurt banks and markets, and undermine the economic policy of Greece and the EU, the central bank said last May in a response to the suit. A judgment is pending.
Sardelis, 61, and Papanicolaou, 72, said several banks, including Goldman Sachs, made proposals to manage Greece’s debt. The bank was represented by its top European sales executive at the time, Addy Loudiadis. She was trusted, said Papanicolaou, because she had helped price competitors’ derivatives and in 1999 warned the Greeks against buying a complex swap.
Sardelis, a former bank economist, described Loudiadis, who’s based in London, as “very professional — a little bit aggressive as is everyone at Goldman Sachs.”
‘Teaser Rate’
The derivative Loudiadis offered Sardelis in 2001 was also complex. Designed to provide a cheap way to repay 2.8 billion euros, the swap had a “teaser rate,” or a three-year grace period, after which Greece would have 15 years to repay Goldman Sachs, Sardelis said. All in, the deal appeared cheap to officials at the time, he said.
“We calculated that this had an extra cost above our normal funding cost on the yield curve of 15 basis points,” Sardelis said. A basis point is 0.01 percentage point.
Loudiadis, now CEO of Rothesay Life, a Goldman Sachs unit that insures longevity risk for U.K. corporate pension plans, declined to comment, a company spokeswoman said.
‘Very Bad Bet’
Sardelis said he realized three months after the deal was signed that it was more complex than he appreciated. After the Sept. 11, 2001, attacks on the U.S., bond yields plunged as stock markets sold off worldwide. That caused a mark-to-market loss on the swap for Greece because of the formula used by Goldman Sachs to compute Greece’s repayments over time.
“If you calculated that when we did it, it looked very nice because the yield curve had a certain shape,” Sardelis said. “But after Sept. 11, we realized this would be the wrong formula. So after we discussed it with Goldman Sachs, we decided to change to a simpler formula.”
The revised deal proposed by the bank and executed in 2002, was to base repayments on what was then a new kind of derivative — an inflation swap linked to the euro-area harmonized index of consumer prices. An inflation swap is a financial bet that pays off according to the degree to which a consumer-price index exceeds or falls short of a pre-specified level at maturity.
That didn’t work out well for Greece either. Bond yields fell, pushing the government’s losses to 5.1 billion euros, according to an analysis commissioned by Papanicolaou. It was “a very bad bet,” he said in an interview.
“This is even more reprehensible,” Papanicolaou said of the revised deal. “Goldman asked them to make a change that actually made things even worse because they went into an inflation swap.”
Confidentiality Requirement
Greece was handicapped, in part, by the terms Goldman Sachs imposed, he said.“Sardelis couldn’t actually do what every debt manager should do when offered something, which is go to the market to check the price,” said Papanicolaou, who retired in 2010. “He didn’t do that because he was told by Goldman that if he did that, the deal is off.”
Sardelis declined to comment about the analysis, as did Petros Christodoulou, director general of the debt-management agency since February 2010.
It isn’t unusual for dealers to impose confidentiality requirements on clients in complex transactions to prevent traders from using the information to front-run or trade against the bank arranging and hedging the deal, said a former official who analyzed the swap and asked not to be named because the details are private.
‘Large Number’
Goldman Sachs’s initial 600 million-euro gross profit “sounds like a large number, but you have to take into account what the bank will be setting aside as a credit reserve, the cost to Goldman to fund the loan and the cost of hedging the currency component,” said Peter Shapiro, managing director of Swap Financial Group LLC in South Orange, New Jersey, an independent swaps adviser. “It’s hard to tell what the profit margin would have been.”
The report Papanicolaou commissioned after taking over the agency showed the repayment formula meant that Greece would have to pay Goldman Sachs 400 million euros a year, he said. The coupon and the mark-to-market swings on the swap prompted George Alogoskoufis, then finance minister, to decide to restructure the deal again to limit losses, Papanicolaou said.
Loudiadis and a team of Goldman Sachs advisers returned to Athens in August 2005, according to former Greek officials. The agreement they reached to transfer the swap to National Bank of Greece SA and extend the maturity to 2037 from 2019, gave the Greeks what they wanted, Papanicolaou said.
‘Squeeze Taxpayers’
The 5.1 billion-euro mark-to-market value of the swap was “locked in,” Papanicolaou said. It was that politically motivated decision to restructure and fix the increased market value that did as much damage as the original swap, said Sardelis, now a board member of Ethniki General Insurance Co., a subsidiary of National Bank of Greece.
“You can’t have prudent debt management if you change all the assumptions all the time,” he said.

Gustavo Piga, a professor of economics at University of Rome Tor Vergata and author of “Derivatives and Public Debt Management,” sees a different lesson.
“In secret deals, intermediaries have the upper hand and use it to squeeze taxpayers,” Piga said in an interview. “The bargaining power is in investment banks’ hands.”
Best Regards

ZULKIFLI HASAN
Aberystwyth, Wales
Islamic finance news
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BLOG OF KNOWLEDGE (Shari'ah, Law, Islamic Finance and Muslim News)
Shari'ah, Law, Islamic Finance and Muslim News
My Journal
Journal Articles
Regulatory Reform In Islamic Finance In Malaysia

Kritikan Kewangan Islam:Apa yang Perlu Diketahui

Maslahah in Stakeholder Management for Islamic Financial Institutions

An Analysis of the Courts’ Decisions on Islamic Finance Disputes, ISRA International Journal of Islamic Finance, 3 (2): 41-71

A survey of Shari’ah Governance Practices in Malaysia, GCC Countries and the UK

Executive Summary: Sharīʿah Governance in Islamic Financial Institutions in Malaysia, GCC Countries and the UK

An Islamic Perspective on Governance. Review of Islamic Economics, 14 (1), 207-209

Regulatory Framework of Shari’ah Governance in Malaysia, GCC Countries and the UK, Kyoto Bulletin of Islamic Area Studies (2010 March, Vol. 3 No.2)

Shari’ah and Legal Issues in Al-Bay’ Bithaman Ajil in the Case of of Arab-Malaysian Finance Bhd V Taman Ihsan Jaya Sdn Bhd & Ors [2008] 5 MLJ

A Shariah Perspective on The “Letter of Offer” As Practised By the Islamic Financial Institutions: A comparative Study With the Malaysian Law of Contract

Hak-hak wanita Islam dalam Kes Mungkir Janji untuk Berkahwin di Malaysia: Kajian Perbandingan antara Undang-undang Sivil dan Syariah, (2005) Jurnal Hukum

Harmonisation of Shariah and Common Law in The Implementation Of Islamic Banking In Malaysia

Role of the Islamic Financial Institution in Combating Money Laundering: Legal and Shariah Perspectives

The Legal Thought Of Madhhab Syafi’i in the Implementation of Islamic Banking in Malaysia. Jurnal Undang-undang IKIM. Julai 2006. IKIM

Shariah Governance in the Islamic Financial Institutions in Malaysia. (2006). Journal of Management and Muamalah International Islamic University of Selangor.

