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Tuesday, 22 May 2012

Financial shock would never have happened under Sharia

LEGAL OPINION by John King
In the West we have, over many years, created a range of financial instruments to meet the needs of business, of investors and of the man and woman in the street. In the recent past, institutions in the Islamic world have developed a parallel set of instruments which seek to fulfil those needs in a way which is consistent with sharia law.
Modern Islamic finance as we now know it today, having its origins in 1960's.
To the extent they think about such things at all, it is probable that many in the West regard Islamic finance as a harmless eccentricity. Some may see its arrival in Europe and North America as an unwelcome intrusion. Few would ever take the time to examine its underlying principles.
In the decades which followed the Reagan revolution, we came to think that markets, including financial markets, could, by and large, look after themselves. Since the onset of the global financial crisis, many in Europe and America have come to believe we need to apply a new ethic to the conduct of financial markets. However, in the West, where public morality is divorced from revealed religion, there is as yet no consensus as to what form this should take.
In the Islamic world, the problem is different. To pious Muslims, it is self-evident that financial markets should be organised in accordance with sharia law, which reflects the truths revealed in the Koran, and the example set by the prophet in the Sunnah.
Most of us are aware that Islam prohibits usury and few would be surprised to learn that a Muslim should not profit from the sale of alcohol or from the distribution of pornography.
What most of us do not know is that the sharia presents a positive vision, based on principles of equity, as to how business should be carried on. In a financial transaction, the person who brings the money should share risk with the person to whom it is brought.
An investment should normally be backed by a tangible underlying asset. One should make an investment only if it is reasonable to suppose it will bring a return.
How are these principles applied in practice? Some conventional instruments, including many of the more exotic creations of Wall Street, are so irremediably unIslamic that no amount of ingenuity could produce an equivalent which was sharia-compliant.
Into this category would fall the high-risk products of casino capitalism and instruments which derive their value not from assets but from algorithms.
Other, more familiar, financial products have their Islamic equivalents. A Western bank pays a saver interest by reference to the “time value of money”. A depositor in an Islamic bank shares in the profit and losses which the institution generates when it puts the deposit to use. An Islamic institution cannot grant a mortgage but it may lease a property to its customer.
In the Christian (or post-Christian) West, Islam can resonate negatively. We often focus on aspects of that civilisation which are foreign and threatening to us and ignore features of Muslim life and beliefs which we might consider more benign.
Our Government is anxious that Dublin should develop as a centre for Islamic finance and, with that in mind, we have amended our tax code so as to create a level playing field for conventional and Islamic financial instruments. So where a bank depositor receives a share in the profits (and losses) generated from, for example, the deposit, the Revenue Commissioners will treat such return as if it was interest.
Opinion in the West is often suspicious of, or antagonistic towards, sharia. Is it right then that our law should accommodate practices which are informed by that code?
In the US housing bubble of 2005-2006, unscrupulous institutions lent money to poor people on the security of their homes. By some form of financial alchemy, investment banks converted these mortgages into triple A securities which they then sold on to fund managers. Some shrewd investors could see this market was heading for a fall and placed their bets accordingly. In the resulting debacle, the global economic system received a shock from which it has not yet recovered.
Nothing remotely like this could have happened if the actors in this drama had been constrained by sharia principles, so we should not be surprised that many Muslims feel that, in the era following the collapse of Lehman Brothers, we might when we come to regulate financial markets consider taking a leaf out of their book.
By John King, a partner in Ivor Fitzpatrick Company Solicitors, where he specialises in media and commercial law.
(Irish Times.Com / 21 May 2012)



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NIB backs AAOIFI’s efforts to reform Islamic finance industry

NIB is backing what could be Islamic finance’s biggest shake up in years, lending its support to the announcement of seven new standards from the Middle East’s leading Islamic finance regulator, the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI).