Kedudukan Murtad Menurut Perspektif Undang-undang Malaysia

Uqud in Financial Services for Entrepreneurship

Perlaksanaan Sistem Perbankan Islam Di Malaysia: Perspektif Undang-undang

Explanatory Note on Anti Money Laundering (Amendment) Act 2005

The Effectiveness of the Administration of Waqf Land In Malaysia” (2007) 3 Shariah Law Reports, Lexis Nexis

The Weaknesses of the Hague Rules and To What Extent the Reforms Made by the Hague-Visby Rules (2007) Malayan Law Journal

Corporate Governance From Western And Islamic Perspectives

Competition Law and Policy from Islamic Perspective

Sulh dan Perlaksanaannya di Mahkamah Syariah

Ethical Principles of Lawyers in Islam

Sharia governance in Islamic financial institutions and the effect of the Central Bank of Malaysia Act 2009, J.I.B.L.R. 2010, 25(3), 105-108

The Challenges of Globalization to Muslims Youth

New Insight on Agency Theory in IFIs: A Reappraisal

Corporate Governance in Islamic Financial Institutions: An Ethical Perspective

Reassessing the Implementation of Islamic Finance

Sejarah Undang-undang Keterangan Islam di Malaysia

Yusuf al Qaradhawi, Mujaddid Kontemporari dan Sumbangan Pemikirannya

Fiqh Demokrasi dan PRU13

Characteristics of Money from Fiqhi Perspective

Public Prosecutor v Dato’ Seri Anwar Ibrahim
Purifying Your Wealth Bringing Barakah to Our Lif

Konsep Negara Madani Menurut Rashid al Ghannoushi

Maqasid al Syariah-Oriented Approach in Government Administration

Riba, Ekonomi, Sistem Kewangan Global dan Kewangan Islam

Maqasid Index

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Tuduhan Liwat Dalam Kes Qazaf Di Mahkamah Syariah

Kedudukan Anak Tak Sah Taraf Menurut Perspektif Undang-undang

Islamic Revivalism in the 21st Century
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25 thoughts on “My Journal”
Ruzian says:
April 1, 2009 at 12:23 am

Saudara Zulkifli, Teruskan menulis dan selamat maju jaya dalam perjuangan Phd..Saya ingin mengucapkan terimakasih kerana paparan bahan di blog saudara telah banyak membantu saya dalam pengajaran dan penyelidikan.

Reply

sadaf says:
May 4, 2009 at 7:40 am

AOA………i send u mail hope u will help me………im doimg MBA and doing a project on my Sub Islamis Finance…i need materail on the topic Islamic Corporate Governance……

Reply

suazzri says:
November 1, 2009 at 3:17 am

Salam tuan,

Berkenaan artikel tuan bertajuk “Islamic Perspective On The Competition Law and Policy”, sy ingin bertanya tahun bilakah ianya di isu? sy ingin gunakannya sebagai reference. Harap dapat email kepada saya ASAP. Thanks.

Reply

ZULKIFLI HASAN says:
November 1, 2009 at 9:25 am

Zulkifli Hasan, 2005, “Islamic Perspective on Competition Law and Policy”, International Conference on Law and Commerce, International Islamic University Malaysia and Victoria University, Australia held on 29 September 2005.

Reply

pako says:
December 16, 2009 at 1:35 am

i am studying islamic finance and i must say your articles were very helpful.  i really struggled to find information on “islamic finance and the law of the law” until i came across your articles. looking forward to reading further materials. thanks

Reply

abdullah firdaus says:
January 5, 2010 at 9:31 am

Aslm Sir.

Sir saya nak tanya,sir ada artikel berkaitan tentang isu tanah x sir.. Saya sedang siapkan Academic Writing bertajuk “The Right of lnad After Death : An anylsis of Syariah and Felda Perspective”

Saya juga sedang menyiapkan kajian sampingan.. tajuknya “Islamic Banking in Malaysia : A comparative study”.saya tgh kumpul model2 islamic banking dariu negara lain.

Harap sir dapat membantu

Reply

mohamad halim bin othman says:
January 10, 2010 at 11:45 pm

Salam Sdr Abdullah Firdaus

Maaf saya mencelah

.Sdr boleh rujuk buku oleh Dr Sudin Haron dan Prof Shanmugam untuk bahan comparative Islamic Banking.

Reply

Bashir Lone says:
March 27, 2010 at 1:27 pm

AslamAlykum

I am graduate in Science & have done charetered accountancy from Institute of chartered accountants of India with 8 years post qualifiaction in Public practice. I am interested in pursuing masteres in Islamic Finance in Uk, USA & Australia  ,Please Suggest me best universities .

Thanks

Allah Hafiz

Bashir Lone

Srinagar India

Reply

asmak Husin says:
July 15, 2010 at 8:52 am

assalamualaikum

saudara zulkifli, saya bercadang untuk membuat proporsal phd ttg combating financial crime within legal framework in malaysia. apakah pandangan saudara. boleh feedback saya

asmak husin

pensyarah CITU, UITM, Shah Alam

Reply

sukmawati bt ramli says:
June 18, 2011 at 12:03 am

Assalamualaikum…tuan…bagi jurnal ‘ Undang-undang Jenayah Islam Di Malaysia,sejauhmanakah pelaksanannya” di manakah ia di bentangkan dan tahun bila? ini bertujuan untuk melengkapkan maklumat bagi ringkasan artikel yg saya buat untuk asgment saya.

sukma, ukm bangi.

Reply

ZULKIFLI HASAN says:
June 21, 2011 at 11:08 am

9.	Hasan, Z. (2007). Undang-undang Jenayah Islam Di Malaysia,sejauhmanakah pelaksanannya” dalam Pengajian Umum, Negeri Sembilan: Universiti Sains Islam Malaysia.

Reply

arief Bachtiar says:
October 13, 2011 at 4:01 am

Salam Kenal

Saya barusan buka blog anda, kalo ada waktu saya ingin tanya banyak tentang bank syariah, saya ngajar di UPN surabaya, Tq

Reply

anna says:
April 13, 2012 at 11:01 pm

Salam Doktor,

Berkenaan artikel tuan bertajuk “roles of islamic institution in combating money laundering: legal and shariah perspective” saya ingin bertanya bila ia dikeluarkan? saya ingin menggunakannya sebagai rujukan. Terima kasih.

Reply

DR. ZULKIFLI HASAN says:
April 16, 2012 at 12:54 am

25.	Hasan, Z. (2007). Roles of Islamic Financial Institution in Combating Money Laundering: Legal and Shari’ah Perspective, International Conference on Islamic Banking and Finance, International Islamic University Malaysia, Durham University, UK, Markfield Institute of Higher Education, UK and Dar Al-Istithmar, Saudi Arabia, 23-25th April 2007.

Reply

ingin tahu says:
September 1, 2012 at 6:03 pm

salam saudara dr zukifli

saya ingin bertanya berkenaan artikel tentang islamphobia. ada tidak yang berkaitan dengan business system

Reply

fatin nazira says:
November 17, 2012 at 8:02 am

assalamualaikum tuan. saya nak bertanya.

berkenaan artikel tuan bertajuk ‘Perlaksanaan Sistem Perbankan Islam Di Malaysia: Perspektif Undang-undang’ sy ingin bertanya tahun bilakah artikel ini? sy ingin gunakannya sebagai reference. Harap dapat email kepada saya. terima kasih.

Reply

Rabeah Bt Abdul Karim says:
April 21, 2013 at 10:47 pm

Assalamualaikum doctor,can you give some opinion on..’What are the biggest obstacles to develop Islamic Corporate Governance(theory and practice) in Malaysia and else where?tq.

Reply

Buvanis says:
May 9, 2013 at 11:22 pm

Hi Dr. Zulkifli Hasan,

I am a PhD Candidate from the University of Otago, New Zealand. Im writing a thesis on property rights of cohabitants in Malaysia, UK and New Zealand on a comparative basis. I have a few questions here. Firstly, If in any example situation, there is a Muslim couple who have not married, but buy a house together, and even before they got married, they break up. In that case, will the case fall under the Sharia court or the civil court? Secondly, how will the court determine the beneficial interest on the property bought? If couples of non-Muslims, the common law principles will take place. Does the same rule apply to Muslims?

Thanks in advance. It’s much appreciated.

Reply

khart2015
says:
September 17, 2013 at 11:17 pm

Hello. I was fortunate to discover your site. You seem very knowledgeable on current global economic issues. I recently travelled to SE Asia. Malaysia is a beautiful country.

I am concerned…like many…about the global economic downturn…as well as, the differences in the values of currencies throughout SE Asia. I have been giving this issue a great deal of thought. The situation seems to often involve massive amounts of Chinese (etc.) loans and the U.S. (etc.) not wanting to back an increase in the value of SE Asian currencies (in general). If SE Asia adopted a single currency…like the Euro…it would probably have to freeze the existing currency loan payback amounts at a certain value…at the time a currency was adopted… in order to gain support and prevent conflict with lenders. Do you feel that this is one of the goals of ASEAN and the “developing” stock markets? The Euro has many difficulties that can be traced to the initial conversion of national currencies. Obviously, the value was based on the wrong products or services. Do you think there are better indicators? The value of the most commonly sold bag of rice in a country…etc. I have returned from Cambodia. I live in the U.S. The standard of living must increase worldwide…these markets are part of that story. Who can the U.S. sell to at these exchange rates? Who can buy our goods? Who can they sell to and provide for their families on the other side of the planet? This is unacceptable. Islamic finance has similar issues. Thanks, Katherine L. Hart

Reply

mukmin says:
April 3, 2014 at 5:38 am

Salam…Dr, if you don’t mind, may i know the details of article of ‘harmonisation of syariah and common law in the implementation of islamic banking’– d publisher and date..i really need it as a reference..thank you Dr..

Reply

DR. ZULKIFLI HASAN says:
April 6, 2014 at 5:41 am

39.	Hasan, Z. (2006). Harmonisation of Shariah and Common Law in the Implementation Of Islamic Banking In Malaysia, International Seminar on Shari’ah and Common Law, Islamic Science University Of Malaysia, 20-21st September 2006. unpublished.

Reply

Hanissah binti Hamzah says:
November 14, 2014 at 8:37 am

Salam Dr.

May I know the details for the article “Shariah Governance In Islamic Finance: The Effects of The Islamic Financial Services Act 2013”. This article is one of my reference. Thanks in advance Dr.

Reply

Hanissah binti Hamzah says:
November 14, 2014 at 8:39 am

Sorry Dr. The title of the article should be “SHARIAH GOVERNANCE IN THE ISLAMIC FINANCIAL INSTITUTIONS IN MALAYSIA”

Reply

Mala says:
March 9, 2016 at 1:37 pm

Terima Kasih jurnal tn sangat membantu….Saya nak jadikan reference untuk isu murtad dan Intelektual Muslim dan Arus Kebangkitan Islam

Reply

min says:
April 8, 2016 at 2:22 am

assalammualaikum dr. saya nak minta izin untuk mengambil kajian dr ini sebagai bahan rujukan untuk assignment saya. boleh kah?