The new standards govern key areas of Islamic finance, including financial rights and their management; liquidity management; bankruptcy; capital and investment protection; agency investment; calculation of profits transaction and options of trust.
AAOIFI will introduce the new standards to the region’s Islamic financial community at a ceremony, to be held at Dubai’s Grand Hyatt hotel, on 23 May, of which Noor Islamic Bank is a sponsor. Islamic finance industry leaders will have the opportunity to debate the proposed changes before a final draft of the reforms is prepared by the end of this year.
Hussain AlQemzi, GCEO of Noor Investment Group and CEO of Noor Islamic Bank said, “We welcome AAOIFI’s initiative to reform the guidelines that direct the work of the Shari’a boards which act as advisors to our industry. The announcement of these new standards will be an opportunity for the Islamic finance industry to engage in meaningful and insightful debate about the future direction of our industry.
“This review of standards is timely. Islamic finance is growing rapidly, hitting $1.3 trillion last year. This speed of growth will inevitably expose systemic flaws in how the industry is regulated, which could impact Islamic finance institutions and stall growth unless they are addressed. That is why we are supporting AAOIFI’s efforts to bring about much needed change.”
AAOIFI, a Bahrain-based organisation, had previously said it wished to develop standards that can benefit the industry and help drive future growth. Among the basic components of Islamic finance to be reviewed this year will be the Murabaha, Mudaraba and Ijara structures, which are designed to permit investment while obeying religious bans on paying interest and pure monetary speculation.
AlQemiz has been an outspoken critic of the lack of clear global consensus on what products and services are Shari’ah compliant. According to AlQemzi, this disconnect between different regions of the world, such as the GCC and S.E Asia, makes it harder for Islamic finance players to construct the type of cross border deals required to challenge the conventional banks dominance.
He has also criticised the Islamic finance industry for its failure to challenge the pre-eminent position of the regulators in driving the sector forward. Speaking at a recent Islamic finance conference in Dubai, Al Qemzi called on his counterparts in the industry to challenge the regulators with new and innovative products and to take responsibility for the sector’s future growth.

<!--[if gte mso 9]><xml> Normal 0 false false false EN-US X-NONE X-NONE MicrosoftInternetExplorer4 </xml><![endif]--><!--[if gte mso 9]><xml> </xml><![endif]--><!--[if gte mso 10]> NIB is backing what could be Islamic finance’s biggest shake up in years, lending its support to the announcement of seven new standards from the Middle East’s leading Islamic finance regulator, the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI).

The new standards govern key areas of Islamic finance, including financial rights and their management; liquidity management; bankruptcy; capital and investment protection; agency investment; calculation of profits transaction and options of trust.
AAOIFI will introduce the new standards to the region’s Islamic financial community at a ceremony, to be held at Dubai’s Grand Hyatt hotel, on 23 May, of which Noor Islamic Bank is a sponsor. Islamic finance industry leaders will have the opportunity to debate the proposed changes before a final draft of the reforms is prepared by the end of this year.
Hussain AlQemzi, GCEO of Noor Investment Group and CEO of Noor Islamic Bank said, “We welcome AAOIFI’s initiative to reform the guidelines that direct the work of the Shari’a boards which act as advisors to our industry. The announcement of these new standards will be an opportunity for the Islamic finance industry to engage in meaningful and insightful debate about the future direction of our industry.
“This review of standards is timely. Islamic finance is growing rapidly, hitting $1.3 trillion last year. This speed of growth will inevitably expose systemic flaws in how the industry is regulated, which could impact Islamic finance institutions and stall growth unless they are addressed. That is why we are supporting AAOIFI’s efforts to bring about much needed change.”
AAOIFI, a Bahrain-based organisation, had previously said it wished to develop standards that can benefit the industry and help drive future growth. Among the basic components of Islamic finance to be reviewed this year will be the Murabaha, Mudaraba and Ijara structures, which are designed to permit investment while obeying religious bans on paying interest and pure monetary speculation.
AlQemiz has been an outspoken critic of the lack of clear global consensus on what products and services are Shari’ah compliant. According to AlQemzi, this disconnect between different regions of the world, such as the GCC and S.E Asia, makes it harder for Islamic finance players to construct the type of cross border deals required to challenge the conventional banks dominance.
He has also criticised the Islamic finance industry for its failure to challenge the pre-eminent position of the regulators in driving the sector forward. Speaking at a recent Islamic finance conference in Dubai, Al Qemzi called on his counterparts in the industry to challenge the regulators with new and innovative products and to take responsibility for the sector’s future growth.
(C.P.I  Financial / 21 May 2012)



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Thomson Reuters Islamic Interbank Rate Gains Ground for Islamic Finance Authenticity

Thomson Reuters today announced the addition of leading Islamic scholars and bankers to the supervisory bodies of the Islamic Interbank Benchmark Rate (IIBR), expanding geographic and community representation on both the IIBR Shariah Committee and Islamic Benchmark Committee. The new members, announced at the 8th Annual World Islamic Funds and Financial Markets Conference (WIFFMC 2012) in Bahrain, add credence to IIBR as a viable alternative for pricing Islamic instruments and establishing Islamic finance authenticity.