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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: April 2012
April 27, 2012
DR. ZULKIFLI HASAN
The Politic of Islamic Finance: Reappraisal
KE MANA ARAH TUJU KEWANGAN ISLAM?
Zulkifli Hasan
Pendahuluan
Persatuan Pengguna Islam Malaysia telah mengejutkan masyarakat Malaysia khususnya kepada industri kewangan Islam dengan laporan telah menerima lebih 4000 aduan sejak 2003 hingga 2012 mengenai ketidakpuashatian pelanggan dengan sistem perbankan Islam. Kenyataan PPIM yang sangat keras dengan menuduh bank-bank Islam menggunakan nama Islam untuk mencapai keuntungan melampau ini tidak boleh dipandang enteng dan remeh oleh pengamal kewangan Islam dan pihak berautoriti seperti Bank Negara Malaysia serta institusi berkaitan seperti Pertubuhan Perbankan Islam Malaysia dan Pertubuhan Penasihat Syariah Malaysia.
Berdasarkan kepada perkara di atas, penulis akan cuba secara ringkas untuk menelusuri dan menilai semula perkembangan dan amalan kewangan Islam di Malaysia setelah ianya dilaksanakan lebih 37 tahun yang lalu. Artikel ini akan meninjau dan mendedahkan kritikan-kritikan yang berterusan mengenai pelaksanaan kewangan Islam yang dikatakan semakin hari semakin jauh daripada aspirasi keadilan ekonomi dan sosial yang digariskan oleh teras dan fundamental ekonomi Islam. Penulisan ini bukan bertujuan untuk menjatuhkan dan mencemarkan perkembangan kewangan Islam tetapi sekadar peringatan dan rasa keprihatinan terhadap peri pentingnya industri ini untuk menilai kembali arah tuju pelaksanaan dan amalannya.
Kritikan Terhadap Kewangan Islam
Semasa kunjungan Profesor Yusuf Qaradawi ke Malaysia bersempena menerima Anugerah Tokoh Maal Hijrah pada 2009, beliau secara peribadi ada menyatakan kebimbangan dan keperihatinan terhadap pelaksanaan sistem kewangan Islam. Terdapat beberapa aspek yang perlu dinilai semula demi memastikan hala tuju kewangan Islam ini benar-benar dapat menyumbang kepada pembangunan sosio ekonomi masyarakat dan memberikan keadilan sosial. Sehubungan dengan perkara ini, penulis akan membincangkan secara ringkas tentang kritikan-kritikan yang telah diutarakan terhadap pelaksanaan dan amalan kewangan Islam. Kritikan-kritikan ini adalah sangat bermanfaat untuk diketengahkan kerana ianya boleh dijadikan sebagai kayu ukur dan asas kepada penambahbaikan serta penentu arah tuju industri kewangan Islam. Setelah meneliti dan membuat sorotan literatur dalam topik ini, kritikan terhadap kewangan Islam secara umumnya dapat dibahagikan kepada beberapa aspek iaitu epistemologi, ’model’ atau pendekatan, produk, metodologi, ’governance’ atau tadbir urus dan pembangunan sosio-ekonomi.
Perkara yang kurang mendapat perhatian dalam ’discourse’ atau pentas perbincangan mengenai kewangan Islam ialah aspek epistemologinya. Tatkala banyak literatur atau rujukan dan bahan ilmiah mengenai segenap aspek kewangan Islam, didapati amat sedikit perbincangan secara serius dari aspek epistemologi atau falsafahnya. Umumnya, pengamal kewangan Islam termasuk ahli akademik tidak ramai yang memberikan perhatian dan mempunyai kefahaman yang mendalam dalam aspek epistemologi ini. Implikasinya ialah didapati pelaksanaan kewangan Islam pada hari ini dilihat lebih cenderung ke arah mempunyai satu dimensi utiliti yang menjadi teras ekonomi kapitalis iaitu memaksimakan utiliti individual ’homo economicus’.
Berbanding sistem kewangan konvensional yang berepistemologikan ’secular approach’ (pendekatan sekular) dan ’humanistic approach’ (pendekatan kemanusiaan), epistemologi Tauhid ’Faith-based epistemologi’ merupakan asas sistem kewangan Islam. Epistemologi Tauhid yang menjadi teras dan falsafah prinsip-prinsip muamalat Islam sepatutnya menjadi aspirasi pengamal kewangan Islam untuk meletakkan maqasid syariah pertimbangan utama dalam setiap perancangan yang hendak dilaksanakan. Dalam hal ini, Profesor Masudul Alam Chowdhury menyatakan bahawa kewangan Islam hanya akan beroperasi secara efisyen di dalam ruang lingkup epistemologi Tauhid yang menuntut semua pengamal kewangan Islam bertindak sebagai khalifah yang mempunyai ’taklif’ atau tanggungjawab kepada semua manusia di muka bumi ini. Epistemologi Tauhid ini adalah sangat unik dan menyeluruh di mana ianya menekankan dua dimensi utiliti iaitu kepentingan untuk mendapatkan kejayaan di dunia dan akhirat.
Kritikan terhadap kewangan Islam dari sudut ’theoretical approach’ atau pendekatan teoritikal merujuk kepada model pelaksanaan dan amalannya. Pada hakikatnya, cendiakawan ekonomi Islam seperti Professor Umer Chapra dan Professor Nejatullah Siddiqi yang dianggap sebagai ’founding father’ kepada kewangan Islam mengusulkan pendekatan kewangan Islam dalam kerangka ’ekuiti’ atau perkongsian iaitu ’two-tier mudharabah’. Mufti Taqi Usmani bersependapat dalam hal ini dan telah menyatakan pandangan beliau bahawa pendekatan dalam kerangka ’ekuiti’ ini mempunyai ciri-ciri yang bertepatan dengan ruh keadilan Islam dan sepatutnya dijadikan sebagai kerangka pelaksanaan kewangan Islam. Namun demikian, amalan kewangan Islam yang terdapat pada hari ini adalah sebaliknya. Apa yang berlaku ialah amalan kewangan Islam dikatakan telah jauh meninggalkan aspirasi ini di mana kerangka ’debt-based’ atau sistem berasaskan hutang menjadi dominan di pasaran dan didapati hingga kini aspek ’ekuiti’ yang diaspirasikan oleh pencetus idea ekonomi Islam dalam konteks dunia moden masakini telah diabaikan. Menyentuh soal ini, Profesor Timur Kuran dan Profesor Mahmud El Gamal telah mengkritik keras pelaksanaan kewangan Islam dengan mengatakan ianya bersifat manipulatif.
Perkembangan kewangan Islam yang pesat sekitar 15-20 peratus setahun menyaksikan pelbagai inovasi produk perbankan yang kini terdapat di pasaran. Dalam masa yang sama, kritikan terhadap produk dan perkhidmatan kewangan Islam jugalah yang paling banyak menerima kritikan daripada pelbagai pihak dari segenap sudut. Di antara kritikan yang popular dan semakin menampakkan kebenarannya ialah produk dan perkhidmatan kewangan Islam ini semakin hari semakin menyamai ciri-ciri dan aplikasi apa yang ditawarkan oleh perbankan konvensional. Produk yang paling mudah untuk dijadikan dijadikan contoh ialah produk pembiayaan perumahan. Sejak pengenalan kewangan Islam hingga sekarang, pembiayaan perumahan yang berprinsipkan ’Bay al Inah’ yang dianggap kontroversi dan tidak diterima oleh ramai fuqaha tradisional dan kontemporari masih lagi menjadi ditawarkan di pasaran. Bahkan jika sebelum ini, kadar keuntungannya adalah tetap dan terdapat sedikit perbezaan dengan pinjaman konvensional, tetapi kini terdapat kadar apungan atau ’floating rate’ yang sememangnya hampir menyamai pinjaman yang ditawarkan oleh perbankan konvensional.
Situasi yang sama berlaku pada produk berasaskan ’Tawarruq’. Pada asasnya ’Tawarruq’ merupakan alternatif kepada produk berasaskan ’Bay al Inah’ terutamanya bagi tujuan kecairan atau ’liquidity’. Walaubagaimanapun, apa yang berlaku ialah ’Tawarruq’ kini digunakan untuk tujuan lain dan bukan sahaja untuk tujuan kecairan. ’Tawarruq’ kini digunakan untuk penjanaan keuntungan melalui pembiayaan termasuk juga bagi produk deposit berstruktur. Produk deposit berasaskan ’Tawarruq’ ini bukan sahaja boleh dianggap sebagai ’hiyal’ atau helah untuk menghalalkan sesuatu tetapi ianya juga menjadi titik tolak ’convergence’ atau penyatuan dengan ciri-ciri produk konvensional. Begitu juga dengan produk pasaran modal Islam seperti ’sukuk’. Sukuk yang berasaskan prinsip ’Musyarakah’ iaitu berdasarkan risiko perkongsian untung rugi pada umumnya bertepatan dengan konsep muamalat Islam. Bagi tujuan ’credit rating’ dan menjamin kebolehpasaran, sukuk Musyarakah akhirnya distrukturkan dengan ’wa’d mulzim’ atau ’purchase undertaking’ yang akhirnya menjadikan produk ini mempunyai ciri yang hampir sama dengan bon konvensional malahan amat sukar untuk dibezakan. Situasi yang sama akan berlaku sekiranya produk Derivatif Islam juga dibenarkan secara berleluasa tanpa ada garis panduan yang sewajarnya. Jika produk sebegini menjadi dominan di pasaran tanpa ada kawalan, pasti ianya akan memadam dan menghilangkan perbezaan di antara sistem kewangan Islam dan konvensional malahan mendedahkan industri kewangan Islam dengan pelbagai risiko yang boleh mengganggu kestabilan industri ini.
Pelaksanaan kewangan Islam juga mengalami permasalahan dari aspek metodologi. Metodologi yang digunakan untuk menyelesaikan isu kewangan Islam termasuk meluluskan produk dan perkhidmatan adalah bersifat tidak menyeluruh dan ada yang mengatakan ianya tidak sesuai. Profesor Al Attas umpamanya mengatakan bahawa kewangan Islam menggunakan metodologi yang tidak autentik iaitu pendekatan dalam kerangka ’keynesian economic dan classical economic’. Dalam hal yang sama, Professor Abdul Hamid Abu Sulayman termasuk Profesor Aslam Haneef telah mengkritik metodologi yang digunakan dalam kewangan Islam iaitu menggunakan pendekatan sains ’fiqh’ atau ’usul fiqh’ menerusi resolusi penasihat syariah untuk menyelesaikan permasalahan syariah dan isu lain seperti implikasi ekonomi dan kewangan. Sepatutnya metodologi ini dinilai semula dengan mengambil kira metodologi atau kaedah yang lain secara intensif yang boleh digunakan dalam kewangan Islam. Oleh kerana keputusan yang dibuat oleh pengamal kewangan Islam bukan sahaja melibatkan hukum bahkan implikasi ekonomi, sosial dan lain-lain, sepatutnya metodologi yang digunakan juga adalah bersifat menyeluruh. Di antara kesan metodologi yang bersifat eksklusif digunakan oleh kewangan Islam pada hari ini ialah kebanyakan produk dan perkhidmatan kewangan Islam yang ditawarkan adalah hanya bersifat halal dan patuh syariah tetapi tidak memberikan kesan yang signifikan kepada sosio-ekonomi masyarakat.
Kritikan terhadap aspek ’governan’ atau tadbirurus juga perlu diberikan perhatian. Tadbirurus institusi kewangan Islam didapati mengutamakan ’shareholder’s value’ atau nilai pemegang saham. Orientasi ’Shareholder’s value’ ini menjadikan institusi kewangan Islam ini cenderung kepada misi dan visi untuk memaksimakan keuntungan pemegang saham. Menyentuh aspek ini, Profesor Abas Mirakhor mengesyorkan institusi kewangan Islam untuk menjadikan pendekatan ’stakeholder’s value’ sebagai model tadbir urus. Model ’stakeholder’s value’ ini mengambil kira kepentingan dan kebajikan semua pihak yang terlibat dalam sesebuah institusi sama ada secara langsung atau tidak langsung termasuk pemegang saham, lembaga pengarah, pengurusan, pekerja, pelanggan, pihak berautoriti, masyarakat umum dan alam persekitaran. Walaupun, asas tadbirurus bermodelkan ’stakeholder’s value’ ini dilihat amat bersesuaian dengan aspirasi kewangan Islam, masih terdapat banyak institusi kewangan Islam yang berpegang kepada pendekatan ’shareholder’s value’.
Dengan pelbagai krisis ekonomi dan kewangan yang melanda dunia, kewangan Islam dilihat mampu untuk menawarkan sistem alternatif yang adil kepada semua. Dalam aspek ini, kewangan Islam diharapkan akan dapat membantu meningkatkan taraf sosio-ekonomi masyarakat terutama kepada golongan yang sangat memerlukan. Namun demikian, sekiranya ditinjau kepada amalan kewangan Islam ada pada hari ini, pelaksanaannya tidak memberikan kesan yang signifikan kepada pembangunan sosio-ekonomi masyarakat. Profesor Mehmet Asutay misalnya telah mengkritik kewangan Islam yang dilihat gagal untuk memberikan sumbangan dan impak yang positif kepada keadaan sosio-ekonomi masyarakat dan pembangunan. Beliau mengatakan bahawa industri kewangan Islam hanya berperanan sebagai aktor dan berkhidmat secara berlebihan untuk pasaran dan tidak memberikan sumbangan sewajarnya untuk pembangunan sosio-ekonomi masyarakat. Bahkan ada juga menyuarakan pandangan bahawa sehingga kini, kewangan Islam dilihat lebih bersifat ’elitis’ dengan memberikan keutamaan kepada projek-projek komersil berbanding pembiayaan dalam sektor kecil dan sederhana dan ’micro finance atau kewangan mikro. Berdasarkan fakta dan informasi yang dikumpulkan, beliau mendapati kewangan Islam tidak sensitif dan sangat kurang memberikan penekanan kepada pembangunan sosio-ekonomi masyarakat bahkan kadang kala terlalu memfokuskan kepada projek komersil yang menguntungkan segelintir individu.
Kesimpulan
Berdasarkan analisis ringkas di atas, dapatlah disimpulkan bahawa pelaksanaan kewangan Islam telah mendapat pelbagai kritikan daripada pelbagai pihak. Kritikan ini adalah bersifat menyeluruh dan ini termasuk aspek espitemologi, pendekatan, produk, metodologi, tadbir urus dan pembangunan sosio-ekonomi. Kritikan ini ada yang bersifat andaian, persepsi dan ada juga yang disokong dengan fakta yang sahih. Walau apapun, kritikan ini harus dilihat sebagai sesuatu yang boleh dijadikan asas untuk menentukan arah tuju industri kewangan Islam. Pengamal kewangan Islam sepatutnya menerima dengan hati terbuka kritikan ini dan semestinya perlu menilai semula strategi, perancangan dan amalan sedia ada. Kritikan-kritikan ini juga membuktikan bahawa trend industri kewangan Islam ini boleh dikatakan secara umumnya semakin hari semakin menuju ke arah ’convergence’ atau penyatuan dengan sistem konvensional dari pelbagai aspek. Hingga satu hari nanti kemungkinan akan berlaku tiada lagi perbezaan yang nyata di antara sistem ekonomi Islam dan sistem berasaskan riba yang menjadi teras perbankan konvensional selama ini. Penulis merasakan, sudah sampai masanya semua pihak yang terlibat dalam kewangan Islam sama ada secara langsung atau tidak langsung untuk secara serius mengkaji, menilai, bermuhasabah, menganalisa dan mentransformasi amalan dan pelaksanaan kewangan Islam sedia ada agar ianya terus subur dan segar demi kemaslahatan umat Islam khususnya dan masyarakat dunia umumnya. Usaha-usaha ke arah memurnikan hala tuju kewangan Islam bukan sahaja perlu datang dari pengamal kewangan Islam dan pihak berautoriti tetapi sokongan penuh oleh masyarakat juga adalah sangat diperlukan.
Regards

Zulkifli Hasan
Duomo, Milan, Italy
Islamic finance news
Leave a comment
April 26, 2012
DR. ZULKIFLI HASAN
Political divisions slow Islamic Finance in Egypt
Political divisions slow Islamic Finance in Egypt
Available at:
http://www.kippreport.com/2012/04/political-divisions-slow-islamic-finance-in-egypt/
As one of Egypt’s biggest commercial banks, AlexBank prepares to launch Islamic financial services next April, the country’s political divisions have left the regulatory environment unclear and unsettled.
Last year’s ousting of president Hosni Mubarak, whose regime neglected and discouraged Islamic finance, has cleared the way for rapid growth of Islamic finance in Egypt. But growth requires a regulatory framework, one that is far from being in place. As Egypt’s transition to democracy distracts the government and political parties bicker over what form of Islamic jurisprudence the country should adopt, basic decisions trail behind.
The country of over 80 million people is a potentially attractive market for Islamic finance; over two decades ago, Egypt was a pioneer in developing the industry, before a scandal erupted over money management firms that touted Islamic investments at returns above prevailing interest rates.
Egypt currently has 14 Islamic banking licenses. Operators include three full-fledged Islamic banks such as Faisal Islamic Bank of Egypt, and several which use Islamic windows, including National Bank of Egypt and Ahli United Bank. Some Islamic mutual funds were launched last year by Al Watany Bank of Egypt, Naeem Financial and Banque du Caire, but only eight of 72 mutual fund products available in the market are Islamic. AlexBank intends to use ten of its 200 branches to offer Islamic consumer banking products across the country, says Bassel Rahmy, head of retail banking. United Bank, majority owned by the central bank, has announced its intention to convert to Islamic operations by the end of 2012.
But, the industry’s roughly 200 branches and 120 billion Egyptian pounds ($19.9 billion) of assets are dwarfed by Egypt’s conventional banking industry; total assets of the entire banking sector are about 1.3 trillion pounds, the latest central bank data show. In comparison, Islamic banks account for over a quarter of assets in the Gulf’s commercial banking market, according to an estimate by consultants Ernst & Young.
Expansion of the industry will need a legal framework to attract investors and limit risks to the banking financial system – but progress is slow. AlexBank’s Rahmy says that commercial bankers had been discussing the subject with the central bank governor, who has indicated regulations would be prepared this year. But there have been no clear public statements on the direction of policy, and senior EFSA officials did not appear at an Islamic finance seminar held in Cairo last month. Although political parties have submitted proposals for regulations, officials from the parties decline to discuss them openly.
One key issue that regulators will need to clarify is whether banks can get involved in Islamic finance through in-house windows or whether they must establish separate subsidiaries. The decision will affect banks’ accounting treatment of their operations. Islamic windows, used by global institutions such as Standard Chartered and HSBC, let conventional banks offer products without setting up expensive standalone operations. The banks have internal controls to segregate conventional and Islamic funds.
In contrast, countries such as Qatar require the complete separation of Islamic from conventional banking operations. Qatar has been an important financial supporter of Egypt, giving it a $500 million grant last year, so it is possible that the Qatari model could carry some weight.
Policy issues are unlikely to be resolved until after a presidential election which starts in May. Afterwards, the distribution of power in the government should start to become clear, and agencies such as the EFSA may eventually be shaken up.
Regards

Zulkifli Hasan
Sarajevo Jewish Museum, Bosnia and Herzegovina. (Jewish Bosnian victims of the Holocaust are commemorated in this book)
Islamic finance news
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April 25, 2012
DR. ZULKIFLI HASAN
Sharia scholar moots agency for standardising Islamic products
Sharia scholar moots agency for standardising Islamic products
AFTAB H. KOLA Oman Time Available at:
http://www.timesofoman.com/innercat.asp?cat=&detail=3785&sec=news
Muscat: Dr Ali Mohiyuddin Al Quradaghi, one of the top sharia scholars in the Gulf Cooperation Council (GCC) on Islamic finance, has mooted the need for the establishment of an institution that could certify and standardise the different Islamic products in the market.
Dr Ali Mohiyuddin Al Quradaghi, the secretary-general of the Qatar-based International Union of Muslim Scholars, and also the chairman of Supervisory Board of Al Hilal Islamic Banking Services, Ahlibank Oman asserted that this can be done through a unified body for fatwa (edicts) and Sharia supervision which should be affiliated to the central bank of each country and this body shall be the benchmark for the subsidiary bodies, and can be composed of the heads of Sharia entities within each country and/or other eminent scholars.
Despite the boom of Islamic finance in recent years, the shortage of experienced scholars in applying Sharia principles for Islamic finance is hindering the progress of the industry. Ali Al Quradaghi feels that the opening of schools of Islamic economics in the universities of the Sultanate has become an urgent necessity because of the scarcity of competent people specialised in Islamic banking, considering that the creation of such a talent pool will benefit the Islamic banking in the Sultanate.
“Members of the Sharia boards should be chosen from among those who are specialised in Islamic fiqh (jurisprudence) and Islamic economy and those who have experience in the field of Islamic banking and other Islamic financial institutions. The most notable challenge is the lack of human competent resources specialised in the field of Islamic banking. We can overcome this challenge by holding training courses, seminars on a permanent basis,” he said.
Pointing out the importance of issuing a unified law for Islamic banks, he said that the lack of uniform laws for Islamic banks may contribute to the creation of some of the problems that would result from different policies, standards and laws from one bank to another.
A strong believer that the risk management is actually better in Islamic banking than conventional banking. “There are serious academic studies which show that the risks in Islamic banks are less than those in conventional banks, including a thesis in the Faculty of Islamic Studies at Qatar Educational Foundation about this comparison, that was discussed in March 2012 and it proves that risk management is actually better in Islamic banking than conventional banking,” he added.
When asked, are you seeing a convergence on standardisation for Sharia interpretation and regulations, he said, “Sharia law allows to take advantage of all the beneficial technical aspects, and it essentially sets uniform standards to achieve equality, and thus there is a convergence of standardisation for the interpretation of Shariah law in its texts that can be subject to interpretative judgment, while the definitive texts as constants.”
Speaking about the most challenging aspect of Islamic finance, the top expert observed, “In my opinion, one of the biggest challenges facing the Islamic banking is the wrong applications, because it leads to loss of its credibility. Most people go to the Islamic banks because their contracts are legitimate and Sharia-compliant.”
“So, if they were found later to be not compatible with Sharia, this will be counterproductive. Therefore I recommend Islamic banks and branches to give priority to this aspect, and stay away from abnormal fatwas which do not serve the Islamic economy.”
What precisely are scholars doing when evaluating whether a particular transaction conforms to Islamic law, Ali Mohiyuddin Al Quradaghi said, “Usually the fatwa and Sharia supervisory boards do several tasks, the most important of which are the formulation of the contracts and tools which the banks need; reviewing the processes and budgets that take place within the institution, and the internal audit of the activities that take place in the bank under the Sharia rules.”
Regards