Launched in November 2011 as the world’s first Islamic finance benchmark rate, IIBR is designed to provide an objective and dedicated indicator for the average expected return on Shariah-compliant short-term interbank funding and an alternative to the conventional interest-based benchmarks used for mainstream finance. Both the Shariah Committee and the Islamic Benchmark Committee jointly oversee the ongoing implementation and integrity of IIBR.

Retired Justice Muhammad Taqi Usmani, the globally-prominent Shariah scholar and chairman of the AAOIFI Shariah Supervisory Board, and Sheikh Dr. Akram Laldin, executive director of the International Shariah Research Academy now both join the IIBR Shariah Committee, with Justice Taqi Usmani taking the role of Chairman to continue the work of Sheikh Yusuf Talal Delorenzo who remains a committee member.

"I strongly believe that IIBR is a step forward towards liberalising Islamic Finance from the dependence on conventional benchmarks which has been a point of criticism in Islamic finance," said Sheikh Dr. Akram Laldin.

In addition, both Dr. Abbas Mirakhor, first chair of Islamic Finance at INCEIF, and Ismail E Dadabhoy, an independent Islamic Banker and ex-executive director and head of Islamic Finance at UBS, join the IIBR Islamic Benchmark Committee.

"The efforts of Thomson Reuters to initiate an analytic and pragmatic approach to designing a non-interest rate-based benchmark are commendable,” said Dr. Abbas Mirakhor. “Hopefully, this initiative will culminate in creating a true sector-driven benchmark for a system of finance that is based on sharing rather than transferring or shifting risk. IIBR is a promising and practical move in that direction."

“I share Thomson Reuters commitment to aiding the development of the emerging international Islamic Finance industry and see that IIBR is part of new generation of tools and standards that will allow for new products, bring all-important transparency and therefore ease international business,” said Ismail E Dadabhoy.

Established in co-operation with the Islamic Development Bank (IDB), Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), the Bahrain Association of Banks (BAB), Hawkamah Institute for Corporate Governance and a number of major Islamic banks, the IIBR uses the contributed rates of 16 Islamic banks to calculate the IIBR rate daily, harnessing Thomson Reuters global benchmark fixings infrastructure which is used to compile over 100 fixings around the world.

“The launch of the IIBR has captured the imagination of the key stakeholders in Islamic finance and the addition of Sh Taqi, Dr Abbas, Sh Laldin and Br Ismail demonstrates their belief in Thomson Reuters commitment and vision to grow, develop and bring authentic innovation to Islamic finance, helping the industry grow to $2 trillion in the next few years,” said Rushdi Siddiqui, global head of Islamic finance, Thomson Reuters. “IIBR remains a great example of collaboration; of an industry coming together to work towards a common objective – Islamic finance authenticity.”

Members of the Islamic Benchmark Committee are:
  • Thomson Reuters
  • Islamic Development Bank (IDB)
  • Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI)
  • Association of Islamic Banking Institutions Malaysia (AIBIM)
  • Bahrain Association of Banks (BAB)
  • Hawkamah Institute for Corporate Governance
  • Statistical Economic and Social Research Center for Islamic Countries (SESRIC)
  • Abu Dhabi Islamic Bank
  • Ahli United Bank
  • Al Baraka Bank
  • Al Hilal Bank
  • Alinma Bank
  • Al Salam Bank
  • Bahrain Islamic Bank
  • Barwa Bank
  • Dubai Islamic Bank
  • INCEIF
  • Ithmaar Bank
  • Kuwait Finance House
  • Dr. Abbas Mirakhor
  • Masraf Al Rayan
  • Noor Islamic Bank
  • National Commercial Bank
  • Qatar Islamic Bank
  • Sharjah Islamic Bank
  • RHB Islamic Bank
  • Bank Muamalat Malaysia

Members of the Shariah Committee are:
  • Justice Muhammad Taqi Usmani (Chairman)
  • Sheikh Yusuf Talal Delorenzo
  • Dr. Abdul Rahim Sultan AlOlama
  • Dr. Mohammad Daud Bakar
  • Sheikh Muddassir Siddiqui
  • Sheikh Dr. Akram Laldin

(Bobs Guide / 21 May 2012)



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