Zulkifli Hasan
Sharjah, UAE
Islamic finance news
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April 24, 2012
DR. ZULKIFLI HASAN
Dispute Resolution in Islamic Finance
Dispute Resolution in Islamic Finance
By Jonathan Lawrence (jonathan.lawrence@klgates.com), Peter Morton (peter.morton@klgates.com) and Hussain Khan (hussain.khan@klgates.com) of K&L Gates LLP
Available at:
http://www.jdsupra.com/post/documentViewer.aspx?fid=6e8592de-ff4f-43cb-8ef2-28eec1b77d7e
The number of Sharia compliant products that are available has grown enormously over the past few years.   Many Islamic finance transactions are governed by English law or the law of another country, instead of Sharia law.   Sharia is a set of moral and religious principles rather than a codified body of laws.   These types of transactions often take place on a global level, with parties originating from different regions in the world.   For example a Swiss bank may launch a Sharia compliant financial product aimed at investors in the Middle East using documentation governed by English law.   Due to the diverse backgrounds of the parties involved, the specialist nature of the agreements and the potential variety of legal jurisdictions in play, there may be considerable benefits in having an authoritative common platform to

resolve  disputes  as  they  arise  in  a  manner  that  is  guided  by  Sharia  within  a  modern commercial context.
The tendency to favour litigation
Litigation (the resolution of disputes through the courts) is the most well known method of determining disputes.   Amongst some entities working in Islamic finance there is scepticism towards  alternative  forms  of  dispute  resolution,  such  as  international  arbitration  and mediation.    At the Asia Pacific Regional Arbitration Group Conference  2011, Hakimah Yaakob,  of  the  International  Shariah  Research  Academy  for  Islamic  Finance  in  Kuala Lumpur, stated that, following a survey that she conducted of 10 Islamic banks and 12 takaful operators (Islamic insurance providers) in Malaysia, she found that there was a ‘credit policy’ in many of these institutions not to include alternative dispute resolution clauses in their contracts, but to opt for litigation instead.   This was said by the financial institutions to have been done, in many cases, in order to avoid credit risks for legal uncertainty.   The preference for litigation was further confirmed by enquiries made of arbitration centres in Malaysia for

the purpose of this report.
Malaysia is not the only Islamic country where there is some reticence towards non-litigation forms of dispute resolution.   In Middle Eastern states, many people have also been sceptical of  using alternative  dispute  resolution  since  the  outcome  of  a  series  of  oil  concession arbitrations conducted in the 1950s to 1970s.  In these arbitrations the local laws were refused and Western systems of law took priority.   For example, prior to the tribunal award in Saudi Arabia v Arabian American Oil Company (ARAMCO) (Award of 23 August 1958, 27 ILR 117  (1963)),  international  arbitration  was  the  most  commonly  used  method  of  settling disputes between the Saudi government and foreign oil companies.  In the ARAMCO case the tribunal stated that the law of Saudi Arabia should be “interpreted or supplemented by the general principles of law, by the custom and practice in the oil business and by notions of pure  jurisprudence”  and  therefore  ARAMCO’s  rights  could  not  be “secured  in  an unquestionable manner by the law in force in Saudi Arabia”.   International arbitration was subsequently seen by the Saudi government as a tool to protect the interests of Western corporations.  The Saudi Council of Ministers issued Decree No. 58 of 1963 which prohibited any government agency from signing an arbitration agreement without prior authorisation from the Council President.
In the renowned English case of Beximco Pharmaceuticals Ltd v Shamil Bank of Bahrain EC [2004] EWCA Civ 19, one of the issues concerned the governing law of the contract.   The contract stated that “subject to the principles of Glorious Sharia’a, this agreement shall be governed by and construed in accordance with the laws of England”.   At trial, the judge, when dealing with the question of the applicable law,referred to the Rome Convention on the Law Applicable to Contractual Obligations 1980 and stated that the convention only made provision for the choice of law of a country, and did not provide for the choice of law of a non-national system of law, such as Sharia law.   It was held that a contract can only have one

governing law and that parties to a contract can only agree to adopt the law of a country as the governing law of a contract.   Therefore, according to English law, as Sharia law is a non-national system of law it is not capable of being the governing law of a contract.
An alternative argument that was made to the English Court of Appeal was that, with English law being the governing law of the contract, it is possible to incorporate general Sharia principles as terms of the contract.   This argument was also rejected.   Lord Justice Potter found the attempt to incorporate by reference the “principles of Glorious Sharia’a” to be too vague to be given effect: he stated, “The general reference to principles of Sharia in this case affords no reference to, or identification of, those aspects of Sharia law which are intended to be incorporated into the contract, let alone the terms in which they are framed.   It is plainly insufficient for the defendants to contend that the basic rules of the Sharia applicable in this case are not controversial.   Such ‘basic rules’ are neither referred to nor identified. Thus the reference to the “principles of …. Sharia” stands unqualified as a reference to the body of Sharia law generally.   As such, they are inevitably repugnant to the choice of English law as

the law of the contract and render the clause self-contradictory and therefore meaningless.”
This case demonstrates that general references to the principles of Sharia law will not be given any meaning, at least by the English courts.   This is especially so given that there is a divergence of opinions amongst scholars as to the principles in question.   On this Potter LJ made the following comment:  “Finally, so far as the “principles of … Sharia” are concerned, it was the evidence of both experts that there were indeed areas of considerable controversy and difficulty arising not only from the need to translate into propositions of modern law texts which centuries ago were set out as religious and moral codes, but because of the existence of a variety of schools of thought with which the court may have to concern itself in any given case before reaching a conclusion upon the principle or rule in dispute.”.

A further recent English Court case regarding incorporation of non-national laws was the Court of Appeal case of Halpern v Halpern [2008] QB 195. Although that case related to a dispute between Orthodox Jews under Jewish law, the Court stated that “it may be that for actual incorporation it is necessary to identify “black letter” provisions, but that seems to me to be another way of saying that there must be certainty about what is being incorporated”.
So, in summary, what these court decisions tell us is that, so far as the English Courts are concerned (i) the governing law of a contract has to be either English law or the law of a country, therefore, Sharia law cannot be the governing law of a contract; and (ii) it may be possible to incorporate as a term of the contract certain principles of Sharia law, provided there is certainty as to what is being incorporated.

The cases referred to demonstrate that, whilst there has been a tendency to favour court litigation as a means of resolving disputes in Islamic finance, the English courts have at times encountered difficulties in dealing with contracts where the parties have, at least to a certain extent, sought to have their dispute resolved in accordance with Sharia or other non-national laws or principles.
Professor Andrew White, associate professor at the International Islamic Law and Finance Centre  in  Singapore,  recently  stated  at  the  Asia  Pacific  Regional  Arbitration  Group Conference 2011 that litigation is not geared towards solving Islamic finance disputes as judges often lack the education in many industry principles.   In this context, some would say that arbitration is well placed to deal with these issues given that in arbitration, arbitrators can be selected that have the requisite knowledge both of Sharia and the relevant commercial transactions.
Additionally, there may be less difficulties in electing to have a dispute in relation to a contract decided in accordance with Sharia law by submitting the dispute to arbitration, rather than litigation.   Taking the position in England as an example, the English Arbitration Act 1996 (which applies to all arbitrations seated in England and Wales) expressly permits the arbitral tribunal to decide the dispute in accordance with the law chosen by the parties or, “if the parties so agree, in accordance with such other considerations as are agreed by them or determined by the tribunal” (s46(1)(b)).   So in English-seated arbitrations the arbitral tribunal can decide the dispute in accordance with such other considerations as are agreed by the parties, and this could include Sharia law.
The key features and foundations of arbitration
Arbitration  is  a  non-court  alternative  method  of  resolving  disputes,  where  a  neutral, independent arbitrator or panel of arbitrators, known as a tribunal, is appointed by the parties to make a binding decision, known as an award, from which there are very limited grounds of challenge.   Arbitration may be either administered (where the arbitration is conducted under the auspices of one of several arbitral institutions) or non-administered/ad hoc (where the parties agree between themselves the rules that will apply to the arbitration, without the involvement of an institution for the arbitration).
Further important features of arbitration include:
1. 	Arbitral rules and institutions – the procedural framework for the arbitration is stipulated in the arbitral rules.  The arbitral tribunal obtain their procedural powers from the arbitral rules which are usually much briefer than court rules, and give the tribunal discretion on many matters unless the parties agree otherwise.   Parties are able  to  choose  which  institution,  if  any,  should  administer  the  arbitration,  and therefore which rules will be applicable to their arbitration.

2. 	Seat of arbitration – the seat of arbitration is typically, but not always, where the arbitral hearing is held.   It is usually expressed as a city.   The seat is an important choice as the law of the seat will govern the arbitral procedure.   As mentioned above all English-seated arbitrations are governed by the Arbitration Act 1996.   The courts of the seat will have certain powers, and the award will be treated as having been made at the seat.

3. 	Neutrality – arbitration in a third country is often an acceptable alternative when contracting parties are not prepared to submit to the jurisdiction of its counterparty’s local court.

4. 	Finality – unlike a court judgment, an arbitral award is generally not subject to appeal on the merits, and may only be annulled for jurisdictional grounds or on the basis of serious procedural irregularity giving rise to substantial injustice.    Whilst this is generally the position, it is always important to check the local arbitration law and practice at the seat of the arbitration to understand the scope for an award to be set  aside and the likelihood of court intervention.

5. 	Procedural flexibility – arbitral procedures can be adapted to the circumstances of the contract or matter in dispute much more readily than court procedures.   For example, the parties can agree to the location of the hearings, the language of the proceedings and the number and qualifications of arbitrators. In the absence of party agreement, the arbitral tribunal usually has a great deal of discretion on procedural matters.

 6. Privacy and confidentiality – arbitral proceedings are generally private and parties  may insert confidentiality wording in their arbitration clause (if none exist in the arbitration rules) so that the contents of the proceedings and the award are kept confidential.
There are two key foundation stones upon which arbitration as a method of dispute resolution has grown.   First, the United Nations Commission on International Trade Law (UNCITRAL) Model Law.   The UNCITRAL Model Law is a model national arbitration law designed to assist states in reforming and modernising their laws on arbitral procedure so as to take into account the particular features and needs of international commercial arbitration. It covers all stages of the arbitral process from the arbitration agreement, the composition and jurisdiction of the arbitral tribunal, the extent of court intervention, through to the recognition and enforcement  of  the  arbitral  award.  It  reflects  worldwide  consensus  on  key  aspects  of international arbitration practice and has been accepted by states in all regions of the world.
Secondly, the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (commonly referred to simply as the New York Convention).   The New York Convention seeks to provide common legislative standards for the recognition of arbitration agreements and for court recognition and enforcement of foreign arbitral awards. The Convention’s principal aim is that foreign arbitral awards will not be discriminated against.   It obliges parties to ensure such awards are recognised and generally capable of enforcement in their jurisdiction in the same way as domestic awards.   Grounds for non

recognition of a foreign award are very limited.   These include awards that are contrary to public policy; where the parties to the agreement were under some incapacity; the agreement is not valid under the law to which the parties have subjected it; or the absence of proper notice of the appointment of the arbitrator or of the arbitration proceedings. An ancillary aim of the Convention is to require courts to give full effect to arbitration agreements by requiring courts to deny the parties access to court in contravention of an arbitration agreement.
Historical connection between Islam and arbitration
Arbitration is specifically mentioned in the Quran at Surah 4, verse 35, “If you fear a breach between them twain (the man and his wife), appoint (two) arbitrators, one from his family and the other from hers; if they both wish for peace, Allah will cause their reconciliation.   Indeed Allah is Ever All-Knower, Well-Acquainted with all things.”   Although the subject matter of this  quote  is  a  matrimonial  dispute,  the  framework  of  arbitration  has  been  applied  to commercial disputes for many years.  Arbitration under Islamic law is known as tahkim where parties agree to settle their dispute by referring it to an arbitrator known as a hakam or muhakkam.
Arbitration has a longstanding history as a form of dispute resolution in Islam, and with the development of international arbitration institutions in the Islamic world, there is therefore an ideal opportunity for international arbitration to establish itself as the method of choice for the resolution of Islamic finance disputes.
Development of international arbitration in the Islamic world
The previously described reticence towards international arbitration is now changing, with many Middle Eastern countries adopting the UNCITRAL Model Law for their arbitration laws, signing the New York Convention and establishing local arbitration centres in the region.
For example, there are four arbitration centres in the United Arab Emirates:

1.  the Dubai International Arbitration Centre (DIAC) which was established in 1994 as the “Centre for Commercial Conciliation and Arbitration”;

2.  the DIFC LCIA Arbitration Centre which was launched in February 2008;

3.  the Abu Dhabi Chamber of Commerce & Industry which was formed in 1993; and

4.  the  Dubai  based  International  Islamic  Centre  for  Reconciliation  and  Arbitration  (IICRA) which was established in 2005 by the Islamic Development Bank and the 	General Council for Islamic Banks and Financial Institutions in order to provide a Sharia based arbitration facility.
Of the four UAE institutions, the DIAC is probably the best known and busiest of the Gulf arbitration centres.
In Qatar there are two institutions: the Qatar International Centre for Commercial Arbitration (QICCA) and the Qatar Financial Centre (QFC).   In Egypt there is also the prominent Cairo Regional Centre for International Commercial Arbitration (CRCICA). Arbitration institutions in Islamic countries outside of the Middle East include the Kuala Lumpur Regional Centre for Arbitration (KLRCA), which has introduced specific rules to deal with Islamic banking and finance disputes.    Other centres, such as Hong Kong, are also able to cater for Islamic finance disputes, with the establishment of the International Islamic

Mediation & Arbitration Centre (IMAC) which was opened in 2008 by the Arab Chamber of Commerce & Industry after consultation with the International Chamber of Commerce, a pre-eminent arbitration institution. Singapore is also a major centre for international arbitration, with the Singapore International Arbitration Centre  (SIAC) being its foremost arbitration institution.
However, the arbitration laws in the UAE, Saudi Arabia, and Qatar are not based on the UNCITRAL Model Law.  In Egypt, Singapore and Malaysia the arbitration laws are based on UNCITRAL Model Law (albeit with the Malaysian act modelled on the 1958 UNCITRAL Model Law with some modifications, rather than the newer 1985 Model Law). In 2010, the UAE Ministry of Economy published a draft independent Federal Arbitration Law, which is based on the UNCITRAL Model Law.  This draft is currently under review and is expected to be introduced in  2012.   In the UAE and Qatar there are  ‘free zones’ for financial services.   These free zones have their own legal jurisdiction and court system which is separate from the rest of the country.   The DIFC and QFC are based in free zones and as such have their own distinct laws that are independent from the national laws governing international arbitration.   Both the DIFC and QFC laws are based on the UNCITRAL Model Law.   The parties do not have to have a connection with the jurisdiction in order to adopt these jurisdictions and their associated laws as the seat of arbitration.
All of the countries discussed above have acceded to the New York Convention.   They are also contracting states to the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (the ICSID Convention).   Additionally the UAE, Saudi Arabia  and  Qatar (along  with  Bahrain,  Kuwait  and  Oman)  are  members  of  the  Gulf Cooperation Council (GCC).   The GCC has a unified economic agreement between member states that they will recognise and enforce judicial and arbitral awards rendered in other member states.
For the purpose of this report we contacted a range of international arbitration institutions to enquire about the number of cases that they have dealt with involving Islamic finance.   We were informed that take up by parties was generally very low.  This could be due to a number of  factors:  many  of  these  institutions  are  relatively  new  and  are  currently  establishing themselves; and certain regions favour litigation to settle disputes.   This curious response from the institutions is all the more unexpected as arbitration has many potential beneficial features as a form of dispute resolution, especially for Islamic finance disputes.   Of course another explanation might be that disputes involving Islamic finance may themselves be relatively rare or resolved by negotiation between the parties without reference to an outside body.
The benefits and the use of arbitration have been highlighted by Peter Werner, Senior Director  of  the  EMEA  office  in  London  of  the  International  Swaps  and  Derivatives Association  (ISDA) Financial Law Reform Committee.    On  1 March  2010, ISDA and International  Islamic  Financial  Market (IIFM)  published  the  ISDA/IIFM  Tahawwut (Hedging) Master Agreement.    Mr Werner recognised a marked increase in the use of arbitration in the financial sector, and particularly in relation to ISDA Master Agreements involving parties established in or operating from emerging market jurisdictions.
The factors for this growth in the use of arbitration include globalisation, the increased involvement of parties from emerging markets in international finance and the clearing rules of most, if not all, of the world’s clearing houses providing for disputes to be resolved by arbitration.   The main reasons for using arbitration were stated to be the unattractiveness of litigating  in  the  courts  of  many jurisdictions,  particularly  emerging  markets,  and  the enforcement advantages of the New York Convention.   If a party succeeds on the merits of a dispute that may prove to be a pyrrhic victory if it is not possible to enforce the resulting judgment.  Leading international arbitrators are familiar with complex transactions, are able to get to grips with issues outside their core expertise and are likely to be much better able to

deal with derivatives disputes than the courts of many jurisdictions.   Arbitration agreements also provide for the parties to be able to nominate members of a tribunal whose main expertise is in derivatives.
Drafting the arbitration clause
In cases where arbitration is the chosen method of dispute resolution it will be necessary to include in the contract a suitably drafted arbitration clause.   Parties and their counsel should consider carefully, as a minimum: the seat of arbitration and the laws which would be applicable  due  to  this  choice,  and  importantly  whether  the  seat  of  arbitration  and  the anticipated jurisdiction for enforcement are signatories to the New York Convention; the rules of  any  institution  they  wish  to  use;  the  categories  of  dispute  covered;  the  method  of appointment and number of arbitrators; the language of the arbitration; and the governing law of the contract, which should preferably be stated outside of the arbitration clause.   Legal advice should be taken to ensure that the proposed choice of governing law will be respected in the arbitration.   For example, whilst an election by the parties to have their dispute referred to arbitration and decided in accordance with Sharia law should be respected for arbitrations seated in England (per s46(1)(b) of the Arbitration Act 1996), that is not necessarily the case in all seats of arbitration.
Special care should be taken in seeking to draft arbitration clauses for multi-party arbitrations and multi-contract arbitrations.  Optional provisions which may be considered for inclusion in the arbitration clause include, for example, making provision for: a specific procedure to be followed relating to the disclosure of evidence; allowing for remedial powers, such as interim relief; rights of appeal; confidentiality; and the qualifications of the tribunal.
In order to avoid ending up with an ill-suited arbitration procedure, it is very important that the arbitration clause is given careful consideration at the time of contracting, and appropriate legal advice is taken.   It is unfortunately the case that all too often the arbitration clause is very much the “midnight clause” thrown in at the last minute without due consideration.  This can have very serious time and cost consequences if a dispute should arise and can seriously hamper a party’s ability to obtain a fair and efficient resolution of a claim.
Mediation
Mediation is another important method of alternative dispute resolution.   Mediation is a flexible process conducted confidentially in which a neutral person (the mediator) actively assists parties in working towards a negotiated agreement of a dispute or difference.   The parties are in ultimate control of the decision to settle and the terms of any resolution. Mediation can be used alongside litigation or  arbitration at any stage.
As with arbitration, mediation  (which is known as sulh) is also a traditional method of reconciliation in Islam and is mentioned in several verses of the Quran.   Sulh is usually conducted  in  an  informal  manner,  but  can  be  facilitated  by  an  institution.    Unlike  in international  arbitration  or  litigation,  mediation  does  not  result  in  a  binding  award  or judgment.   At the conclusion of the mediation process if the mediation has been successful, the parties draft and sign a contract that reflects the settlement terms.
Not all mediations result in a settlement being concluded, and for that reason, mediation is not a standalone means of dispute resolution.   However, it is commonly used alongside, or to prevent, litigation or arbitration.
A form of facilitated negotiation, mediation can have considerable benefits in terms of saving time and costs.   Parties may also wish to select the mediator based on their expertise in Islamic finance.   However, mediation may not always be suitable, for example where there is a need for a precedent or a binding award or judgment or the same issue arises in related agreements or matters.
Conclusion
The Quran and Sunnah repeatedly stress the importance and benefits of settling disputes quickly and discreetly.   International arbitration is a method that can be used to achieve this. When parties have carefully considered and drafted international arbitration clauses in their Islamic finance agreements, they can have greater confidence that any disputes which may arise will be handled in an equitable, confidential and, importantly, Sharia compliant manner.
Best Regards

ZULKIFLI HASAN
Pesantren at Danok, Thailand
Islamic finance news
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April 23, 2012
DR. ZULKIFLI HASAN
100% Islamic financing: What could go wrong?
What could go wrong?
By Blake Goud: Available at:
http://investhalal.blogspot.com/2012/04/what-could-go-wrong.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+sharingrisk+%28Sharing+Risk+dot+org+blog%29
When I saw the headline “Emirates Islamic offers 100% financing for UAE homes”, I thought I had traveled back in time to a bygone era (specifically 6-10 years ago in the United States).  I looked at the date on the article, April 14, 2012, and it surprised me that an Islamic bank would have stumbled upon a product that had so recently led to havoc in the conventional financial markets.  Sure, the US housing boom was fueled by other factors (securitization and re-securitization of mortgages into complex securities), but one of the reasons the problem spread into the real economy was that a fall in home prices pushed many homeowners into a position of negative equity (owing more on their homes than it was worth).
The way that Islamic home finance works today would not insulate an Islamic bank offering this type of product from problems down the road, and since the product offered here is only for 5 years, it creates a potential refinancing risk, since most people cannot afford to pay for a house in just 5 years.  A 5 year loan requires that either refinancing will be a available five years from now, or a rise in home prices (and thus a buyer expects to sell within 5 years).   Both assume that the home will either remain the same price or increase, which the financial crisis and recession following it has demonstrated is a dangerous assumption.
The difference between a 100% financing product and an 80% financing (e.g. 20% down payment) is that the former incentivizes greater speculation on home price rises because it doesn’t require they buyer to have ‘skin in the game’.  The incentive problem is made more complicated by the potential for buyers who default to be threatened with arrest. However, while this might limit the number of defaulters (in an non-optimal way), the incentive problem remains.  It is a frequent refrain that Islamic finance was spared some damage during the credit because it is different from conventional finance, but if Islamic banks start moving into the same types of products that caused problems in the financial crisis, will this hold true in the future, or are we on the road to Islamic CDOs?
Regards

Zulkifli Hasan
Langkawi Island, Malaysia
Islamic finance news
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